So It Begins

The economic impact of COVID-19 has been shockingly large and swift, but most of the information has been anecdotal. Economic data reports are by their nature backward-looking. However, the latest unemployment claim figure and the University of Michigan’s Consumer Sentiment Index point to a sharp contraction in economic activity. We should see further evidence of that in this week’s data.

Initial claims for unemployment benefits rose to 2,898,450 in the week ending March 21, which works out to 3,283,000 on a seasonally adjusted basis. The previous record was 695,000, set in 1982. “Nearly every state providing comments cited the COVID-19 virus,” according to the report, and “states continued to cite services industries broadly, particularly accommodation and food services,” while “additional industries heavily cited for the increases included the health care and social assistance, arts, entertainment and recreation, transportation and warehousing, and manufacturing industries.” Bear in mind that not all furloughed workers can file a claim (for example, the self-employed or those seeking part- time employment) and there is normally a bit of a lag between a layoff and a filed claim. The $2.2 trillion economic aid package will relax the rules and extend benefits to a broader range of unemployed workers. Still, the unprecedented increase in jobless claims suggests that labor market conditions are deteriorating more rapidly than was thought earlier.

The March Employment Report (due April 3) will understate the degree of weakness in the job market. The payroll survey covers the pay period that included the 12th of the month. Hence, it will be biased toward the first half of the month (with a semi-monthly pay period, someone who works on March 1 would be counted). The Bureau of Labor Statistics’ data also include an adjustment for small firms, which can’t be surveyed. The model that does the adjusting works well, except at turning points. The bottom line is that one shouldn’t take a moderate decline in March payrolls as a good sign. On the other hand, a large decline in payrolls should be more worrisome, in that it almost certainly understates the decline. In any case, worse figures will be seen in the April data.

Scott Brown
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The UM Consumer Sentiment Index fell to 89.1 in March (vs. 101.0 in February). It was “the fourth largest one-month decline in nearly a half century.” However, the report noted that the seven-day average was falling sharply toward the end of the survey, and if it were to stabilize into April, “it would amount to a record two-month decline of 30.1 points.” Consumers don’t spend sentiment. The chief drivers of spending are income, wealth, and the cost/ability of borrowing. However, sentiment tends to be correlated with the fundamentals, which are deteriorating rapidly.