It will get worse
Bottom Line Due to the coronavirus pandemic, nonfarm payrolls in March lost 701,000 jobs—with nearly 3 million household jobs disappearing—marking the single worst month for the labor market since the depths of the Great Recession in March 2009. In addition, the unemployment rate rose from a half-century low of 3.5% in February to a 3-year high of 4.4% in March, a level that could easily double next month. We believe the labor market will weaken considerably in coming months.
The Labor Department also revised January and February down by a combined 57,000 jobs, so the net effect of this morning’s report was a loss of 758,000 jobs. Yet, the Bloomberg consensus was forecasting a relatively modest loss of only 100,000 jobs, compared with Federated Hermes’ more damning forecast for a loss of 910,000 jobs. The source of this delta, in our view, was the timing of the survey week for the March payroll report. For the week ended March 14, initial weekly jobless claims posted a relatively normal 282,000 claims. But claims soared the next two weeks, to 3.307 million on March 21 and to 6.648 million on March 28, both easily surpassing the previous record of 695,000 claims set in October 1982.
To some degree, the Phase Three fiscal-stimulus legislation signed into law by President Trump on March 27 may have helped to precipitate this spike of nearly 10 million new unemployment claims over the past fortnight. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which Congress and the administration had been debating for several weeks, extends unemployment insurance from 26 to 39 weeks and pays an extra $600 per week for the next four months.
459,000 leisure and hospitality employees lost their jobs last month, in addition to 50,000 in temporary services and 46,000 in retail, as many states are operating under mandatory shelter-in-place orders. These are relatively low-wage jobs that require the least skill, so these workers are easy to fire and then hire back. Many employees may have felt that employers were doing them a huge favor by firing them now, letting them collect outsized unemployment benefits for the next four months while Covid-19 dies down, and then hiring them back when the economy begins to kick back into gear during the second half of 2020.
How bad can this get? Confirmed illnesses and deaths from the coronavirus in the U.S. have yet to definitively peak, so our research friends at Cornerstone Macro believe we could approach 20 million unemployed in April, based upon the spike in claims that we’ve seen over the past two weeks and what they expect is in the pipeline in coming weeks. In their view, the employment rate (U-3) could climb to 17% over the next few months. Goldman Sachs is forecasting an increase to 15%. Those would appear to be best-case scenarios, as Treasury Secretary Steven Mnuchin offered a worst-case scenario of 20% unemployment and St. Louis Fed President Jim Bullard gave an estimate of 30%. Amid this damage to the labor market, then, second-quarter GDP likely will plunge to -16%, according to an average of a dozen estimates from major sell-side brokerage firms.
Double-bottom retest coming for stocks? After a 35% collapse in stock prices from February 19 through March 23, the S&P 500 enjoyed a powerful 20% rally last week. However, we do not believe that this rally is sustainable, with several weeks of horrific economic news, such as the jobs report, right in front of us for the next few weeks. We are not expecting a “V-bottom” economic recovery but rather a “U-bottom,” which takes longer to develop.
The start of first-quarter earnings season in mid-April likely will be dreadful, rife with discouraging management guidance. We expect stocks will retest their March 23 lows later this month, as we await better news during April on the trajectory of the coronavirus. If we’re right that Covid-19 begins to peak and then plateau by the end of April, we can begin to expect better economic and financial-market results during this year’s second half.