U.S. Weekly Jobless Claims Unexpectedly Rise As Labor Market Takes Step Back

[Adam Varga + 123]

The number of Americans filing for unemployment benefits unexpectedly rose last week for the first time in nearly four months, suggesting the labor market was stalling amid a resurgence in new COVID-19 cases and depressed demand.

https://www.reuters.com/article/us-usa-economy/us-weekly-jobless-claims-rise-labor-market-recovery-stalling-idUSKCN24O1QY

[0R0 + 6,251]

Hardly unexpected. The loudly proclaimed surge of cases in the South is what it driving this retrenchment. CA is being extreme in closing down arbitrarily again.

Fortunately, the case counts are peaking or have peaked already in most Southern states - CA is flat. Deaths seem to have peaked already in AZ and FL that peaked in cases first. So there is good reason to believe the relapse into self segregation will lighten up soon after.

The question is how long of a steadily declining trend in cases and deaths is necessary before the panic mongers give up on fanning the flames of panic and people resume activity.

 

[Dan Warnick + 6,100]

10 hours ago, 0R0 said:

Hardly unexpected. The loudly proclaimed surge of cases in the South is what it driving this retrenchment. CA is being extreme in closing down arbitrarily again.

Fortunately, the case counts are peaking or have peaked already in most Southern states - CA is flat. Deaths seem to have peaked already in AZ and FL that peaked in cases first. So there is good reason to believe the relapse into self segregation will lighten up soon after.

The question is how long of a steadily declining trend in cases and deaths is necessary before the panic mongers give up on fanning the flames of panic and people resume activity.

 

Good points all, @0R0.  Do you think some of the new claims are also coming from companies implementing RIF in order to right size, given brick and mortar store closures, companies that realize how many of their previous employees are no longer (or never were) necessary, and the fact that every single company's order books have shrunk drastically?

[0R0 + 6,251]

On 7/26/2020 at 7:20 AM, Dan Warnick said:

Good points all, @0R0.  Do you think some of the new claims are also coming from companies implementing RIF in order to right size, given brick and mortar store closures, companies that realize how many of their previous employees are no longer (or never were) necessary, and the fact that every single company's order books have shrunk drastically?

All are in play

The transition to Work From Home and virtual retail was ongoing but has been accelerated by a factor of 10. Some of the physical store chains had been transitioning to online and delivery for years and it is now 70% of their business. Productivity gains from work from home and time savings for employees make the office an old fashioned throwback that is questionable in value.

So we are seeing a collapse of the existing business models while the new ones require a large scale investment and migration to take place to complete the transition. That makes for bare order books for serving the existing physical retail and physical office, while companies like Amazon can't keep their delivery pledges broadly, but only do so for food. They are hiring both directly and indirectly to fortify their local delivery businesses. Bottlenecks and supply chain disruptions are everywhere. Inventories of some office and home products are non existent. Amazon can't get their truck fleets supplied fast enough.

So the 30 million unemployed and low business gig workers are very real. Much of their work is not coming back. Not in physical retail, not in driving people into their offices, not in restaurants that will never have a lunch or after work dinner business on a scale that will keep the doors open. Surveys indicate about 28% of office work and thus occupancy and downtown support business (restaurants bars cleaners, stores) will not come back. The office support staff is going to disappear. Restaurants are doing a brisk business in deliveries that may become a permanent mode of operation for them once rents are renegotiated - to reflect the 30% drop in street traffic the properties will see permanently, and on which their rent value was based.

Enormous piles of debt are to be restructured as the occupancy falls by 1/3, or worse for some places. Real estate is always rather thinly capitalized, Commercial RE capital has become threadbare as they tried to expand volume to generate higher ROE with more properties and debt. They will all come out of this in restructuring with lower rents and book values and losses to their junk bond and leveraged loan investors. This financial damage is enormous and both banks and funds need credit support from the Fed to prevent that from impacting their ability to fund the expansion and buildout of the exurban migration, and the Millennials' coming baby boom.

You can see this globally in G-4 fiscal and central bank credit impulses. Europe and Japan have a problem exurbanizing effectively as population density is regionally terrible and they can't fire the excess workers if they transitioned to work from home. Germany and France Italy and Spain can adapt, as can E Europe, The low countries can't.

 

 

Frankly, there is still far more of the old economy financial overhang that needs to be cleaned up immediately. It has been crumbling slowly for a decade and has seen no Fed support - they were tightening instead into end 2018. As bad as the chart below paints the job market and its financial market reflection, the reality is both much worse and much better.

The much better part is that there is a cumulative 3 mil home shortage and an ongoing 300k annual deficit at the current elevated rate of new housing starts. The demand for this housing is coming from the exurbanization of the Millennials as they have the opportunity to work (form home) where they can afford to live. That has been their economic log jam for a decade since they first made it into the labor force in size. It is why so many remain in mom's basement, now including screaming baby and hair raising in law behaviors on all sides.

Downtown commuter and CA rents and taxes eat a typical 60-65%% of Millennial (and X'er) income, and that in a multifamily household. A mortgage truck and SUV in exurban low tax states costs 30% of income for the WFH transplant, about 50% for those remaining in high tax congested coastal states on the Pacific and N. Atlantic coasts. The big difference is in the amount of space they have available (dedicated home offices rather than Manhattan kitchen or Brooklyn shared living room) and the disposable income gained to raise a child or two.

The job/rent conundrum has been the major stumbling block for the economy since 2005-2014. High energy prices drove business into high energy efficiency downtowns and industrial parks and out of the dispersed industries of the still rusting industrial belt, as well as offshore, where dorm dwelling low income workers could be put to work as they need little compensation for their energy costs. This is what drove the "by definition" income stratification as lower income earners had to pay exorbitant rents in congested metros where jobs were available. Obviously, you don't own properties to rent out immediately out of college. You also can't afford a mortgage anywhere within commuting distance of your work as $4-5 gas will make short work of what you might save in rent. So you have to live with roomates and must think the worst of your landlord and his huge income just off the property you are living in.

WFH solves these economic problems and the faster the managements of companies accept it and break out of downtowns and industrial parks in high tax states and municipalities the better off they and their workers and the economy in general would do.

In my basic modeling, the debt markets need more Fed injections than have come so far in order to lift money supply to reasonable levels that can support the remaining debt overhang.

The debt to money supply ratio adjusted for the current expansion so far is at 2.8, or roughly where Japan is, and still 50% tighter than where the Euro zone is.

The financial community and the Fed and other Central banks are finally realizing that you can't expect positive real yields in an industrialized world of parsimonious pre-retirees and penny pinching retired people, where demand from a shrinking Millennial (ex US) generation can't come close to filling in. So long as the high savings cohort is a growing portion of society, monetary velocity and inflation have to be low, and forcing a real interest rate on a market that does not care for it means that you are far tighter in monetary policy than you ever imagined you could be.

In this very dense chart the 2 main trends are the dropping monetary velocity (red) and the demographic drivers of it, the elevated portion of savers in society (% aged 55-64, plotted inversely) and the income of the 25-54 spending demographic (top blue line), though in my book that ends at ages 45-50, but the Fed database doesn't provide the age segments I need to display that properly. It also doesn't allow for the income hierarchy dividing pre retirement high income managers and leaders from younger inexperienced workers. Thus the blue line overstates the incomes of the spending stage portion of workers. The lower dark blue line shows the population growth rate which another restraint on demand as it dropped from 1.4% in 1992 to 0.5% recently as teens have avoided pregnancy and millennials were cooped up in mom's basement or with roomates so avoided having children. WFH should reverse that and support higher spending for raising kids.

The purple line reflects the unit margin of business (which feeds both corporate and labor incomes) is showing the impact of the drop in oil gas and other commodity prices. They have increased substantially throughout the CV19 crisis, which allows for more broad growth once volumes are allowed to come back with easing business restrictions and more functional supply chains. What remains to support the topline is demand support from government programs to keep the unemployed afloat and support their incomes as they go back to restricted work. It does not need to be as generous as it had been to date, but it does need to be there in substantial amounts, or we will resume the tight financial conditions such as we saw even before CV19.

Industrial production outside energy is already nearing half way back to where it was pre CV10. but only 1/3 of its way back to where it was at its peak in Dec 2018 at 106.6, when the Fed doubled up on tightening as the financial system was screeching to a halt and new tariffs were  about to kick in. Talk about tone deaf..

Jun 2020: 93.7043 

May 2020: 87.6031 

Apr 2020: 84.5842 

Mar 2020: 100.0684 

Feb 2020: 105.2554 

Peak Dec 2018 106.6

The savings buildup with the government stimulus programs are going to change the shape of consumer markets going forward. Charted are annual rates, so we need to consider duration to gain a feel for long term impact.

It takes substantial policy reaction to continue counteracting the Chinese agents occupying the US Democratic State governorships and key major cities and their rioting proxies attacking the country's history culture and businesses. We are not approaching a cold war with China, we are in a hot war using less conventional means, where traditional Chinese operations of massive bribery and organization of coercive mobs and biological warfare with deniability (CV19) are ongoing hot war theaters of operation, while the US still dallies about with naval exercises in the S China sea and refrains from charging the Democratic state establishments and rioters as the Chinese agents they know they are.

Fiscal responses need to be maintained, and so does the Fed's action to clear the financial system's capacity to finance the new business and its requirements in logistic centers, massive housing construction, and local production of furnishings for all that new square footage, while the value of the existing downtown and commuter real estate and the debt it backs up plummet in value.

Edited July 27, 2020 by 0R0