Hidden Unemployment Data Shows US Economy is Not Recovering
Every week since May, I hear TV pundits gleefully report that unemployment figures declined again, that people are getting back to work, and that America is back on the rise.
And every week, they report the same wrong numbers.
It is infuriating.
Today, for instance, headlines touted job growth and projected the unemployment rate would decline to around 8%.
Sure enough, the headline number came in at 8.1% and there was much rejoicing.
But like all of the data we look at, there’s more to it than just a headline number. And to really dig in, we must understand not just the short-term trend, but also its wider context, its various components, and any relevant historical perspective.
Today, I’m going to do just that, because the pundits are just not telling you the whole story.
Smoke and Mirrors
There are a few primary components to unemployment data, chief among them being initial jobless claims, continuing jobless claims, and the overall size of the labor force.
Most of the TV chatter I heard this morning was about initial claims – people first signing up for unemployment – which did fall slightly to 837,000. And the chart they tended to show across all networks looked something like this one:
Source: Bloomberg, Department of Labor
Now, I understand that doesn’t look worrisome – the worst is clearly behind us and while the trend is flattening out, it is at least moving in the right direction.
But just for some historical perspective, here is what the exact same chart looks like when I include the 2008 financial crisis:
Source: Bloomberg, Department of Labor
At the peak of the recession in March 2009, weekly initial jobless claims topped out at 660,000 – more than 20% below the country’s level today.
And still going.
Since this week’s initial claims become next week’s continuing claims, we should see a similar story there… just on a 1-2 week lag. The chart confirms as much, with this week’s total falling to 11,767,000 people.
Source: Bloomberg, Department of Labor
But again, historical perspective here is important. And the truth is that no single event since we began keeping track of weekly ongoing claims comes even close to this year.
Not stagflation in the 1970’s, not the battle with inflation in the 1980’s, the economic malaise of the early 1990’s, not the dot-com bubble, and not even the Great Recession… nothing.
Source: Bloomberg, Department of Labor
Factoring in a labor pool of roughly 151 million people means the unadjusted unemployment rate clocks in at somewhere around 7.8%.
This is where the story starts to get fishy.
Because if we have a historically high number of claims relative to just 12 years ago, and we didn’t grow in population rapidly – which we didn’t – then we should also have an historically high unemployment rate, right?
Well, apparently not.
Source: Seawolf Research, Department of Labor
According to “official” data, we’re not even to the peak of the recession yet, which was around 10%.
And yet we keep seeing companies post new rounds of layoffs. This week alone, Disney laid off 28,000 theme park employees, oil producer Royal Dutch Shell plans to cut back another 9,000 jobs, and roughly 45,000 airline jobs are likely to get slashed as travel has all but stopped.
If you’re wondering why these events aren’t showing up in the data, it’s because as usual, the government is hiding them from you.
Hidden Figures
In this case, the mathematical gymnastics are being done via categorization.
Specifically, the CARES Act signed into law earlier this year has been providing relief to workers under a new category called “Pandemic Under Assistance”, or “PUA”.
And while the Department of Labor discusses these numbers every week, they are buried at the bottom of the report and not widely circulated in the media.
But if you can find them, you can easily see they are telling a much different story. I’ve highlighted them here in blue.
Source: Seawolf Research, Department of Labor
In total, nearly half a million more people filed for some form of unemployment this week, bringing the total number of people not working to 26,529,810.
Worse, it represents a 1,763% increase in unemployed US residents over last year.
And when I add those PUA claims into the total unemployment chart, it is evident that the economy has stopped improving altogether.
Source: Seawolf Research, Department of Labor
As I stated above, initial claims are a leading indicator of continuing claims, and it is clear they have stalled out at around 1.5 million people per week. That means continuing claims are going to follow the same trend until benefits run out.
And the optimism of US workers at the outset of the pandemic has clearly faded, with almost 1/3 of the labor force either already unemployed or afraid they will be unemployed very soon.
Source: The Daily Shot
That trend is unlikely to shift course. While the biggest part of that pessimistic change from April to July came from the entertainment and leisure industries, Challenger Job Cuts data shows layoffs now beginning to permeate the transport and aerospace/defense industries as well.
Source: Challenger Gray & Christmas
The remainder of economic data releases today were also bearish, with huge disappointments in personal income, new orders, and consumer comfort.
Source: Bloomberg
Moreover, these factors imply that current consumer spending levels can’t last without a fiscal stimulus bill, on which Democrats and Republicans still seem far apart.
That stimulus helped savings deposits increase rapidly at the beginning of state-level restrictions, which in turn pulled credit card balances down by 13%. But those trends are slowing, too, as more and more people are forced to pull money out of savings and 401k’s to pay rent and bills.
Source: FRED
But unless spending returns and is directed at stocks and stuff instead of rent and bills, the Fed is unlikely to get the inflation they’re looking for, and this market rally is going to run out of steam.
Source: BCA Research
I find it difficult to think that we will get a stimulus deal before the election unless the market begins to go south. But as I wrote on Tuesday, there’s so much cash still remaining on the sideline – as evidenced by the chart of money market funds below – it’s also hard to see a move lower.
Source: Bloomberg
In addition, options markets are pricing in a pretty large election-related risk judging from the Oct-Nov spreads.
Source: The Daily Shot, S&P Global
So I think once again that volatility is the best play here, and our last ¼ stake in iPath Series B S&P 500 VIX Short-Term Futures ETN (BATS – VXX) makes sense to deploy here.
Because after all, the only thing I’m certain about is uncertainty, and volatility is the best hedge.
I have a feeling this is going to be a crazy month.
All the best,
Matt Warder
