Higher-than-expected gains in the US initial unemployment claims in June pare down optimism regarding the jump in May payrolls. In the week ending June 13, the number of claims rose by 1.508M (1.3M exp) where the week prior was revised up to 1.566M.
However, the “sticky” behavior of continuing claims is more worrying. Their number declined less than expected – from 20.6 to just 20.54M with a forecast of 19.85M. This pool of unemployed people is fluid – meaning that to get a decline in the number, the stream of new claims (those who extend their initial claims) should be less than the outflow (persons who got the job and move out of the pool). Hence the sluggish decline that we observed last week suggesting that outflow weakened – less than the expected people who have become employed.
There is a solid reason to expect this tendency; the pandemic put constraints on people’s ability to find a job while also decreasing their drive to search at all. In addition, eligibility requirements for receiving the benefits were relaxed significantly. To get benefits, an unemployed person doesn’t have to be in active search for a job, getting laid off during the pandemic is the sufficient condition.
Obviously relaxed requirements create moral hazard: the unemployed become less interested in looking for a job because their income is insured by the government. In other words, they become disincentivized to do that.
Those disincentivized workers create distortion in the calculation of unemployment rate: they are unemployed and should be counted as such, but since U-3 unemployment measure counts only those who is in active search for a job, demotivated workers are obviously missed! In other words, extended social insurance in such an unusual way underestimates the real number of unemployed and will keep it that way while the state insures income. Extended unemployment benefits are due to end in 6 weeks, so it should not be surprise if we see a plunge in consumer spending and rise in unemployment if government prefers a “rough exit” from this stimulus.
Based on the data on continuing claims, the unemployment rate in the United States may be at least at 14.1% (the official BLS estimate for May is 13.3%) and at most 20% (if we take into account those who receive benefits under the pandemic program).
The data calls for caution about how we should interpret the sharp increase in jobs count in May as the impulse can be short-term and unstable. This conclusion is consistent with the comments of bankers from the Fed. Loretta Mester said that according to her observations, firms are in no hurry to return employees to their jobs. The head of the Federal Reserve Bank of Atlanta Bostik said that after talking with representatives of the restaurant industry, he concluded that 20-30% of restaurants and entertainment venues in the region might not open, and structural unemployment could rise.
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