US Labor Market on Steroids – How long will that last?

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Market bears decided to find a pressing point of stock buyers before the weekend amid a release of worrying US employment data. In fact, the point of concern is quite unobvious, as it’s hiding behind the improvement of some “popular” indicators, but let’s try to figure it out what’s wrong.

US stocks closed in the red on Thursday, Friday trading shows that pressure remains, which can be seen in the modest sell-off of Asian and European equities as well as weak futures on US stocks.

Yesterday, attention of market participants was drawn to the piece of statistics released on every Thursday – initial and continuing claims for unemployment benefits. This data has gained particular significance after the US substantially expanded its income insurance program by introducing a variety of generous pandemic-related payments to unemployed. At the same time, the unemployed who are not in search of work also became eligible to receive payments, which created a situation where a good part of jobless is not captured by official unemployment measures. Consequently, the importance of alternative labor market metrics, which capture these “unreported” unemployed, has increased significantly.

The data this Thursday showed that the initial and continuing claims, in a positive sense, exceeded expectations:

  • Initial claims – 1.314M, 1.375M expected.
  • Continuing claims – 18.062M, 18.8M expected.

However, if we dig deeper, some disturbing underlying employment trends continue to unfold. For example, claims for all unemployment benefit programs, contrary to expectations, continued to increase and rose by 1.4M to 32.9M, highest on record. In the chart below, you can see how many people the BLS considers unemployed and how many people receive unemployment benefits – almost twice higher:

Using values of the gray curve, real unemployment should be now around 20% (compared to official 11.1% of the BLS)!

In the context of “awakening” pessimism in remarks of the Fed officials, such a dynamics of unemployment claims is quite expected. Recall that earlier this week the head of Atlanta Fed said that “there are signs” that recovery in economic activity starts to stifle and discussions about a new stimulus package are becoming more and more appropriate. One of the subtle signals that the government is working on this issue was the extension of the Paycheck Protection Program (that “non-repayable” paycheck loans) until August 8. Increased unemployment benefits expire at the end of this month and the growing dependence of consumer component of GDP on this program suggests that the government will be forced to extend them. Already according to the established, slightly ugly tradition, such a decision will probably only launch a new leg of rally in the US stock markets.

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