FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
June 9, 2020

IN THIS ISSUE:

1. May Jobs Report Was Very Misleading – Here’s Why

2. US GDP Expected to Plunge by 25-40% in Second Quarter

3. Economists Predict Big Rebound in Second Half of 2020

4. Alpha Advantage Strategy Webinar Wednesday 12:00 Eastern

May Jobs Report Was Very Misleading – Here’s Why

Last Friday’s unemployment rate report for May was a stunner. It was a complete and utter surprise. And I think it’s important to know why this happened. In short, the Labor Department made a big mistake in calculating the number of Americans employed versus unemployed in March and April, and they openly admitted it in last Friday’s jobs report for May.

To explain, let’s go back to early March when the Labor Department reported that the February unemployment rate fell to a near 50-year low of 3.5%. The economy clearly looked like it was on track for a major rebound this year. But then the coronavirus hit, and the unemployment rate jumped to 4.4% for March.

Then in April, the coronavirus became a pandemic and much of the economy was in lockdown as most Americans were advised to shelter at home. In early May, the Labor Department reported the April unemployment rate spiked to 14.7%, the highest since the Great Depression.

During the March-May period, over 42 million Americans filed for unemployment benefits, a record in such a short time. For that reason, intense attention was focused on last Friday’s unemployment report for May. Most economists expected the jobless rate to shoot up to near 20%, approaching Depression-era levels, and most forecasters predicted that an additional 8 million jobs were lost in May alone.

Yet to the surprise of everyone, the Labor Department reported Friday morning that the May unemployment rate fell to 13.3% and a record 2.5 million new jobs were created last month. Wow! No one in the forecasting community saw anything like that coming. One CNBC reporter called it the biggest pre-report “miss” in history.

However, unless you read the Labor Department’s jobs report in its entirety, you would have missed a giant caveat at the end. Read carefully: The Labor Department admitted that in April and May it elected NOT to count workers who were furloughed from their jobs or had their hours cut to zero due to the coronavirus crisis as unemployed.

Rather than unemployed, the Labor Department classified them as “employed but not at work for other reasons.” While the Labor Department admitted this was a “misclassification error” as they put it, they did not explain how or if they will correct it. They went so far as to say that if they had corrected the error, the unemployment rate for April would have been 19.5%, not the 14.7% they reported, and the jobless rate for May would have been 16.3%, not the 13.3% reported on Friday. What a huge difference!

As usual, most in the mainstream media failed to read the huge caveat at the end of the jobs report, and most focused only on the report’s claim that a record 2.5 million jobs were created last month. Keep in mind that most of those jobs were new hires by businesses that were reopening following the coronavirus shutdown.

Stocks reacted to the jobs report by shooting higher Friday morning. The Nasdaq Composite Index soared to a new record high during the day, and the Dow and the S&P 500 were within 5-10% of new record highs as well.

President Trump, of course, held a hasty, shameless press conference on Friday to herald the news about all the new jobs created in May and claimed it happened because of the way he had handled the COVID-19 crisis. “We made every decision correctly,” he claimed. Yeah, right!

The bottom line is that a record number of jobs, 2.5 million, were created in May (assuming it is not substantially revised later), but it was largely due to businesses reopening. Restaurants and bars alone accounted for 1.37 million jobs last month as many reopened. The question is, should those be considered “new” jobs, especially since the Labor Department didn’t count many of those workers as unemployed in the first place? I expect some serious revisions from the Labor Department just ahead.

US GDP Expected to Plunge by 25-40% in Second Quarter

On May 28, the Commerce Department reported that 1Q GDP fell 5.0% (annual rate), slightly worse than its initial estimate of -4.8%. The latest report was in-line with most pre-report estimates. It was the largest quarterly decline since the 4Q of 2008 when GDP fell by 8.4% in the depths of the Great Recession.

Yet the 5% decline in the 1Q is expected to be small potatoes compared to what most economists expect for the 2Q which ends on June 30. Due to the coronavirus crisis and the widespread shutdown of the economy, most forecasters now predict that 2Q GDP will plunge by 25% on the low side to 40% on the high side. If correct, it will be the worst economic contraction of our lifetimes.

As noted above, over 42 million American workers have lost their jobs and applied for unemployment benefits in the last three months, also the worst we’ve seen in our lifetimes. The US workforce hit a record high of near 165 million people in February of this year, just before the COVID-19 pandemic hit. That’s over 25% of the workforce!

Your first thought might be: How can 25% of the workforce be out of a job when the unemployment rate is only 13.3%? And that would be a good question. The answer is that the official unemployment rate does not count everyone who is out of work. Among those not counted are those who have given up looking for work.

And that includes a LOT of working age Americans today. With two-thirds of the economy mostly locked down recently, there haven’t been that many places to send a resume. With the COVID-19 pandemic still very much with us, millions of working-age Americans have been stuck at home and afraid to go out looking for work.

A growing number of economists believe that the lockdowns that shut down wide swaths of the economy and triggered the layoffs of tens of millions of workers will send GDP shrinking by up to a 40% annual rate in the 2Q. If so, that would be the largest quarterly decline on record and four times the size of our previous worst quarter recorded in 1958.

Unfortunately, we won’t see the Commerce Department’s first estimate of 2Q GDP until the last week of July. Until then, we can only wonder just how bad that number will be.

Economists Predict Big Rebound in Second Half of 2020

While most economists expect a very rough 2Q, more and more forecasters expect a very strong rebound in the economy beginning as early as next month. Some believe GDP will grow by 20-25% in the 3Q and 4Q, especially if the reopening of the economy continues to go as planned.

Last week, the Congressional Budget Office released new projections suggesting GDP will rebound at an annual rate of 21.5% in the second half of this year. Larry Kudlow, President Trump’s senior economic advisor predicted last week that the economy will grow by 20% or more in the last half.

As regular readers know, I am skeptical for several reasons. First, I don’t believe consumers are going back to their old spending habits anytime soon. As I predicted, most Americans either used the stimulus money to pay bills they were already incurring, or they saved most of it. The saving rate spike to a record 33% last month, as I wrote in last Thursday’s BLOG.

Second, there is growing evidence that many Americans who are receiving $600 a week from the Treasury may not want to go back to work until those payments expire. At $600 a week, many are making significantly more than they were at their old jobs.

If you can believe this, Larry Kudlow said last week that the Trump administration is seriously considering a new stimulus plan to pay people to go back to work. I’m not making this up! Kudlow said that there will very likely be a plan to give “bonus payments” to jobless Americans to go back to work when the $600 a week stimulus ends in July.

You have got to be kidding me!! Unfortunately, they’re not. Kudlow said the bonus payments to go back to work could be included in the Senate’s next coronavirus bill. Kudlow said the bonus payments to go back to work could be in addition to a payroll tax cut of 7.6% which the Trump administration is also considering.

This is asinine: First, we pay people not to work – ridiculous. And now we’re gonna pay them to go back to work – ludicrous. What’s our country come to? I wish I could tell you.

If you figure it out, please let me know.

Alpha Advantage Strategy Webinar Wednesday 12:00 Eastern

We will be hosting a live webinar this Wednesday, June 10 at 12:00 Eastern time with Alpha Advantage’s Trading Manager which implements the professionally managed strategies. He will give a short presentation on how the Alpha Advantage Strategy works, and then he will take questions from the listeners. You can register for this free webinar HERE.

I urge you to register for the webinar on June 10 even if you know you can’t attend the live event. By registering, we will send you a free recording of the live webinar which you can view at your convenience. Again, you can register for the webinar HERE.

All the best,

Gary D. Halbert

SPECIAL ARTICLES

Surprise: Jobless Rate Falls to 13.3%, 2.5 Million New Jobs

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Gary's Between the Lines Blog: COVID-19 To Slash $16 Trillion Off GDP Next 10 Years

 

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