State of the Economy

Massive Spike in Unemployment

Last week, headlines worldwide screamed that the unemployment rate was the highest level in history, as initial jobless claims came in at 3,283,000, an increase of 3,001,000 from the previous week's level. And the headlines were not wrong: that week was the highest level of initial claims in history, besting the previous high of 695,000 from October of 1982.


Well, this Friday, that record was shattered as the DOL reported that there were 6.6 million unemployed. But the reality is, the Employment Situation Report is backwards-looking, meaning that it has not fully captured what's happening today – much like the recently reported ISM Non-Manufacturing Index. The next few months will better capture the full extent of unemployment, with some suggesting that the unemployment rate will be closer to 10%, not the currently reported 4.4%.


In addition, the DOL reported that average hourly earnings for March were up 0.4% after increasing 0.3% in February. Those hourly earnings numbers are expected to change significantly too.


Manufacturing Data

The Institute for Supply Management reported that economic activity in the non-manufacturing sector grew in March for the 122nd consecutive month as its ISM Non–Manufacturing Index came in at 52.5% versus 57.3% in February. Economists consider the dividing line between expansion and contraction to be at 50.0%.


In other words, the data suggests that this means continued growth in the non–manufacturing sector, but at a slower rate this month compared to the previous month.

Some will suggest, however, that the numbers are not as encouraging as they might appear, as the data has not yet caught up to actual business levels impacted by the coronavirus.


Oil Prices Remain Volatile

Contributing to the recent stock sell-off was the tumbling cost of oil. Remember when the price of Brent Crude, the international standard, plummeted by almost 25% over the weekend of March 7th and 8th alone, which was on top of a more than 10% drop on the previous day? Then on the following Monday, the price of oil was about $34/barrel, its lowest level since 2016. Well, oil ended the quarter just north of $22/barrel.


But then this past Thursday, oil prices spiked a staggering 30%+ after President Trump tweeted that Saudi Arabia and Russia would cut production by 10 to 15 million barrels per day. Within hours of the President's tweets, confusion ensued and Russia denied that there was an agreement, with Saudi Arabia seemingly confirming soon thereafter that a deal wasn't reached.


Now the worry is that supply is so bountiful that we might run out of room to actually store all of it. And some are suggesting that the price of oil could turn around and head south soon. Consider this: according to Bloomberg News, Wyoming crude grade was recently bid at negative 19 cents a barrel.


Corporate Earnings are Declining

With everyone focused on volatility and market swings, the media has not covered corporate earnings in as much detail as past quarters. But research firm FactSet is reporting that analysts are making huge cuts to corporate earnings estimates.

From FactSet's Release dated April 3rd:


“The Q1 bottom–up EPS estimate (which is an aggregation of the median EPS estimates for Q1 for all the companies in the index) declined by 9.1% (to $36.97 from $40.68) from December 31 to March 31.”


For comparison purposes, FactSet further reports:

“In fact, the bottom-up EPS estimate for Q1 witnessed the largest quarterly decline since Q1 2016 (-9.8%) and the eighth largest quarterly decline since FactSet began tracking this data in Q2 2002. However, it should be noted the decrease in Q1 2020 was much smaller than the declines of -34.3% and -31.3% recorded for Q4 2008 and Q1 2009.”

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