Temporary Unemployment Spike Brings Silver Lining To Terrible Jobs Data

The headline unemployment number for April 2020 has drawn attention at over 14%. It’s both the highest unemployment rate on record and the biggest monthly increase. Also, it’s likely that May’s data will prove worse. There are important trends beyond the headline numbers that start to tell the story of how the COVID-19 crisis is playing out in the economy and markets.

 

It’s no surprise which sectors of the economy are worst hit, but the impact is severe. We can see that the unemployment rate in the leisure and hospitality sector has risen to almost 40%. That’s astronomic, and it stands out at the most impacted sector, but wholesale and retail has also seen a big spike to almost 20% unemployment. This perhaps lends support to unemployment being temporary as its easy to imagine that demands picks up for these sectors, staffing will resume too.

 

It also explains some of the disconnect between unemployment data and the stock market. We’ve seen enormous spikes in retail and hospitality unemployment, but these sort of companies generally fall into the consumer discretionary sector, which makes up 10% of the value of the S&P 500. Just two companies, Apple and Microsoft, have a greater weight in the S&P 500 than the entire consumer discretionary sector. The composition of the S&P 500 matters in terms of how it’s reacting to the COVID-19 crisis. Many of the relative winners from COVID-19 have a much bigger weight in major indices.

 

If there is an area that has been relatively spared, it’s finance where unemployment is just 5%, but that’s still a doubling in the unemployment rate from the April 2019.

 

So we can see that although certain hospitality and retail have been extremely hard hit, no major sector has been spared. Consistent with the leap in the headline numbers, so all parts of the economy have seen a big hit from rocketing unemployment.

 

Government unemployment has jumped to 10%. That gives a broad baseline for those unable to work for reasons related to COVID-19 lock down activities but less directly related to sales or profitability issues.

 

If the massive spike in unemployment we’ve seen in April is indeed temporary as approximately 9 of 10 impacted workers believe it to be, then a V-shaped recovery may be on the cards.

 

A major yardstick will be how soon those in hospitality and retail resume work, because these sectors are disproportionately impacted. Still, the broad-based nature of current unemployment across the U.S. economy should not be ignored. To put it another way even, if not a single job had been lost in retail or hospitality, U.S. unemployment would still stand at around 10%. That’s still a major jump. Spikes in certain sectors matter, but the unemployment trend is broad-based. A V-shaped recovery is possible, but we’ll need to see these jobs rapidly come back in practice, rather than asserting that they will based on an unemployment report.