Its Difficult To Ignore The Disincentives, With Employment Numbers Still Low – Forbes

Total All Unemployment Claims

As much as the big miss in employment was a shock on Friday May 7, the May 12 CPI data turned out to be a double whammy.April headline CPI came in at +0.8% M/M, while market consensus was +0.2%, another huge miss by market forecasters.Y/Y CPI was+4.2%, up significantly from Marchs 2.6% Y/Y print. What appears strange to us, and looks to be contradictory to reality, is that the Wall Street narrative continues to be that the employment numbers were an aberration, (i.e., we are in a boom) but, the CPI numbers (clearly caused by base effects (i.e., the fact that the CPI had dipped significantly last spring) and temporary supply chain issues) were symptomatic of a systemic 1970s style inflation.Neither sentiment, we think, recognizes reality.

Beneath the Employment Data

Looking at the changes in the raw (Not Seasonally Adjusted NSA) job numbers (from the Establishment/Payroll Survey) just for the last three reported months of 2021 (February through April) (see table), it is clear that the NSA net new jobs are over a million each month.

Chang in Nonfarm Payrolls (000s)

But, the Seasonally Adjusted (SA) data are much lower, especially for April.Must be an anomaly, right?Wrong!The following table shows both the NSA and SA data for March and April since 2015.

Change in Nonfarm Payrolls (000s)

Excluding the year 2020, Marchs 1176K NSA number is significantly higher than the data from 2015 to 2019, indicating that the SA number should be higher than its predecessors.When it comes to April, however, the 2021 1089K NSA number is not much different than the 2015-2019 data.The mean of the NSA data for the April 2015 2019 data is 1068K, and the mean of the SA data for that period is 215.If we apply the ratio formula to the 1089K NSA number for 2021, we get 219 (1089/1068*215 = 219).While it appears a little high, we would tend to trust the 266K reading, as the SA factors may have changed slightly. So, No!Aprils 1089K reading is not a number that represents a booming economy and the 266K SA number is not an aberration.Now, lets turn to the March data.Using the same process as above produces a number for March of 258K, not 770K.If anything, the 770K number actually appears to be the aberration. Conclusion: The economy is not booming.

More Slowdown Data

In the latest weekly Department of Labor release (for the week ending May 8), Initial Unemployment Claims (ICs) at the state level fell to 487K from 514K.By the way, that 514K was revised up from 505K, so the drop, as far as the market was concerned was just -18K, really not significant given the size of recent revisions.In the special Pandemic Unemployment Assistance (PUA) programs, there was a slight uptick in ICs from 102K to 104K. Not a word in the financial media this week about the weekly DOL unemployment data!If anything, this data confirms our analysis that there really is no boom, just some recovery toward the pre-pandemic slow-growth economy.Of course, a continuation of helicopter money (the IRS just sent out $1400 checks to individuals as they process 2020 tax returns totaling $1.8 billion) will continue to fan the flames of the boom mentality.

The critical Continuing Unemployment Claims (CCs) rose nearly 700K the week ended April 24 latest data (see the chart at the top of this blog) and now sit at 16.9 million.Of these, 13.0 million reside in the PUA programs.The chart shows almost no progress for these CCs for the past three months.

Disincentives

After having been buried for months, the disincentive topic is finally seeing the light of day.The question is whether or not the enhanced (additional) federal unemployment benefits of $300/week is such a disincentive that it isnt worth the effort for those unemployed who worked in the lower wage service sectors to return to work or find a new job.In the May 12 edition of the Wall Street Journal (States End Enhanced Aid for Jobless, A-2, McCormick & Cambon), the authors state that the extra $300/week supplements the state average of $318/week.Using a 40-hour workweek, this $618 week benefit is equivalent to $15.45/hour and to $32,136/year.In two recent editions of Barrons, reference was made to the enhanced benefits being equivalent to a job paying over $32,000; so, these numbers corroborate each other.

In prior blogs, we indicated our belief that the enhanced $300/week benefit was a disincentive to work, especially for the lower paying wage sectors like leisure/hospitality. We have observed that the No. 1 complaint of businesses has been the lack of applicants, and we have pointed out the ubiquitous-ness of the Help Wanted sign.

Now, after pleas from businesses and The Chamber of Commerce to halt the $300/week federal supplemental benefit, several states (all with Republican governors) are ending these enhanced federal supplements.At this writing, 11 states are moving toward the elimination of the enhanced $300/week benefit, and it appears more will join.If this indeed occurs, we should see significant reductions in the CCs, likely beginning in June.

Note: It appears that the Biden Administration has stumbled upon a de facto method to raise the minimum wage as companies are now competing with the $15.45/hour effective unemployment wage!

Inflation

As indicated above, the headline CPI was a shocker.Core CPI (ex food and energy) was the highest monthly increase since 1982.The day after the CPI, the PPI (Producer Price Index) produced another shockwave.Aprils PPI (+0.6% M/M) was double the consensus view (+0.3%).On a Y/Y basis, PPI grew 6.2%, much of which had to do with base effects, but that number still plays to the view that the economy has entered a period of systemic inflation.As if in anticipation that the Fed would now be forced to abandon its inflation will be transitory and last for a couple of quarters stance, yield curves have risen.In addition, the idea that the Fed might have to tighten earlier than anticipated set off some selling in the equity markets, which were down three days in a row early in the May 9-15 week.

An analysis of the CPI data suggests that the price increases were concentrated in 7% of the economic sectors.For example:

The above two sectors were simply returning to their pre-pandemic pricing, as the travel/tourism economy has begun to reopen.Airfares are still down -20% in the index from pre-pandemic levels, and average hotel rates are still -6% lower.Las Vegas, for example, is now nearly 100% reopened.

The auto rental business has limited supply, and apparently didnt effectively anticipate reopening demand.Early in the pandemic, rental companies slashed their rental fleets due to the shutdown and plummeting demand.

Demand for used cars remains high as people still are avoiding public transportation.The recent CDC announcement that vaccinated people neednt wear masks any longer may help the public transportation industry, but we believe that the return of pre-pandemic demand is still a long way off.

For the other 93% of the economy, the core CPI index rose +0.3% M/M (annualized to 3.66%), and the all-important rent, medical, and education components only rose +0.2% M/M.

As we have stated in past blogs, we agree with the Fed that the inflation in our midst is transient.

Conclusions

A deep analysis of the recent employment data convinces us that employment is lagging despite reopening and the need of businesses, and this lag seems to rest squarely on the disincentives provided by the federal governments enhanced unemployment benefits.The financial media has finally recognized the topic.After business pleas, several states have moved to cancel the federal enhanced benefit before it expires in September.We believe such moves will result in a faster normalization of the labor markets.

Our views of the demand and supply landscape keep us in the transient inflation camp.We expect that by Q4, markets will realize that economic growth will return to 1%-2% (i.e., no boom) and that the inflation that we are currently seeing, and will continue to see for several more months, will calm, if not turn to deflation as the nearly 17 million unemployed vie for the eight million jobs that recently showed up in the latest JOLTS (Job Openings and Labor Turnover Survey).

(Joshua Barone contributed to this blog.)

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Its Difficult To Ignore The Disincentives, With Employment Numbers Still Low - Forbes