The worst employment report in our lifetime is out and the market reaction is mixed. That’s because the May report is likely to be even worse and the range of estimates in this one were so wide that the only deeply held conviction had to be, “it’s gonna be bad.” Also, as we’ve often mentioned recently, the market wants to look past the ugliness that will be April and May and focus on the progress being made in reopening parts of the economy, balanced against the inevitable rise in virus cases. One can’t, however, just ignore this jobs report, if for no other reason than it’s historic nature. Job losses totaled 20.5 million versus the median expectation of 22.0 million and 870 thousand actual in March. With numbers this large the range in estimates was wide, ranging from 8.6 million job losses to 30.0 million. Meanwhile, the unemployment rate leapt from 4.4% to 14.7%, slightly shy of the 16.0% expectation but a new all-time high nonetheless. Also, the BLS noted obvious errors in survey responses, just like in March, such that the unemployment rate could have been 5% higher than the official figure. We look at some more details below.
- The unemployment rate rose 10 percentage points to 14.7%, just under the 16.0% expectation, but the BLS noted obvious errors in survey responses, just like in March, that if adjusted would have added 5% to the official rate. The issue revolves around the response to being out of work as either a “temporary layoff” which counts as unemployed or “employed but absent from work.” They noted a huge increase in the latter response, just like in March, which resulted in the undercount of unemployed, per the BLS. There was also a lower response rate (70% vs. an average 83%) which makes the numbers a bit less reliable. The Household Survey—which is used to generate the various employment ratios— saw 15.9 million persons added to the rolls of the unemployed (23.0 million versus 7.1 million) while 6.4 million persons left the labor force (156.5 million vs. 162.9 million). The underemployment rate (unemployed plus part-time workers wanting a full-time job and those wanting a job but not currently looking) soared from 8.7% to 22.8%, also a new record high as part-time workers rose by 5.1 million.
- For the month, 20.5 million jobs were lost, shy of the 22.0 million median estimate. However, just as was the case in March, the survey week of April 12 was followed by several more weeks of jobless claims that totaled more than 11 million which could push the total jobless number over 30 million, or a nearly 20% unemployment rate. Similar to March, leisure/hospitality-related jobs led the service sector’s 17.1 million decline in jobs with 7.6 million jobs shed. Retail saw 2.1 million jobs lost. Goods-producing jobs decreased 2.3 million jobs with manufacturing shedding 1.3 million jobs.
- Average hourly earnings in April rose 4.7%, easily beating the 0.4% forecast, and the March print. What may look like a silver-lining in the jobs report is actually a reality of most recessions where lower-paying jobs are shed first leading to these pops in monthly wage gains. Year-over-year earnings rose to 7.9%, but like the monthly wage gains, the YoY increase is more a function of lower-wage workers getting hit with the first wave of layoffs, while higher-wage employees survive the early cuts. That will be another reason for the Fed to remain super accommodative (read super low fed funds rate) well into the future in hopes a rebound reaches down to those lower-wage workers and the labor force doesn’t suffer a permanent decline.
Funding Your SBA PPP Loans, Part II
With the rollout of the second tranche of the SBA Paycheck Protection Program, most bankers are once again inundated with loan requests. If anything, an increased familiarity with the program is allowing faster and cleaner processing of loan requests. While the purpose of the program is to bridge the bulk of operating expenses of small businesses for the next two months, in order for the loan to be forgiven the borrower will have to document covered expenses for the two month period after origination. Thus, in a best case scenario loans may be repaid by the SBA in three months, but most likely the process will take several months more.
While the Fed has instituted a lending program to help fund SBA PPP loans, if a bank doesn’t want to go through that application process, the investment portfolio remains a quick and easy source of funding. With rates at or near all-time lows most investment portfolios are sitting with sizeable unrealized gains, even low-yielding, short-maturity bonds. Selling these low-yielding, soon-to-be-maturing bonds can be a quick and easy way to source needed SBA PPP liquidity without undermining future portfolio earnings.
Another strategy is to take larger gains that can be used to help offset coming loan losses, and/or increases to loan loss provisions. This strategy can accomplish two objectives: raises liquidity for the origination of SBA PPP loans while also providing something of a buffer against increased loan loss provisions and/or actual losses that seem, inevitably, to be coming.
In either scenario, the investment portfolio can be a quick and easy source of liquidity, and also provide a buffer against future loan losses and/or increase loss provisions. Please contact your CenterState Representative for more information and to more closely review your particular needs and the options available in your investment portfolio.
Unemployment Rate Hits Record High
The unemployment rate rose ten points to 14.7%, a new post-WWII record but one that is not expected to stand long. That’s because the rate is expected to increase again, perhaps above 20% for May, given the continued string of multi-million weekly jobless claims that hit after the April 12 survey week for this report. As the graph shows, April’s print easily exceeded the previous record of 10.8% set in November 1982 and almost matched by the 10.0% rate in October 2009, during the height of the Great Recession. While a bounce of some sort can be expected as partial reopenings occur across the country, the extent of the damage will make it a long slog to get back to anything close to full employment.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.10%||-0.01%||1 Mo LIBOR||0.22%||-0.08%||FF Target Rate||0.00%-0.25%||3 Year||0.235%|
|6 Month||0.13%||UNCH||2 Mo LIBOR||0.45%||-0.09%||Prime Rate||3.25%||5 Year||0.332%|
|2 Year||0.13%||-0.07%||6 Mo LIBOR||0.69%||-0.02%||IOER||0.10%||10 Year||0.624%|
|10 Year||0.66%||+0.05%||12 Mo LIBOR||0.80%||-0.04%||SOFR||0.05%|