The Peak in Surging U.S. Welfare Claims is Still Some Way Off say Economists

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New U.S. welfare claims rose by a record clip last week, according to Department of Labor figures, which puts the world's largest economy on course for a double-digit unemployment rate and huge falls in GDP up ahead.

Some 6.64mn American workers made new applications for welfare payments during the week to last Friday, up from the previous upwardly-revised record of 3.28mn during the prior week and with many state authorities having cited the coronavirus and impact of efforts to contain as being behind the increase. 

"[This] has a strong claim to being quite literally the worst single economic data release of all time, in terms of its significance for both the U.S. economy and global markets," says Ranko Berich, head of market analysis at Monex Europe. 

All states reported increases in claims for the week to March 21, the Department of Labor said, with the largest increases in Pennsylvania (+362,012), Ohio (+189,263), Massachusetts (+141,003), Texas (+139,250), and California (+128,727), which are some of the most heavily impacted states. Meanwhile, the smallest increases were in the Virgin Islands (+79), South Dakota (+1,571), West Virginia (+2,671), Vermont (+3,125), and Wyoming (+3,136).

There was an uneven spread of job losses across industries last week, with hotel and restaurant industries being the most severely hit while manufacturing, health care and social assistance (charity) industries also received deep wounds in the most recent period. In addition, cracks have begun to appear in the construction, wholesale trade and retail sectors too. 

Above: Department of Labor graph showing weekly changes in new U.S. unemployment claims.

"That's the equivalent to more than 4% of the previously employed population, adding to the 2% or so that claimed in the prior week. These data certainly suggest that the unemployment rate will peak higher than we previously assumed in the near-term, with a rise above 10% now likely in the coming months," warns Andrew Grantham, an economist at CIBC Capital Markets. 

The world's largest economy had an unemployment rate of 3.5% in February, it's lowest level for many decades although much of the related jobs gain had accrued to the industries that were the most impacted by job losses last week. The coronavirus is as a result, and quite literally, eating the costly and hard-won U.S. economic progress of recent years while serving to exacerbate an already-deteriorated government fiscal position. 

CIBC says the U.S. jobless number could rise above 10% in the months ahead, surpassing even the peak seen during the global financial crisis, although such projections are no longer even remotely sensational. Rather, they've been normalised in exactly the same way as 4% intraday swings in the world's largest and most liquid stock markets have been. And the forecasts for GDP, which are also no longer sensational, are even worse than that with some economists looking for a second quarter contraction larger than -20%. The economy has, after all, ground to a standstill in recent weeks with New York - the 'city that never sleeps,' - turned desolate and near lifeless. 

Above: Johns Hopkins University showing national distribution of confirmed coronavirus cases in the U.S.

"We doubt we are anywhere near the peak," says Mark Vitner, a senior economist at Wells Fargo. "Numerous states report they are still having a difficult time processing the flood of claims."

Vitner cites the case of New York where it was reported that more than 7.8 million calls inquiring about unemployment benefits during the week ended March 28, were made, compared to around 50,000 calls in a usual week.

"Given the magnitude of that increase, the fact that there were ‘only’ 366K claims officially reported in New York State suggests that when the processing logjam clears, there will be a much larger surge," says Vitner. New York received 1.2 million calls on Monday, March 30 alone.

However, the peak in jobless claims should come in a relatively short space of time, when compared to the more gradual lag in previous recessions.

"The abrupt halt to economic activity that occurred, as more than three-quarters of the U.S. population fell under stay-at-home orders, means that a great deal of the rise in jobless claims is likely to be compressed into a relatively short period of time, with initial claims likely peaking in April," says Vitner.

Washington has advised that Americans practice social distancing while some states have imposed 'shelter in place' orders that go further than the federal guidance. Those orders are the mechanism that gives legal muscle to China or prison-style attempts at placing populations under 'lockdown,' with California the first to implement one on a state-wide basis. 

Social distancing and 'lockdown' may have worked in China and could yet work in the U.S. and other western countries, although only at great cost to an economy that is estimated to rely on consumer spending for 70% of GDP.

With almost all but online and grocery retailers closing in the large, densly populated urban hubs of activity, that consumer spending is being disrupted in an unprecedented way and economy-watchers need not be part-time rocket scientists to fathom how even forecasts of 20% falls in quarterly GDP might turn out to be on the conservative side of the spectrum. 

"Our Coronavirus U.S. Consumer Activity Tracker—which tracks spending in categories of consumption that are likely to be disproportionately affected by the coronavirus—declined by 8pp for the week of March 22-28 to -60% year-over-year," says Joseph Briggs, a U.S. economist at Goldman Sachs. "Labor market indicators suggest significant weakness in the US, Canada, and the UK."

Above: Johns Hopkins University graph detailing daily number of new confirmed coronavirus cases in the U.S.