U.S. Economy: Still-rising Welfare Claims and Coronavirus-bitten GDP Data Have Silver Linings

- New U.S. welfare claims surprises on upside of expectations again.
- Q1 GDP revised from -4.8% to -5% although there is a silver lining.
- Revision results from lesser change in corporate inventory stocks.
- While consumtption and business investment were revised higher.

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American welfare claims rose last week despite that the bottom of the coronavirus-splattered economic trough was seen in April, suggesting that U.S. unemployment climbed deep into the second quarter, but there was a silver lining in the small print as well as in downwardly-revised GDP figures. 

New U.S. welfare claims rose by 2.12 million in the week ending May 23, down from a 2.4mn increase in the prior week but above the market consensus for a 2.10mn change. However, the number of continuing welfare claims which is what's important for the jobless rate, fell some -3.86mn to 21.1m during the prior week ending May 16, Department of Labor data revealed this Thursday. 

The gap between the two above figures hints at a silver lining to Thursday's jobs data and offers economy-watchers a glimpse light at the end of the labour market tunnel because in the week ending May 16 there were only 2.4mn new welfare claims. This means the economy created jobs rather than shed them and could be taken as a sign that a labour market recovery is already underway in the U.S. although observers might not see that in the official data for a while. 

Official jobless figures are compiled by the Bureau of Labor Statistics, which only counts in its unemployment rate the people who are without a job but who are also actively seeking one.

The rub for economy-watchers hoping to see a falling unemployment rate in the months ahead is that the numbers of individuals meeting that definition will almost increase as the labour market and economy reopen, generating an artificial increase in the jobless rate following its artificial suppression in April. 

The takeaway is the U.S. jobs market could be on the verge of coming back to life, but one influential economist cautions there's more to it than that.

"The reopening of states is pushing businesses to rehire some of the people let go when the virus hit. The headline number overstates the true extent of the hiring, though, because California requires people to re-file bi-weekly, and this is an off-week. California continuing claims fell by 1.4M, despite the near-total lockdown in the state over the period, so we’re discounting this as evidence of an improving labor market," says Ian Shepherdson at Pantheon Macroeconomics. 

Thursday's second estimate of GDP growth in the first quarter was revised and in the wrong direction too. The Bureau of Economic Analysis said Thursday the economy actually contracted by -5% during the opening months of the year, a downward revision from the -4.8% initially declared, despite that quarter having seen barely any of the so-called 'lockdown' that brought the economy to a standstill toward the end of the month and much more so in April. 

GDP growth downgrades were driven an adverse change in the overall change observed the level of corporate inventories. Many and especially food retailers stock piled products ahead of and during the intial stages of the shutdown amid panic buying that stripped shelves bare in some parts, although this wasn't enough to prevent the total inventory build from declining and subtracting from the BEA's second estimate. 

However, there was also a silver lining buried in that announcement too in the form of upward revisions to earlier estimates of consumer spending and business investment, which were not impacted as much as was previously thought. That might mean the overall economic blow delivered by the pneumonia-inducing coronavirus will less than previously thought for the second quarter, where the trough has been seen. However, data for that period will not be out until August and there are still many uncertainties.

"This still represents only the tip of the iceberg in terms of the negative impacts of social distancing on GDP, which are likely to cause a contraction of around 40% annualized in Q2," says Andrew Grantham, an economist at CIBC Capital Markets. "While the decline in durable goods orders in April wasn't quite as bad as expected, the opening up of capacity in the industrial sector and continued struggles in aviation industry will likely mean the rebound in the second half of the year in business investment lags behind other areas of the economy."