Common Cents & Putting Lipstick on My Pig on May 8, 2020

Despite headlines claiming it was better than expected, this morning’s Employment Situation report was dreadful. It was the worst piece of economic data I have seen in my career, and saying anything other than that is like ‘putting lipstick on a pig,’ ‘whistling past the graveyard,’ or ‘ignoring the elephant in the living room.’ Take your pick.

The Bureau of Labor Statistics (BLS) estimates the US economy shed 20.5 million jobs during April, and the Unemployment Rate shot up to 14.7%. However, Pollyannas have noticed the average estimate in the Bloomberg surveys were 21.95 million and 16.2%, respectively. By these measures, and almost by these measures alone, I suppose you could say the report was, indeed, better than expected. Unfortunately, that is where the fun stops.

You see, the modes, the most oft given estimate for the two surveys were, respectively, 20.0 million and 15.0%. As such, the data was very much in keeping with analysts’ estimates, just not the average estimates. Then there is the confusing way the BLS calculates the Unemployment Rate.

First, it estimates the ‘civilian noninstitutional population’ 16-years of age and older. In April, this number was 259.896 million. Of these, the Household Survey suggests 156.481 million were participating in the workforce, or 60.2%. Of this number, 133.403 million Americans reported (or at least the methodology suggests they did) they were employed. This means 23.078 million were unemployed. So, 133.403 million (employed) divided by 156.481 million (participating in the workforce) equals 85.3%. Ergo, the Unemployment Rate must be 14.7%. Voila!

Now, it is import to note, the equation is the number employed divided by the number participating to determine the employment rate. The remainder, by definition, is the Unemployment Rate. If a person drops out of the workforce, says to [heck] with it, they are NOT included in the calculation. Think about that for a second. Despite being unemployed, people who aren’t looking for work aren’t considered, well, unemployed. As a result, we could have no one participating in the labor force and have an Unemployment Rate of, get this, 0%. Of course, we would be as poor as church mice, but the headlines would be awesome.

For April, the average survey estimate for the Labor Force Participation Rate was 62.0%, which would have been a decline of 0.7% from March’s 62.7% reading. However, far more Americans dropped out of the workforce last month than expected, as the Participation Rate slumped to 60.2% and the ‘civilian labor force’ shrank by 6.432 million. As a result, the denominator used in calculating the employment rate was less than expected! As a result, ratio of employed was higher than it ‘should have been,’ meaning the Unemployment Rate was lower.

Had the Labor Force Participation Rate actually been 62.0%, with the same number of Americans claiming to be employed (133.403 million), the math would have been: 133.403 million divided by 161.136 million equals 82.8% (employment rate). As a result, last month’s Unemployment Rate would have been 17.2% if only so many people hadn’t dropped out of the workforce! Never mind they don’t have a job! They are no longer part of the equation.

I understand this may be a little confusing, if not very. However, the point here is, again, the report wasn’t good, and it WAS in line with expectations. The only real difference is MORE workers dropped out of the labor force than analysts had forecasted. They got the true number of unemployed folks mostly right. They just got the denominator of the equation wrong. If that makes sense.

Even so, 20.5 million payroll jobs lost. An official Unemployment Rate of 14.7%. Guess what? We are going to shed jobs again this month, May, and the Unemployment Rate will continue to climb. The only thing that will keep it from doing so is if people keep dropping out of the work force. That is the ONLY way the official Unemployment Rate doesn’t go up again in May.

But let those numbers sink in for a second. Try to put them into context. 20.5 million payrolls lost and that is better than expected? 20.5 million! Let me put that into some perspective. The following numbers come from the Census Bureau’s July 1, 2019 estimates:

  • Florida has a population of 21.478 million
  • New York has a population of 19.454 million
  • Georgia has a population of 10.617 million
  • Tennessee has a population of 6.833 million
  • Alabama has a population of 4.903 million
  • Montana has a population of 1.069 million

So, roughly 4 State of Alabamas, every breathing individual in it, lost their jobs last month. 20 Montanas. 2 State of Georgias, and 3 Tennessees. New York and Florida both lost their jobs in April, for all intents and purposes. That is how bad that job loss number is, and Wall Street apparently thinks it is good news as I type here at 11:04 am CDT on May 8, 2020.

To be sure, I get it. You can’t fight the Fed, and folks are looking for some good news. Yes, I am certain many investors are discounting all this bad information, and are looking months into the future. I understand interest rates are low, as are energy prices. These things have always been good for the American consumer, which makes up roughly two-thirds of our GDP equation. I have been doing this line of work for a while, and I realize what is going on today.

I just happen to think maybe, just maybe, the markets aren’t fully appreciating the severity of these numbers, and what their practical long-term impact will be. These are completely, and I mean that in its strongest and most absolute definition, unchartered waters. No one has seen a 20.5 million monthly job loss number, because it had never happened until last month. Never, as in ‘not once’ and ‘at no time.’ So, it baffles me to read this was a good report, better than expected, not as bad as feared, and all that noise. Why? Because the headline numbers were better than the average estimates of a fistful of analysts attempting to put a number on an economic situation with no historical precedent?

If that is your story, okay.

I will grant the bulls this: you can’t the Fed, and the Fed is ‘all in’ here. That is, in large part, the reason why we are basically neutral on our overall equity targets, as opposed to be significantly underweight. There is a lot of liquidity floating around that has to go somewhere. So, why not stocks? Indeed. However, that alone isn’t a comfortable enough reason to check your brain at the door when reading dreadful, depressing economic reports. That the Fed has given the markets a blank checkbook? Various lending facilities, and all of that? Yeah, that might prop up paper asset classes for a period of time, but it won’t indefinitely prop up an economy that is hemorrhaging jobs and, therefore, household income…particularly at the low end of the income spectrum.

Read that last sentence again, if you want, because it will probably end up being the next big story: how everything ‘we’ did to prop up the economy and help the so-called working class ended up widening the divide between rich and poor even more. As I told one of my co-workers this morning, there IS a certain amount of ‘let them eat cake’ attitude in the markets, at least today. How else can you explain the stock markets rallying like gangbusters after the worst piece of economic data in, well, ever?

You know, I should just quit worrying and learn to love the Fed. Maybe I should whistle “Patience” by G&R when I walk past the graveyard. Perhaps I should put some lipstick on that pig and introduce it to the elephant in the living room. Hmm. Now, wouldn’t THAT be something.

Have a great, but chilly, weekend. Do you think it strange we are having the coldest Spring in memory at the same time the global economy is essentially in lock down? Hmm. I wonder what Greta would say.


John Norris

Chief Economist



As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.