Job trouble? Wave of rehiring after economy reopened to fade in July after viral spiral

The engine of the U.S. economy may have gotten clogged again — no thanks to the recent acceleration in coronavirus cases. That’s bad news for Americans hoping to return to their old jobs.

Just how much damage has been done will become more evident this week, especially from the U.S. employment report for July due next Friday. The number of jobs regained last month is unlikely to match the huge increases in May and June that totaled a combined 7.5 million.

Wall Street

economists predict the U.S. added about 1.5 million jobs in July.

Even that estimate may be inflated though by seasonal changes in educational employment at the state and local level, Morgan Stanley contends. Private-sector jobs could increase by less than one million, the investment bank calculated.

See: MarketWatch Economic Calendar

Whatever the case, a much smaller increase in hiring or rehiring in July would bode ill for the U.S. recovery from the coronavirus pandemic. The government last week reported that gross domestic product sank a whopping 32.9% in the second quarter on an annualized basis, the biggest decline since World War Two.

Read: Economy suffers titanic 32.9% plunge in 2nd quarter, points to drawn-out recovery

Also:‘A massive welfare economy’ – federal aid prevents even steeper GDP collapse

“The big question hovering over next week’s employment report is whether the two-month surge in job gains stopped in July,” says David Donabedian, chief investment officer of CIBC Private Wealth Management. He thinks that’s exactly what happened.

It will be hard for the economy to make up a lot of lost ground in the third quarter unless hiring snaps back even faster.

See:MarketWatch Coronavirus Recovery Tracker

The U.S. lost a record 22 million jobs in March and April, according to Labor Department data. So far the economy has recovered less than one-third of those jobs.

The weekly tally of jobless claims, meanwhile, showed an even higher 30 million unemployed people were collecting benefits as of mid-July, representing about one in five Americans who said they were working before the pandemic, according to a Labor Department survey of households.

Robert Frick, corporate economist at Navy Federal Credit Union, said many people who expect to return to work are going to find they have no jobs or businesses to which they can return, a “grim reminder” of how much long-term damage the pandemic has caused.

“In the long run we are going to see a sobering slowdown in job growth,” he said.

The still-high level of unemployment, the viral spiral, and the uncertainty over whether Washington will provide more financial aid has understandably made Americans feel less confidence. On Friday Congressional lawmakers were still at odds on the next relief package with many benefits set to expire at the end of July.

A variety of measures that monitor consumer attitudes show a clear deterioration in July that’s likely to bleed over into August. That will make a recovery even harder.

Read:Consumer confidence wanes in July and points to rockier economic recovery

And:Consumer sentiment falls as coronavirus cases rise and federal aid set to expire

The news might not all be negative next week, however.

Manufacturers — auto makers in particular — have shown more resilience than the service side of the economy. The closely followed ISM manufacturing survey could show improvement for the third straight month.

The housing industry has also snapped back faster than expected amid a surge in home sales. Prospective buyers with secure jobs are taking advantage of record-low interest rates to buy new homes, a trend that may have been fueled by people fleeing the closed spaces of cities with a high number of coronavirus cases.

Even that potential bit of good news, however, has been overshadowed by the broader damage to the economy from the latest spike in coronavirus cases in many American states.

A full recovery can’t take root and blossom, economists say, until the disease is brought under control.

See: Pandemic will continue for some time, experts tell Congress as U.S. case tally nears 4.5 million

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Investors should prepare for a coronavirus-induced ‘vicious spiral’ more than twice as bad as the financial crisis, says J.P. Morgan

There is a widespread view on Wall Street that the stock market hit its lowest level of the bear market last month, and that a combination of an ebbing of the coronavirus in late spring and unprecedented fiscal and monetary stimulus will set the stage for a sharp rebound in corporate profits later this year.

However, Mislav Matejka, head of global equity strategy at J.P. Morgan warned investors in a research note this week that there is a significant chance the global economy experiences “a vicious spiral, which is typical of recessions, between weak final demand, weaker labor markets, falling profits, weak credits markets and low oil prices.”

What’s particularly troubling to Matejka is that the current recession has been triggered by a shock to the consumer — which makes up 70% of GDP in Western economies — as workers around the globe are prevented from earning a living by the closures of nonessential business. This dynamic has led J.P. Morgan economists to predict “only a gradual bottoming out in activity, such as seen after the Great Financial Crisis, and not a V-shaped one that we see, for example, after natural disasters.” A so-called V-shaped economic recession is typically defined as one characterized by a sharp, but brief, slowdown in business activity that is followed by a powerful rebound.

The bank’s house view is that the unemployment rate will remain elevated at 8.5% during the second of the year, while the peak-to-trough decline in real U.S. GDP will be 10%, versus the 4% decline during the financial crisis. “And this is all assuming that the virus is history by June, which might prove significantly optimistic,” Matejka wrote.

Therefore, he advised clients to ignore technical signals indicating stocks are oversold, or to be reassured by the massive fiscal and monetary support provided by global governments. To do so would be “missing the elephant in the room, that is the first consumer and labor market downcycle in 11 years.”

“While consensus view still appears to be a quick recovery, recessions tend to linger,” Matejka added. “It took equities on average 18 months to record the final low in the past.”

J.P. Morgan

Economic data thus far show the beginnings of a negative feedback loop, he argued, where lower consumer spending leads to lower corporate profits, lower corporate investment, more job losses and further declines in consumer spending. This cycle can continue even when the reason for initial weakness has been removed, he said.

“Here though, we worry about a Catch-22: the pace of consumer recovery in China is very slow, which could push economic forecasts of a recovery further out,” Matejka added. “On the other hand, the risk of a second wave of infections rises” if economic activity recovers too quickly.

J.P. Morgan

This is why J.P. Morgan strategists are closely watching the situation in China and South Korea. An absence of reaccleration of cases in those places is a necessary condition for a bottoming in stocks in the U.S. and Europe. In addition, Matejka advises clients to wait for the coming revision of earnings forecasts. So far S&P 500 earnings per share estimates have only come down 3%, versus the 20% to 40% typical of previous recessions.

Once earnings estimates fall to necessary levels, it is possible that equity markets will finally begin to “over-discount” a recession. This would be indicated by the S&P 500 trading at 10 times forward earnings — a low seen in previous downturns—versus the roughly 14 times as of Friday’s close, creating an attractive entry point for investors, Matejka argued.

U.S. stocks finished the holiday-shortened week sharply higher Thursday, with the main indexes recovering about half of their losses that were racked up in late March during the height of fears about the impact of COVID-19.

The Dow Jones Industrial Average

gained 285.80 points, or 1.2%, to close at 23,719.37, while the S&P 500

jumped 39.84 points or 1.5% to end at 2,789.82. The Nasdaq Composite

advanced 62.67 points to trade near 8,153.58, a 0.8% gain.

For the week, the Dow rose 12.67%, the S&P 500 notched a 12.1% gain for the abbreviated week, marking its best weekly gain since 1974, and the Nasdaq rose 10.59%, according to Dow Jones Market Data.

From its recent March 23 low, the Dow is up 25.01%, the S&P 500 is up 22.27% from that point and the Nasdaq is up 18.20%, according to FactSet data.

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More than half of renters say they lost jobs due to coronavirus: ‘They could face housing situations that spiral out of control’

The longer some people stay at home, the more difficulty they have making ends meet.

“Low-income renters — many of whom work in service industries hit hard by the pandemic shutdown — are at high risk for eviction and homelessness during shelter-in-place measures,” according to a report by Mary Cunningham, a fellow at the Urban Institute, a left-of-center nonprofit policy group.

The recent $2 trillion CARES Act, a federal stimulus package, “didn’t do enough to address increases in housing insecurity for the nearly 11 million low-income renter households paying more than half their income toward rent before the pandemic,” Cunningham added.

“Eventually, the rent will be due and someone needs to pay it,” she wrote. “Low-income renters, especially those who lose employment during the crisis, will have a hard time paying back rent, and they could face housing situations that spiral out of control.”

More than half (53.5%) of renters reported that they lost their job due to the measures introduced in their town or city due to the COVID-19 pandemic, concluded a survey of 5,000 renters and 5,000 landlords by Avail, an online resource for landlords.

“Some cities are also requiring renters to provide documentation demonstrating that their inability to pay rent is a result of circumstances created by the coronavirus,” Avail’s report said. But 66% of renters said they did not know if their state had paused evictions or was considering such moves.

The National Multifamily Housing Council tracked data from 13.4 million apartment units and found that 31% of renters had not paid their rent in the first week of April, up from 19% for the same period in the previous month, according to a report released this week.

“The COVID-19 outbreak has resulted in significant health and financial challenges for apartment residents and multifamily owners, operators and employees in communities across the country,” said Doug Bibby, the president of the National Multifamily Housing Council.

Almost half (46%) of renters say they have less than $500 in emergency funds, while 22% of homeowners say they don’t have enough saved to cover their mortgage payment for a month, according to a separate poll of 1,000 renters and homeowners from Clever, an online service connecting house hunters with real-estate agents.

Ben Mizes, the CEO of Clever, said the cuts in lower-paid jobs in recent months were “hurting the people who need their paycheck the most,” echoing a study by Deutsche Bank that said high-wage jobs were the least affected by the coronavirus pandemic last month.

Rafael Nunez, 30, who works as a plumber in New York City, said his boss called him on Sunday to tell him that there was not enough work. “I could be home for three weeks. I could be home for four days. I have no idea,” he previously told MarketWatch.

“I even got a piece of paper in my paycheck saying that we cannot use any vacation hours or any sick hours,” he said. “That’s really upsetting because Passover is coming up. Usually, I get paid for that with my vacation hours, and now it’s like a whole month without pay again.”

He said his savings are running out. “We’re going to pay for this month. That’s what we’re leaning towards right now. But next month is still in the air.” Nunez said his landlord had the same problems with other tenants. “They seemed like they were chickens running around with their head cut off.”

Nunez spoke to his landlord to waive late fees and avoid eviction. In the midst of COVID-19, many cities and states have issued moratoriums on evictions. The CARES Act also temporarily prohibits evictions for certain properties funded by the Department of Housing and Urban Development.

(Jacob Passy contributed to this story.)

Rafael Nunez, a New York City-based plumber: ‘We’re going to pay for this month. That’s what we’re leaning towards right now. But next month is still in the air.’

Courtesy of Rafael Nunez

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