US: A Tough Week, and a Policy Mistake

By Dan North | April 27, 2020

As a reminder, we have been saying for a while to expect really awful data for several months, and today’s report is no exception.

Let’s just reel them off - they are all terrible and there’s not much point in discussing them.

  • Existing home sales fell 8.5% m/m in March, the biggest decline in over four years.
  • New home sales fell -15.4% m/m, the biggest decline in almost seven years.
  • Markit PMI indexes, which signal contraction when they are under 50, recorded breathtaking drops. The manufacturing index plummeted from 48.5 to 36.9, while the services index, covering 85% of the economy, crashed down to earth from an already sickly 38.9 to a disastrous 27.0.
  • New orders for durable goods fell -14.4% m/m in March, the second-largest decline ever. The good news here is that most of the drop was due to steep declines in volatile orders for autos and aircraft. After stripping these and other volatile items out, “core” orders actually gained +0.1% m/m (don’t expect to see that again any time soon).
  • The University of Michigan’s Consumer Sentiment survey fell from 89.1 in March to 71.8 in April, still maintaining a surprising degree of optimism. Note that the survey was at 101 in February, the highest level in almost 15 years.

Which brings us to the hottest thing in economics, weekly jobless claims. They have been the most carefully watched piece of data recently because they are so fresh, or as the economists put it, there are “high frequency”. So we got another astronomical number yesterday, showing 4,427,000 new people applied for jobless benefits last week. But, looking for the silver lining, note that in the second chart, it’s the third straight decline, it’s 15% below last week, and it’s 36% below the record high set four weeks ago.

Nonetheless, the situation is terrible. And when we look at it a different way, it’s even worse. As shown in the chart below, since the end of the Great Recession 10 years ago, the economy created a robust 23 million new jobs. And just in the past five weeks alone, they have all been destroyed.

And that leads us to a policy mistake that was intended to support the labor market. A few weeks ago, a handful of Senators threatened to hold up the Coronavirus Aid, Relief, and Economic Security (CARES) act because they thought the unemployment benefits in the act were too generous, and that those benefits would actually pay some employees more to stay at home than to go back to work. Of course, they were scorched for opposing the bill on those grounds, but it turns out, it looks like they were right.

And here’s the chart at the heart of the story. It shows that with the new increased benefits, 37 states now pay those who apply for unemployment insurance at least 100% of their wages, and in many states, quite a bit more.

If you think it’s just a theoretical calculation, here’s a CNBC story which bitterly proves the point.
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