We were expecting bad job numbers in March but not the horrific numbers we’ll see next month. That’s because the survey for the March jobs report occurred on March 12 and that was when the weekly jobless claims jumped a pedestrian 282,000. The subsequent weekly claims hit 3.3 million and 6.6 million yesterday so the true picture of job loss from the coronavirus will be felt in the April report. That report won’t arrive until May 8, which seems like a lifetime away at this point. Meanwhile, the March report was bad enough with 701,000 jobs lost with the unemployment rate rising from 3.5% to 4.4%, both of those exceeded expectations (100,000 and 3.8%, respectively). The BLS noted too that some survey answers in regards to employment status were most likely recorded incorrectly such that the unemployment rate could easily have been a full 1% higher. As is their policy, however, they didn’t change survey responses. The rate will likely head over 10% in coming months so a percentage point undercount in March doesn’t seem a big deal at this point.
- The unemployment rate rose nine-tenths to 4.4% (4.382% vs. 3.517% in February) well above the 3.8% expectation. The Household Survey—which is used to generate the various employment ratios— saw 1.353 million persons added to the rolls of the unemployed (7.140 million versus 5.787 million) while 1.633million persons were subtracted from the labor force denominator (162,913 million vs. 164,546 million). The BLS also noted that survey results indicate potential errors in recording respondent answers correctly which suggests the more accurate unemployment number could be a full 1% higher. As is policy they didn’t adjust recorded answers of the survey takers. In any event, Goldman Sachs has the rate peaking at 15% by mid-year. It’s still anyone’s guess where the rate crests but it’s fair to say we’re in for a new post-WWII record. That record is 10.8% set in December 1982 and was almost matched by the 10.0% set in December 2019 during the height of the Great Recession. While a bounce of some sort can be expected given the induced coma we’ve put the economy in, the extent of the damage will make it a long slog to get back to anything close to full employment.
- For the month, 701,000 jobs were lost easily blowing out the 100,000 expectation, and that is with a survey week of March 12 which was the week before the huge spike in jobless claims to 3.68 million so as bad as this number is the worst is yet to come. As one would expect leisure/hospitality-related jobs led the service sector’s 659,000 decline in jobs with 459,000 jobs shed. That number will continue to grow in April. Goods-producing jobs saw a net decrease of 54,000 jobs with construction generating the bulk of the losses at 29,000 month. Manufacturing saw 18,000 jobs lost, more than offsetting the 13,000 gained in February.
- Average hourly earnings printed a 0.4% gain for the month which beat the 0.2% forecast, and was the highest since November 2019. Year-over-year earnings rose to 3.1% for the second time in the last three months. Obviously, the YoY wage gains will head lower in the months ahead as job losses and reduced wages flow into the numbers. Thus, we can look back on this cycle and call March 2019’s gain of 3.4% YoY the high but that pales in comparison to the 4.0+% gains in expansions past. That will be another reason for the Fed to remain super accommodative (read super low fed funds rate) well into the future.
Funding Your SBA PPP Loans
With the rollout of the new SBA Paycheck Protection Program beginning today, most bankers are no doubt swamped with loan requests and will be for weeks to come. The question will come, however, how to fund all these loans? While the purpose of the program is to bridge the bulk of operating expenses of small businesses for the next two months, most loans will generally be under $1.0 million but the number of loans will be sizeable. In order for the loan to be forgiven, the borrower will have to document covered expenses for the two month period after origination. Thus, in a best case scenario loans may be repaid by the SBA in three months, but most likely the process will take several months more.
One area of the balance sheet to generate liquidity for the funding of the new SBA PPP loans is your investment portfolio. With rates near all-time lows most investment portfolios are sitting with sizeable unrealized gains, even bonds with yields in the 1% range. Taking gains on the lowest yielding bonds in a portfolio is one strategy that will work in raising funds and still maintain the existing portfolio yield.
Another strategy could be to search out larger gains that could be used to help offset coming loan losses, and/or increases to loan loss provisions. This is a more strategic use of investment sales that accomplishes two objectives: raises liquidity for the origination of SBA PPP loans while at the same time providing something of a buffer against increased loan loss provisions and/or actual losses that seem to be inevitably coming down the pike.
In either scenario, the investment portfolio can be a valuable resource both for liquidity to fund what’s sure to be a popular loan program, and also provide an additional buffer against coming loan losses. Please contact your CenterState Representative for more information and to more closely review your particular needs and the options available in your investment portfolio.
Unemployment Rate Poised for a Record
While the unemployment rate rose 9/10ths to 4.4% the rate is expected to soar in April and could easily exceed 10% given the level of jobless claims we’ve seen in the last two weeks. Goldman Sachs has the rate peaking at 15% by mid-year. It’s still anyone’s guess where the rate eventually crests but it’s fair to say we’re in for a new post-WWII record. As the graph shows, that record is 10.8% set in December 1982 and was almost matched by the 10.0% set in December 2019 during the height of the Great Recession. While a bounce of some sort can be expected given the induced coma we’ve put the economy in, the extent of the damage will make it a long slog to get back to anything close to full employment.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.07%||+0.08%||1 Mo LIBOR||1.02%||+0.03%||FF Target Rate||0.00%-0.25%||3 Year||0.443%|
|6 Month||0.13%||+0.03%||2 Mo LIBOR||1.44%||UNCH||Prime Rate||3.25%||5 Year||0.491%|
|2 Year||0.24%||UNCH||6 Mo LIBOR||1.20%||UNCH||IOER||0.10%||10 Year||0.638%|
|10 Year||0.59%||-0.09%||12 Mo LIBOR||1.00%||+0.03%||SOFR||0.01%|