Unemployment rate 'has not seen its peak': Economist

Another 2.438 million Americans filed for unemployment benefits in the week ending May 16. Michael Darda, MKM Partners Chief Economist and Market Strategist joins Yahoo Finance’s On The Move to weigh in on the latest jobless report and escalating tensions between the U.S. and China.

Video Transcript

- We want to turn our attention back to markets and what's driving these markets. And to help us understand that, we asked Michael Darda, the MKM Partners Chief Economist, to join us to talk about these issues. But very quickly, I don't know if you can weigh in on this.

But these ramped-up pressures on China and this news about de-listing Chinese companies, do you think that's going to have any kind of impact over the next week, months on the markets Michael?

MICHAEL DARDA: Thanks for having me on Adam. I think the impact is pretty obviously a adverse one. So the question is, how far does this go? And how severe is it? It wasn't long ago that we were in a full blown trade war with China essentially. And that eventually eased. So we can see how markets react to this kind of news at the margin. And it's negative.

So we know it's certainly not a positive. And then further I would just say that there is an underlying agenda here in terms of, you know, certain folks that have wanted to get much tougher with China agenda. Now the pandemic is being used as an excuse to advance that agenda. But before the pandemic there were other reasons for taking those actions. So that is something investors should keep in mind as well.

- Hey Mike, it's Julie here. So bringing us back to the US and to the jobless claims numbers, because I'm curious as we see this pandemic and the gradual reopening and as we simultaneously see the ratcheting up or re-ratcheting up of tensions with China, is that-- I mean, I know we have to look a little further down the road here.

But is that also eventually going to cause some economic pressure on the US and further hamper some of the efforts to improve the job situation, the economic situation here?

MICHAEL DARDA: It certainly could. I mean, it depends on how far it goes and how severe it is. You would think just out of basic self-preservation the administration probably wouldn't choose a time like this to re-amplify the trade war. You know, if we know something about the president, it's that he's pretty sensitive to moves in the equity market.

And so you would think heading into an election, you really wouldn't choose that moment to rock a boat that's already tipped over essentially, you know, which brings us back to jobless claims. So I don't think what's going on with the trade situation is going to be enough to stop or to reverse any potential rebound that might happen in the economy this summer.

We certainly know that we've fallen very suddenly. I mean jobless claims tell us that, right, shooting into the stratosphere. And there's some good news and some bad news. The good news is that first time claims which are a forward looking indicator have been receding. They're still at super high levels. But they've been falling basically for the last seven weeks.

The bad news is that continuing claims continues to ratchet to new highs. So the unemployment rate probably has not seen its peak yet but may peak in the next few months. And so this is certainly a very sharp recession, one of the sharpest, maybe the sharpest in history. It could also go down as one of the shortest, only four or five months.

The next question is, how long will it take us to get back to full employment? And that's what everyone's debating now.

- Well Mike as we're talking, we're watching the downside accelerate, at least on the Dow which is off about 100 points.

MICHAEL DARDA: Yeah.

- You've pointed out sometimes it's better just to try to understand this market than to fight it.

MICHAEL DARDA: Right.

- Elaborate on that. Because I think a lot of investors are trying to figure out with the unemployment picture we have why is the market, for that matter, where it is today pretty much much better than you'd expect?

MICHAEL DARDA: Right. It doesn't seem to make a lot of sense when you look at a stock market, the Dow and the S&P 500 up more than 30% from the lows, yet the so-called fundamentals, whether we're looking at the labor market or earnings, don't look very rosy, in fact look awful. And so that's created a lot of confusion.

But I think if we take a step back and recognize that markets are forward looking, they're not always correct. But they are discounting anticipated moves in the business cycle and in earnings. Typically markets will bottom three or four months before a recession ends.

So we have to ask ourselves, you know, is it completely out of the question that we would see the business cycle bottoming out and starting to recover sometime this summer, which would be consistent with the, let's say, the unemployment rate peaks a bit higher than we saw in April, you know, in May or June of this year or maybe July and then starts to recede from there.

I actually think that's quite likely. And that may be all the stock market is telling us at this point. We're still, you know, we're still off the all time highs for sure. We're still down on the year. But the equity market seems to anticipate a turn in the business cycle. And you have very low discount rates at the same time. And that may be all that's required to explain what's going on here.

It's sort of interesting that some investors that are out there sort of getting angry at the market, maybe they were ill-positioned for what just happened.

BRIAN CHEUNG: Michael, it's Brian Cheung. You're talking about a few things here with the business cycle and then also with the unemployment numbers obviously with another eye popping number this morning. But I'm wondering, you've acknowledged that there is some disconnect between the economic picture here and what the equity markets are anticipating.

But I think there's a delineation here about what the catalyst is going to be in the future, that maybe markets are pricing in right now. So is it unemployment? Is it the expectation that whatever the shape recovery is going to be, markets can be paying attention to any sort of labor market numbers to show that people are being pulled back in? Or is it the business cycle aspect that you just mentioned? In which case, it would really be earnings I guess for the next few quarters.

MICHAEL DARDA: Yeah. Great question. I think it's both, basically the market anticipating a turn in activity. So that would include the labor market and earnings, spending, and investment. And so I think it's important for investors to understand the difference between levels and rates of change.

So the timing on a recovery, when you go from a contraction phase to an expansion phase, is simply just going to be a transition in the rate of change. That doesn't mean that you've regained everything that you've lost in a very short period of time.

For example, if this is a four or five month recession, pretty unlikely, we're going to get all the way back to full employment in four or five months, which would be essentially a perfect V recovery. There's literally no one predicting that. Well, there's actually-- I do have one friend you guys should have on, Lars Christiansen. He's a Danish economist.

He actually makes a quite compelling case that we might see something like that. I'm not that brave. I'm thinking more or less one to two years back to normal. But that would still be quite a bit quicker than where the consensus seems to be, which is somewhere between predicting no recovery like an L or, you know, a very low sloping V-shaped recovery, where it's another 10 years to get back to normal.

And I think, you know, that's probably not likely to be the case unless we end up with a policy failure that goes beyond just the evolution of the pandemic itself. These things aren't going to last for 10 years. The Spanish flu lasted two to three years. So pandemics won't last forever. This should not be a lost decade.

And I think what we have with equity markets is just simply the anticipation of a turn in the cycle. And that will include everything from spending to investment to jobs to earnings.

JULIA LA ROCHE: Yeah, Michael. It's Julia La Roche. I was going to ask you about what shape you think the recovery might be. But instead of that, I just want to know what happens in the scenario where you have people maybe in an older demographic, I'm kind of thinking maybe around 60, who are out of work who might just give up looking for work or employment?

We saw this kind of in the last recession. And then what also happens if companies realize, whoa, we actually don't need this many head count. And we can reduce our workforce and more people can work from home. And they'll be as productive. Or the businesses just don't come back.

MICHAEL DARDA: Right. So I think as long as you have sufficiently supportive policy in place, whether that's the Fed with monetary policy and/or fiscal policy with a important assist, the demand will come back. But it may come back in somewhat different areas. So the composition of spending and investment might look a bit different.

So there could be lingering effects from the pandemic. And that'll be, you know, a really important question that investors will have to ask in terms of where to position going forward. As it relates to the labor market and people giving up and maybe not being tracked properly, there are certain measures that we can watch that were helpful after the Great Recession that told us that there was probably a bit more slack in the labor market than widely recognized.

If you remember, it wasn't long before there was an anticipation that we're overheating. We're already at full employment. And this is what the unemployment rate simply falling into the fives and the sixes from 10%. And we went far lower than that, bottoming out at 3 and a half. So we can watch the labor force numbers.

You do have some people dropping out now. So it is important to look at some of these broader measures of the labor market. And there is some evidence that the unemployment rate now it's just shy of 15% probably doesn't fully capture the shock that hit this labor market.

So I'm not in any way trying to minimize how severe this is. You have to go back to October 1940 to see an unemployment rate as high as the one that we just saw. And that probably doesn't tell us the true state of affairs. That said, my expectation is that we probably see a peak in the unemployment rate any way you measure it within the next few months. And then we start coming down from there.

It'll still probably take a couple of years to fully heal. But any longer than that I think we're really dealing with a policy failure, which is more of a choice than fate.

- Adam, I believe you are muted my friend.

- I am muted so that you all don't hear me coughing while everybody else was talking. Michael Dada, MKM Partners Chief Economist and Market Strategist, thank you very much for joining us. We are going to move ahead to a issue that a lot of people are paying attention--