The key numbers will be the labor numbers: Economist

Steven Blitz, U.S. economist at TS Lombard, joins The Final Round to discuss the state of the economy and what could be on the horizon with the upcoming jobs numbers.

Video Transcript

MYLES UDLAND: We're joined now by Steven Blitz. He's a US economist over at TS Lombard.

And Steven, I want to start with a topic that you addressed in your latest note and something that we kind of puzzled over last week. I wrote about it, but I'm not exactly sure if I got any 100% firm satisfying answers, which is what's the deal with jobless claims? 2.1 million 10 weeks into this cycle where we've been led to believe, at least based on the April jobs report, that a lot of these layoffs were temporary. Just thinking about the jobs report on Friday and the way the labor market has shifted, what do you make of that data? And do you think that we're looking at probably a-- or perhaps a deeper slump in the second half of this year than maybe the stock market is pricing in?

STEVEN BLITZ: To the last point of your question the answer is simply yes. But I think to go back to the jobless claims numbers, the fact that the initial-- I'm sorry, that the continuing claims dropped off by like 3 million, that was a critically positive number, which showed you that people are getting pulled back to work. The fact that it's still around 2 million is a horrendous number when you think that normally in a recession, that recession that gets you up to 8%, 10% employment-- unemployment rate, you're running around 800,000 a week. So that 2 million is a lot.

I'm going to say, for the moment, that a lot of that has to do with bureaucracy at the state level. A lot of people just couldn't get online to apply in a lot of states where what you did was not eligible for state unemployment but it was eligible for federal. Like in New York, for example, you had to apply get rejected and reapply. So there's a lot of-- I know-- I think they've changed that, but a lot of states, it probably hasn't been changed. So I'll still call that a residual. So that to me the most important number on the weekly numbers is the-- is continuing claims and watching those drop is a very positive sign.

Now, you know, two-handed economists, right? So the negative is this. When you look at job searches for unemployment insurance which tracks very well with initial claims, they seem to have leveled out on the downside. And that's suggesting, which has been my contention all along, which is that as the temporary mandate shut down, reopening occurs, we're going to see the recessionary impact of what's been created. And that's kind of what that job search number is telling you about.

MYLES UDLAND: And so then, Steven, I guess as you think about the second half of this year and what a recovery might look like. Have your expectations changed considerably over the last month? Is it, to you, about what happens with this labor market we've been discussing? Is it about, you know, how the virus progresses into the later half of the year? What are you kind of keying off right now?

Well, I-- look, on the virus, I have to be in the middle, right? So the virus I have to say, no cure, but no resurgence that shuts people down, whether mandated or not. Because I can't forecast either, and so I just take a middle path that people just mitigate, they learn what to do, and they kind of live their lives as they've done in the past in the premedicine era, sort of pre-World War II.

But in terms of the economy. I think the key numbers will be the labor numbers as opposed to top line GDP. The top line GDP numbers are going to look great just because you're shutting down and reopening. The top line unemployment rate number is going to look great in terms of its movement, because you'll go from 25% to say 8% or 10%. But understand that 8% to 10% unemployment is a significant unemployment number for recession in this country in the post-war.

And what's also going to happen, which is going to change the politics of it-- because I overheard your political conversation earlier, but not to get too far into it-- is that right now who's gotten laid off is essentially the low skill, low wage worker, right? Because that's who works in restaurants and retail stores, et cetera. As this recession goes on, who gets laid off starts to move up the skill and income chain, and you're going to start to see political pressure on doing something change from where we are right now. Because right now it's, well, we're reopening. We'll get some package passed after July 31, but it doesn't have to be anywhere near as expansive as the ones we've passed. My guess is that's going to start to change as we get into July.

SEANA SMITH: Steven, you mentioned that the labor number is the number to watch. We obviously have a pretty high rate of unemployment right now. Could be expected to rise over the next couple of weeks. But as we try to dissect or I guess dig into what that exactly means for so many businesses, a lot of businesses have started to reopen, but they're not rehiring all the workers that they have had to lay off. Consumer confidence, Americans aren't spending as much as they were before this current crisis. So how do you think that plays into business's recovery and then the potential rise in bankruptcies because of that?

STEVEN BLITZ: Well, I think you hit it right on the head. I mean, the answer, once again, is simple yes.

So I think what's going to be interesting on Friday when we see the employment data is that, a month ago, 80% of the people who were unemployed said that they were on a temporary furlough. And that kept up forward expectations on the economy, and you see that in a lot of consumer surveys. When you flip to this month, has that changed?

Because as the recognition grows that this is not a three month bank holiday, but that even opening up to your point stores that close, restaurants, whatever aren't going to hire back the same number of people, right, and from that, bankruptcies are going to rise and the area where this hurts the most is through the small businesses. And this is why the fed's been pushing lending programs and why the treasury has been pushing lending programs.

Because what the fed does, in terms of interest rates and, broadly, monetary policy, favorably impacts the largest firms, but it doesn't reach down into the small store, a small manufacturing firm, the small service firm. And this is where, when those bankruptcies start to rise, it starts to adversely impact the small banks, because that's who lends to these firms. So that's where it does start to get worse. So you know, it-- so what evolves is a recession, is a plain old vanilla recession that's going to be glossed over a bit if you just look at top line GDP.

MYLES UDLAND: All right. Steven Blitz with TS Lombard. Thanks joining the program. Always great to get your thoughts. We'll talk to you soon.

STEVEN BLITZ: OK. Thank you.