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California’s unemployment claims are staggering

Things have not been going well for the Golden State recently. Among rolling blackouts, wildfires, and a Bay Area exodus the state also boasts exceptionally high unemployment. Over 6.3M Californians collected unemployment benefits based on the Department of Labor’s most recent weekly data – representing over 35% of the state’s covered employment*. Over half of these unemployment claimants are receiving benefits from the newly created Federal pandemic programs intend to provide benefits for “gig economy” workers and extend additional benefits to those that had exhausted traditional unemployment.

The Pandemic Unemployment Assistance (PUA) program was created to provide 39 weeks of unemployment benefits to “gig economy” workers and others who are unable to work due to COVID, but who are not eligible for traditional unemployment benefits. The smaller Pandemic Emergency Unemployment Compensation (PEUC) program provides 13 weeks of additional benefits for workers who have exhausted their rights to traditional unemployment benefits.

A few takeaways from this data:

  • The threat of an Uber/Lyft shutdown in California comes at the worst time. If those services do cease to operate, the PUA rolls may balloon even further in the near-term, and if rideshare drivers are classified as traditional employees, there may be fewer jobs for them to return to once economic activity begins to return to pre-pandemic levels.
  • Several key election states (Ohio, Pennsylvania, and Michigan) have more claimants on PUA than traditional unemployment. As the PUA and PEUC programs are set to expire on December 31st, an extension of these programs into 2021 may be a valuable campaign promise from the candidates.
  • Hawaii’s high unemployment is unsurprising given it’s large tourism industry and it’s mandatory 14-day quarantine for new arrivals, which deters all but the most dedicated visitors. Given the dependence of Hawaii’s economy on tourists arriving by plane (or cruise?), the recovery in that state’s labor market will be much slower.

*Covered employment only considers employees who are eligible for traditional state and federal unemployment programs, so 35% is not California’s unemployment rate. The large share of potential PUA claimants (the corresponding denominator of “gig economy” workers) is not accounted for in traditional covered employment.

The Wall St.-Main St. disconnect is global

One of the major themes in the crisis has been the growing disconnect between the US stock market and the reality of the economic crisis on average Americans. Around the world, global stocks in several key markets are also out of step with the economic pain felt in their domestic economies. In general, countries with more severe economic contractions expected in 2020 have seen stocks fall sharply. However, stocks in the US, China, Germany, Japan, and India have been notably resilient.

In China, the MSCI China ETF has returned 10.6% YTD, despite the IMF’s estimate for 2020 GDP growth falling by 5 percentage points during the same timeframe.

In January, the IMF forecast that the US economy would grow 2.0% in 2020. As of their most recent forecast in June, the economy is set to shrink 8.0% – representing a delta of -10% for economic growth since the beginning of the year.

Globally, growth expectations have been reduced by 8.2%, with particularly sharp contractions in Western Europe, Brazil, and Mexico where the impacts of COVID have been more severe.

In APAC, GDP forecast revisions have been more mild. The IMF forecasts less economic pain for China and Japan, owing to earlier emergence from lockdown in China and less significant disease incidence in Japan.

In Japan, stocks have been resilient – falling less than 5% YTD. In China, the MSCI China ETF (MCHI) has so far outperformed the S&P500 YTD.

In Europe, German stocks are roughly even YTD, while France, UK, Italy and Spain have all seen 10-20% declines.

Developing markets that are more dependent on commodities have been particularly hard hit. Stocks in Brazil, Mexico, and Nigeria have fallen 25% or more YTD. By contrast, stocks in India have been fairly resilient despite a 10.7% reduction in forecasted GDP growth, which swung from +5.8% in Jan to -4.9% in June.

How the remainder of the year will shake out for global equities remains to be seen, but what bears repeating is that a country’s stocks do not necessarily reflect the underlying domestic economic picture. This is true for many reasons, including concentration of equity indices into pandemic-resistant or cyclical sectors (e.g., technology in the US, mining in Brazil), greater international diversification of revenue for domestic stocks, as well as a backdrop of US elections and geopolitical tensions which will create new winners and losers in certain economies and sectors.