MorningWord 6/8/20: The Boarded-Up Windows, The Empty Streets

by Dan June 8, 2020 10:10 am • MorningWord

On Friday’s Fast Money special at 6 pm, we discussed the May Jobs report, a massive surprise in the change of payrolls, and the unemployment rate. The magnitude of the surprise was curious to many, to which I asked CNBC’s Senior Economics Reporter Steve Liesman’s take on the miscalculation in the Bureau of Labor Statics which caused the unemployment rate to be 3% points below if a subset of nearly 5 million workers were properly classified in the May survey:

He like many clearly acknowledge the mistake, but its the 2.5 million job gains compared to the forecast 7.5 million loss is the headline to focus on, not what the unemployment rate was in May. Let me be very clear, while the May data makes my view on sustained high unemployment wrong directionally, I am very happy that furloughed and laid-off workers are going back to work.


Mohamed El-Erian for Bloomberg called the miscalculation the biggest forecasting error ever for a single data release:

What is particularly puzzling for economists like me, and for Wall Street analysts, is that the BLS report seemingly missed a stage that the vast majority of all other data are going through, or expected to do so: that of getting bad at a slower rate before improving. This aspect will undoubtedly be an area of significant research, including the impact and implications of government policies such as the PPP (Paycheck Protection Program). After all, it is hard to find any higher frequency data that suggest that, as of mid-May (the effective snapshot date for the BLS jobs report), the economy had already turned sharply.

El-Erian suggests that economists like many American, job’s have gotten increasingly difficult due to the pandemic and the politics surrounding almost everything we do these days:

Their work is being complicated by questions about the robustness of some of the data compilation and classification practices used by the Bureau of Labor Statistics and Census Bureau, especially during a pandemic, as well as the high degree of political polarization of numbers.

Oh and if it makes you feel any better about your own forecasting about the economy and markets everyone was really wrong on this one…

economists and Wall Street analysts were uniformly wrong on the direction of the move, forecasting deterioration when the vast majority of the reported numbers pointed to a uniform improvement. The homogeneity of the miss was also notable as not one of the 78 economists surveyed by Bloomberg came close to the actual number. For example, the most optimistic projection for payrolls was a decline of 800,000; the actual number was an increase of 2.5 million.

I guess the real question is whether May was truly an inflection point in the unemployment that resulted from the Pandemic, or will we continue to see tremendous volatility in the data and see lower lows? you guess is as good as mine, but I liked AEI’s James Pethokoukis’s take on the report on Friday:

A surprisingly strong May jobs report, but still 21 million reasons why Washington shouldn’t take a victory lap…

there are many more steps America has to take to complete the “comeback,” which is why Washington should take no more than a few moments of pleasure in these numbers before getting back to work. Unemployment remains historically high, a total outlier. (And that’s not even taking into account that a 13.3 percent unemployment rate probably understates the severity of the ongoing jobs crisis by about three percentage points because of worker misclassification.)

The previous post-World War II high was 10.8 percent in December 1982. And the average recession peak for unemployment (including “jobless” recoveries) is 7.8 percent. So even if the rates dips into the high single digits over the rest of the year, it still means the labor market remains incredibly damaged. The COVID-19 recession may technically be over, but prosperity has yet to return. Capital Economics: “While we do expect a continued surge in hiring in the coming months, the need for continued physical distancing well into the future suggests there will be lingering damage in some industries, with the unemployment rate remaining elevated for years.”

I suspect as the initial surge of reopenings abates, and some industries come to accept the new realities in a post-pandemic world that involves lumpy international trade, huge costs associated with social distancing, hospitality industries dealing with less tourism and forced lower capacity, and white color jobs being rationalized in a work from home, lower revenue environment will cause waves of unemployment in the months/quarters to come.

This brings me to a point I made on Friday’s show, New York City where I have lived since the mid-1990s might truly be changed at least until there is a vaccine. The major private sector employers in this town, financial firms, media, advertising/pr/marketing will all be making cuts in the summer/fall. Talk to any manager at these businesses, the optics of doing it during a health pandemic were bad, so they waited to see how long the lockdowns would last, but many have realized that they can cut lots of costs, those are coming. Oh, and the work from home thing for large parts of the white color workforce will stay in place for some time. Think about the ecosystems that exist to support these workers, lunch spots, coffee shops, Irish pubs, fancy restaurants, cocktail bars, delivery workers, ride-share, public transportation, etc etc. I know lots of NYers who are saying if I don’t need to be here for my job any more than why be in a dense urban area that suffered 22% of the deaths in our country during this pandemic, why pay the premium to be in a petri dish? If their private schools are going to be remote learning then move to the sticks and save the cash.

That’s not to mention the public sector employers, The City of NY, Dept of Ed, Dept of Health, and the MTA (public transport) will all be facing massive budget pressures due to lost tax revenue and budget shortfalls.

I am hopeful the hollowing out of NYC of late is just a short-term response to the pandemic, but I am worried about small business, I am worried that if 1 in 3 restaurants don’t reopen at all, if Broadway doesn’t reopen until next year if white-collar workers don’t need to be here then their expense accounts spent on drinks, meals, concerts, knicks games, Ubers all go away, and so will those people who used to do those jobs. If bankers from London, Hong Kong, and San Francisco no longer fly to and from NYC to pitch deals who will stay at the Plaza or the Ritz, dine at Pastis and Union Square Cafe? If Madison Square Garden only hosts the teams, not the fans and certainly not concerts who are dining on Keen’s Steakhouse’s famous Mutton Chops? Who is going to buy or rent the thousands of apartments and commercial space that just came online in Hudson Yards and other parts of the city like Chelsea and Tribeca? What will all those domestic workers, busboys, and dog-walkers do for work?

You get the point, NYC is going to be a tough sell for a while.

This time is different, I lived in London in 2000 and 2001 but came back to NYC three months after 9-11 and while the mood was somber and still shell-shocked there was resolve that the city would rise up, stronger. It is obviously too soon to say what is going to happen, but unlike in the aftermath of 9-11, our country is as divided as it has been in my lifetime and the right solutions will be less obvious to half of our population, which makes me less confident that the right choices for our citizens will be made.

The looting last week in this city and many others around the country that diverted attention from what was largely peaceful protests about police brutality was a sort of gut punch to an already hollowing out of bricks and mortar retail in NYC.

This is what my neighborhood looks like from last Monday to this Monday:

I worry that the stock market is saying one thing about the pace of the recovery, and the true state of the economy, but if a city like NYC is slow to recover, I am not sure the rest of the country will be able to do most of the heavy lifting.

NYC is today entering Phase 1 of its reopening plan, lets see that the protestings bring on the virus front, let’s see how many employers bring their workers back, how confident residents are to eat at restaurants, etc, because aside from outside activities there will be little to do in this urban jungle until there is a vaccine. Maybe I am being a bit dramatic, and of course, I want to get back to where we were pre-pandemic, but even then it was my view that our situation was a bit of a debt-fueled mirage on every level.

I fear that the boarded-up windows and the empty streets will have a lasting financial toll on this city.