On the ‘Scarring’ Scare

In the week ending June 13, another 1.5 million US workers filed for unemployment benefits—the 13^th straight week of massive claims.^[i] In total, a staggering 45.7 million people have filed since mid-March.^[ii] Joblessness is no doubt a personal tragedy—one way too many Americans currently face due to the COVID lockdowns. Some suggest this will drive lasting economic damage—“scarring”—that will persist even after lockdowns end, hampering stocks and any economic recovery. With layoffs remaining high even as businesses reopen, some think this scarring has already set in. But we think this thesis gets it backward. Businesses’ hiring decisions respond to economic conditions—they don’t determine the economy’s direction.

Some economists argue claims’ remaining historically elevated, even as states reopen, is evidence of scarring—that lockdowns’ economic impact is permanent, not temporary, as businesses fold and force folks out of jobs. Instead of a V-shaped economic recovery as businesses reopen, they project more of an L-shape as businesses cut back and people struggle to find work, keeping demand low for years. In our view, this ignores some crucial factors. For one, it isn’t clear employers actually laid off 1.5 million people in June’s second week, as many states continue having issues processing claims. States’ unemployment agencies are generally staffed to process hundreds or maybe thousands of claims a week, give or take. When they suddenly received tens or even hundreds of thousands of weekly claims under lockdown, a backlog piled up.

Last week in Kentucky, hundreds who filed for unemployment benefits in previous weeks waited in long lines at temporary offices to receive word on their applications’ status.^[iii] To work through the bottleneck and resolve their claims, the state is hiring an outside contractor to “help process a backlog of thousands.”^[iv] Other states reporting backlogs in the last week include, California, Idaho, Iowa, Maryland, Michigan, Nevada, New Jersey, North Carolina, Oklahoma, Oregon, Washington and Wisconsin. In Washington, the National Guard is now helping process claims.^[v] Reports suggest many claims filed weeks ago are only now registering as states work through their mountains of unprocessed claims.

In our view, this suggests not everyone reported as newly unemployed in a given week actually lost their job that week. There may also be issues with double counting, as some people file multiple times or with different programs. These technical issues blur the picture claims data present.

With that said, state-level data offer some preliminary evidence that reopening is spurring some economic green shoots, even in labor markets. America’s reopening process is still early—and uneven. Those further along have seen more employment improvement thus far. Oregon, for example, was under partial lockdown until last Friday. That day Multnomah County—home to Portland, the state’s most populous region by far—became the last to start phase one reopening. Contrast this with Colorado, which began reopening statewide in late April. In May, when national employment rose 1.9% m/m, Oregon’s rose 1.3% and Colorado’s 2.8%.^[vi] From jobless claims’ peak in the week ending April 25 and the most recent report, Oregon’s weekly claims fell -53%, while Colorado’s dropped -74% (US claims fell -61%).^[vii] Or take late-opening California and early-opening Texas, the two biggest states by population and GDP. California employment rose 0.9% m/m in May, while Texas’ increased 2.0%.^[viii] California’s initial jobless claims fell -23% from April 25 to the most recent report, whereas Texas’ dropped -62%.^[ix] Of course, every state faces somewhat different circumstances, but we think this helps illustrate how lockdowns’ duration is affecting data.

Economic scarring is, in our view, a twin argument to “jobless recovery” headlines that typically accompany—and cast doubt on—early economic expansions. High unemployment—even to previously unprecedented levels—has never stopped recovery before. In 2009, unemployment peaked at 10.0% in October, but recovery began in June.^[x] The other time post-WWII unemployment rose into double digits was 1982, hitting 10.8% in November.^[xi] It stayed above 10% through June 1983, even as a new bull market began in August 1982 and GDP resumed growing in Q1 1983.^[xii] High and rising joblessness doesn’t prevent turnarounds because expansions don’t hinge on hiring. Rather, hiring is an after-effect of the business investment that usually drives a turnaround. Only once companies reach the limits of their ability to boost output with less headcount do they ratchet up hiring. Markets move in advance of all of this, pricing in future growth before it materializes. Stocks don’t need perfection. They need only spy better days ahead—against prevailing pessimism—for recovery to begin.