6.6 Million More Americans Sign Up for Unemployment. Oil Surges. Markets Green.

The US economy is starting to feel the pain of the shutdowns implemented to contain the coronavirus as the number of Americans applying for unemployment benefits smashed another record.

Last week, 6.6 million Americans filed for jobless claims. This is double the record 3.3 million Americans who filed for temporary financial assistance the week before.

The magnitude of the labor market’s contraction is unprecedented. Economists believe that jobless claims will continue to pile in and the number of unemployed could reach 20 million by the end of April. Goldman Sachs predicts that unemployment could reach 15% by June.

Employees from a wide range of industries – restaurants, retail, trade and construction – are seeking unemployment benefits due to massive lay offs.

Several reasons explain why unemployment claims are very likely to continue increasing in the coming weeks:

  • States are either already in lockdown or are starting to tighten restrictions: Florida, Mississippi, Nevada, Pennsylvania and George have all enacted confinement measures. This will lead to a further contraction in economic activity and more workers will be laid off.
  • The Federal bailout will extend the scope of the unemployment benefits program: Financial assistance will be provided to people who weren’t eligible before such as independent contractors, self-employed, free lancers, etc. Companies are more willing to lay people off as they will benefit from the governmental safety net.

However, the real unemployment numbers are even higher than the ones reported. Indeed, unemployment agencies have yet to process all of the claims so the real data will be revealed in the coming weeks. Ironically, unemployment agencies are one of the rare businesses currently hiring.

Here’s a quick overview of how many workers filed for unemployment in the past two weeks:

  • 1 million Californians applied for unemployment benefits,
  • 12% of the Pennsylvania labor force filed for benefits,
  • 10% of the labor force filed for benefits in Rhode Island and Nevada.

Small businesses have been the hardest hit. Indeed, they survive on low cash reserves and their survival is heavily dependent on a stable economic climate. It is estimated that they have laid off more than 6 million workers since March.

These small businesses are hoping that the federal bailout provide them with sufficient aid to survive until the economy reopens.

In theory, the bailout should accomplish this goal: Companies and organizations with 500 or less employees will receive a loan equivalent to 8 weeks of their prior average payroll (for the self-employed this would be earnings), plus an extra 25% of that sum. The total loan for each business is capped at $10 million.

The conditions of the loan are quite favorable: Businesses need not pay back the money for six months and, if they maintain their workforce, the government will forgive the entire share of the loan spent on payroll and benefits, utilities, rent, mortgage payments and other debts.

In sum, the vast majority of the federal loan could be erased.

Will this help workers or line employers’ pockets? The bailout bill mandates that 75% of the loan be spent on payroll and that companies rehire their entire workforce once the crisis is over. If both of these conditions are respected, then the loan can be forgiven.

On top of that, the bailout also provides an extra $600 per week in unemployment payments on top of what states are paying. However, it is still unclear when individuals will start receiving this money.

The only question now is how far will this money go if the crisis goes on for longer than expected? US Treasury Secretary Steve Mnuchin has declared that he will ask Congress for more money to help out small businesses as these measures received huge bipartisan support.

How are the markets reacting?

Incredibly, at writing, the S&P 500 Index is up 1.4%.

Perhaps the market is reacting favorably to oil prices surging by almost 10% following news than Saudi Arabia and Russia may reach a compromise to settle their ongoing price war. An agreement would result in both countries restricting their supply in an effort to bring prices back up.

Further, oil is boosted by buyers taking advantage of the 60% YTD price decrease. China has revealed its intention to boost its oil reserves. This announcement follows President Trump’s declaration that he ordered US energy officials to purchase substantial amounts of oil to boost the nation’s strategic reserves.

However, this may be the only piece of good news: US companies are seriously contemplating cutting their dividends, the economic shutdown is expanding, unemployment numbers are soaring and the economic outlook is bleak.

All of these converging factors could exert downward pressure on markets in the coming days and weeks.

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