Why the US jobless surge is worse than in Europe
America’s emergency aid supports those made unemployed instead of preventing lay-offs
For decades, European economists have studied the American labour market with admiration, recognising its superior flexibility and lower average unemployment rates over successive economic cycles.
Furthermore, in contrast to many European economies, there has been no upward drift in the equilibrium, or “natural” unemployment rate, needed to stabilise inflation in the long term. These advantages are often said to explain the extra dynamism and higher growth of potential output in the US economy, though some of these claims can be disputed.
But the rise in the US unemployment rate since the start of the Covid-19 crisis has been much greater than that in Europe. According to data for April 2020, US unemployment has risen by 11.2 percentage points since February, while in Germany the increase has been only 0.8 points.
Full crisis figures are not yet available in other European economies, but JPMorgan’s latest forecasts show US unemployment rising by triple the increase expected in Europe by the third quarter of 2020.IMF forecasts show similar patterns.
Why is this happening?
One possible explanation could be that the US lockdowns have been more severe than in Europe. But the opposite seems to be the case. According to Goldman Sachs’ “effective lockdown indices”,the impact on the level of US output from virus control restrictions was around 15 percentage points in April, compared with about 20 points in the EU and the UK.
It seems that US businesses have responded to the events of the past few months by increasing the number of lay-offs much more rapidly than has happened in Europe. This could reflect the traditional hire-and-fire structure of the US labour market, including the much greater ease in declaring redundancies. However, it also seems to be due to the nature of emergency employment support measures introduced on either side of the Atlantic.
In Europe, much of the fiscal ammunition has been spent on directly supporting businesses that have kept workers formally “employed” in their original jobs, even if they are no longer working full time. For example, in Germany, the short-time working scheme — or Kurzarbeit — has already replaced up to 60 per cent of earnings for 10m employees who might otherwise have lost their jobs. This scheme worked well after the 2008 financial crisis and is now being copied by other European countries.
In the UK, the coronavirus job retention scheme has replaced 80 per cent of lost earnings for 7.5m employees, up to a maximum of £2,500 a month. Chancellor Rishi Sunak has sensibly announced that a version of this scheme will remain in place at least until the end of October. Without such schemes, lay-offs and redundancies in Europe would already have been vastly greater.
In the US, the nature of government support has been different. The overall scale of fiscal spending through the Coronavirus Aid, Relief, and Economic Security Act has been larger than in Europe. However, more of it has been aimed at income support for workers who have become unemployed, often with the result that some of those displaced are actually better off than in their full-time jobs before the crisis.
While the American Paycheck Protection Plan is intended to help small companies keep workers in their original jobs, its coverage has been limited compared to equivalent programmes in Europe. Bottlenecks have slowed down the disbursement of urgently needed cash.
There is still time to repair some of these snags in future stimulus packages, but Congress does not seem to be travelling down that path. This is perhaps why Federal Reserve chairman Jay Powell has repeatedly expressed strong concerns about the danger of the huge surge in unemployment becoming entrenched, slowing economic recovery. He warns this could happen unless there are new programmes of direct intervention from the federal government.
Recent influential research by economists at the Federal Reserve Bank of San Francisco has reached similarly worrying conclusions about the persistence of high unemployment after the pandemic. Ironically, the flexibility of the US labour market, which has long been its greatest asset relative to Europe, may have become a handicap during the current crisis.
Mystery of prolonged Covid-19 symptoms adds to unknowns
Growing evidence that some sufferers have to endure problems from fatigue to organ pains for six weeks or more
When Rachel Pope was diagnosed with suspected coronavirus, she did not know it would take a month before she would start to feel better. Or that she would “relapse” the following week, with terrifying kidney, heart and lung pains.
“It’s very scary,” said the UK-based lecturer, who as of Sunday was on day 70 of her symptoms. “It’s been very changeable — I think as it works its way through different systems.” The woman she suspects she caught the virus from, who first felt symptoms three months ago, is still suffering from fatigue.
The two are not alone in their prolonged illnesses. Around the world there is growing evidence of people with confirmed or suspected Covid-19 suffering symptoms for six weeks or even longer — one more mystery to add to the list of unknowns about the virus and how it affects the human body.
Scientists do not yet know whether these people are infectious throughout their illnesses, or whether they are suffering from the disease itself or from some knock-on effects. The answers will have significant implications for health systems around the world that are already under immense strain, and inform decisions on how governments lift lockdowns.
“I’ve studied hundreds of diseases and this is the most unusual,” said Tim Spector, professor of genetic epidemiology at King’s College London.
Data from his team’s symptom-tracking app, which has been downloaded by more than 3m people globally, indicated that about 10 per cent of people still had symptoms at 25 days, and 5 per cent were still ill a month later.
“Someone urgently needs to be doing studies on these people,” said Prof Spector.
Different countries list a range of virus symptoms. The UK National Health Service names only high temperature and continuous cough, while the US Centers for Disease Control and Prevention outlines five more, including muscle pain and loss of taste or smell. The World Health Organization lists more than a dozen, categorised as most common, less common and serious symptoms.
Paul Garner, professor of infectious diseases at the Liverpool School of Tropical Medicine, has blogged about his experiences of lingering coronavirus symptoms, as he approaches his seventh week.
“The illness went on and on. The symptoms changed, it was like an advent calendar, every day there was a surprise,” he wrote this month. “Sometimes I felt better and became optimistic; after all, the paralytic state had not recurred; but then the next day I felt as though someone had hit me around the head with a cricket bat.”
In a survey by wellness group Body Politic of several hundred people who suffered prolonged virus symptoms in North America and Europe, 91 per cent who had not yet recovered had experienced symptoms for an average of 40 days. Not all of them had tested positive for the virus.
Ms Pope was admitted to hospital twice when she first became unwell, where doctors diagnosed potential blood clotting and then a possible heart attack. Both times the tests were negative and she was later sent home with suspected Covid-19. She has not been tested because of the UK’s strict eligibility criteria but is “fairly convinced” she has the virus.
Kaveri Jalundhwala, a trainee doctor in the UK, who had more than 40 days of symptoms, said she was not tested for a month, and when she was it came back negative. Near the start she felt better and returned to work, only to fall sick again. “I’ve had three waves of getting ill and better,” Dr Jalundhwala said. She is “absolutely sure” she was still infectious when she went back to work.
Since many of those suffering prolonged symptoms will not have been admitted to hospital or tested, they “aren’t being counted in any kind of statistical way” in official data, said Dr Jalundhwala.
It is far from clear why some people experience these extended periods of disease, and what the implications might be. One suggestion is that those with underlying health problems are more susceptible to longer illnesses: the Body Politic survey found that 58 per cent of respondents had at least one pre-existing condition, such as asthma or vitamin D deficiency.
The persistence of tiredness has prompted some to speculate that this could be something like post-viral fatigue rather than Covid-19 itself.
Mike Ryan, executive director of the WHO’s health emergencies programme, said he was aware of reported cases of “relapses” but it was important to understand whether these were reinfections, the continuation of the disease or the result of a different, chronic condition.
Those who have been admitted to hospital “could remain quite frail” for some time after being discharged, he added.
Derek Hill, professor of medical imaging science at University College London, said he was particularly concerned about those suffering long illnesses who had not been admitted to hospital and were not being monitored. “People initially thought this virus was like flu, but it’s quite different,” he said. “Bafflingly so.”
Why Grounded Aircraft Is Hurting Rolls-Royce Stock
Rolls-Royce Holdings , which sells turbines and engines for passenger jets and military aircraft, had turned a corner following a string of profit warnings and bribery allegations from 2016.
These allegations were investigated on both sides of the Atlantic and resolved after Rolls-Royce (ticker: RR.UK) reached a legal agreement with the U.S. Department of Justice and the United Kingdom’s Serious Fraud Office.
After sinking to a low of 529 pence in February that year, the shares recovered, almost doubling to 981 pence in February 2019 on its ambitious low carbon plans.
But by the end of last year, they had slid to 686 pence, after the company revealed in November a plan to resolve problems with its Trent 1000 engine, which would cost 2.4 billion pounds sterling ($2.9 billion)—more than the £1.6 billion first forecast.
The impact of coronavirus has caused the stock to plunge to 279 pence. The engineering group makes a significant portion of earnings from maintenance contracts for its engines, and if aircraft are grounded, regular maintenance isn’t needed, reducing earnings. While this will be a short-term issue—and some analysts see the low share price as a buying opportunity—the impact of this and the Trent 100 problem are a double whammy that means the stock is best avoided in the short term.
Research firm Vertical downgraded Rolls-Royce from Hold to Sell in a March note, discounting the stock by 14%, to 240 pence. Analyst Robert Stallard wrote that Rolls-Royce looks vulnerable: “This is a company that was not in the best of financial shape before this down cycle hit.”
The firm, which has a market value of £5.4 billion, fetches a high 43 times this year’s expected earnings and trades at a considerable premium to its peers.
In February, it posted operating profit of £810 million for 2019, up from £631 million on revenues of £15 billion. But CEO Warren East told Barron’s that the company is taking “swift action” to adapt to the impact of Covid-19 on its civil aerospace operations while drawing on the “resilience” of its defense business and looking for a postpandemic boost in power systems, in areas such as the backup power-generation market.
“The synergies between our divisions leave us well placed to capitalise on the long-term potential of all our markets,” he says. “The world on the other side of this pandemic will need the power that we generate to fuel economic recovery, and I absolutely believe the call for that power to be more sustainable and lower carbon will be as strong as ever. This plays to our strengths.”
The Rolls-Royce name came from an electrical and mechanical business set up by Henry Royce. He built his first automobile in 1904, and teamed up with salesman Charles Rolls to produce cars under the Rolls-Royce badge. At the start of World War I, the government asked it to move into aero engines. In 1971, the firm ran out of money and was nationalized. Two years later, the U.K. government floated the car business on the London Stock Exchange, and it was taken over by Bayerische Motoren Werke (BMW.Germany) in 2003. The engine business was floated in 1987.
Now, Rolls-Royce may announce as many as 8,000 job cuts by the end of the month, according to news reports, because Boeing (BA) and Airbus (AIR.France) require fewer engines. Separate from the pandemic, it will take a few years to resolve the premature wear on the turbine blades of the Trent 1000 engine, used in Boeing’s 787 Dreamliner.
Rolls-Royce’s defense business is stable because government budgets have remained steady, but its commercial business will be in turmoil for some time.
Investors would be best to power away from the stock for now.
Why Luxury Brands Are Raising Prices in a Pandemic
Top-tier brands like Chanel and Louis Vuitton are hiking prices in what looks like a bid to pad margins, cushion the impact of lower sales volumes and capitalise on the China rebound.
The Covid-19 pandemic has savaged the global economy and crushed consumer demand for luxury goods. Now may not seem like the best time to raise prices on expensive handbags. But that’s exactly what top-tier luxury brands Chanel and Louis Vuitton are doing.
Louis Vuitton raised prices by 3 percent in March and another 5 percent in April. This week, Chanel was even bolder, raising prices on its iconic 11.12 and 2.55 handbags, as well as its Boy, Gabrielle and Chanel 19 bags, and certain small leather goods, by between 5 percent and 17 percent. The percentage increases reflect prices in France, but the hikes are being phased in globally.
As the news leaked, thousands of shoppers in Asia flocked to Chanel stores to snap up handbags before the price increases take effect in their markets in what effectively became a sort of reverse sale. Lines formed outside Chanel boutiques in Shanghai, Hangzhou, Guangzhou and Beijing. In Seoul, the queues were so long that the municipal government is considering an order to suspend Chanel from doing business in the city, citing fears over Covid-19 infections.
Luxury prices have been rising for decades, growing at more than twice the rate of inflation. It’s common to see one to two price hikes per year, typically under 10 percent, reflecting everything from the rising costs of raw materials and labour to the customer’s growing willingness to pay. But the amount of Chanel’s latest increase raised eyebrows.
“Like all major luxury brands, we regularly adjust our prices to take changes in our production costs and raw material prices, as well as exchange rate fluctuations, into account,” said a spokesperson for Chanel. “In the current environment, the price of certain raw materials, which were already difficult to procure due to the quality we require, has increased again.”
The pandemic has no doubt disrupted the luxury supply chain and product shortages may even be a factor. But raising prices will also help Chanel and its competitors to pad margins and cushion the bottom-line impact of lower overall sales volumes as they try to make up for revenue lost during weeks of forced store closures. Louis Vuitton declined to comment.
It’s a very difficult time for the luxury business. According to Bain, sales are expected to sink by up to 35 percent this year. Consumer demand remains extremely low in Europe and the United States, where retail is slowly sputtering to life again. But Asian spending is bouncing back, if not to pre-pandemic levels, then at least enough to signal opportunity.
Chinese consumers drove 90 percent of global luxury growth last year and, in its first quarter results, Louis Vuitton owner LVMH, a bellwether for the sector, reported a sharp rise in Mainland China sales, starting in mid-March as stores in the country began re-opening. Raising prices will surely help brands like Chanel and Louis Vuitton make the most of the momentum.
Raising prices will help Chanel and its competitors to pad margins and cushion the bottom-line impact of lower overall sales volumes.
Of course, Chinese consumers historically do only about one-third to half of their luxury spending at home, preferring to buy while travelling outside Mainland China, both to benefit from the symbolic value of buying European luxury goods in the continent’s fashion capitals and capitalise on persistent price differentials. And with overseas sales effectively at zero, Mainland sales would roughly have to double or triple to make up for lost revenue.
Chanel said its price hikes were in line with the “harmonisation” strategy it adopted in 2015 to better equalise prices across markets. “These adjustments are made while ensuring that we avoid excessive price differentials between countries,” said the spokesperson for the brand. “We believe it is essential not to penalise our clients on the basis of geographic considerations.”
Louis Vuitton has also made attempts to minimise price differentials. Last April, when the Chinese government lowered its VAT on luxury goods from 16 percent to 13 percent, the brand responded by lowering prices in China by 3 percent. In a statement at the time, it said it was “fully supportive of the Chinese government’s ongoing efforts to narrow the price gap between China and overseas.”
But the recent price hikes are global and do not seem calculated to drive the repatriation of Chinese spend. Nonetheless, Asian consumers appear likely to stomach the increases, at least when it comes to Chanel and Louis Vuitton, such is the pricing power of top-tier brands.
The strategy is probably not replicable for brands further down the food chain, however. Indeed, it serves to further differentiate the true luxury credentials of brands like Chanel from competitors, who may have a hard time increasing prices in Asian markets where some consumers may be feeling squeezed by the economic contraction and tired of paying more.
According to market reports, Gucci and Prada, which may not be seeing as strong a recovery in China, are playing a more cautious game on pricing, with no plans for hikes. The ailing British label Mulberry is even going in the other direction, lowering its prices by up to 20 percent in some Asian markets in an attempt to entice consumers to buy. Whether anyone else has the guts to put their brand credentials to the test and implement Chanel-style price hikes remains to be seen
Closing Stock Market SummaryThe S&P 500 (+0.4%), Dow Jones Industrial Average (+0.3%), and Nasdaq Composite (+0.8%) ended Friday's session modestly higher, recovering from early declines that followed more weak economic data and increased U.S.-China tensions. The Russell 2000 outperformed with a 1.6% gain after a rough week for the small-cap index.
The communication services (+1.3%), consumer discretionary (+1.1%), and materials (+1.0%) sectors led today's gains, helping the S&P 500 rebound from an early 1.3% decline. The utilities (-1.4%) and financials (-0.7%) sectors were Friday's laggards.
Early in the day, economic data showed total retail sales decline a record 16.4% m/m in April (Briefing.com consensus -11.9%) and industrial production decline 11.2% m/m in April (Briefing.com consensus -12.1%). The market wasn't visibly upset by the data, though, likely due to the prevailing view that it can't get any worse.
Instead, there was a negative reaction to news that the Trump administration moved to block semiconductor shipments to China's Huawei Technologies. With relations already strained because of the coronavirus outbreak, the move renewed worries about potential Chinese retaliation against U.S. companies.
Investors bought buy the dip, though, except in the semiconductor space given the headline negativity. The Philadelphia Semiconductor Index declined 2.2%, which included an earnings-related decline in Applied Materials (AMAT 52.04, -2.39, -4.4%).
Outside the semiconductor space, oil prices capped a strong week with another solid performance. WTI crude futures rose 7.1%, or $1.94, to $29.38/bbl today to extend its weekly advance to 18.8%.
DraftKings (DKNG 29.23, +3.92, +15.5%) was an individual standout after the sports betting company topped EPS estimates and provided positive commentary regarding its outlook.
U.S. Treasuries ended the week with modest losses. The 2-yr yield increased one basis point to 0.15%, and the 10-yr yield increased two basis points to 0.64%. The U.S. Dollar Index declined 0.1% to 100.38.
Reviewing Friday's economic data:
- Total retail sales declined a record 16.4% m/m in April ( consensus -11.9%) while retail sales, excluding autos, declined 17.2% m/m (consensus -8.2%).
- The key takeaway from the report is that the broad-based weakness is a representation of the adverse spending shock that resulted from shutdown measures, announced pay cuts, and the massive jump in unemployment.
- Industrial production declined 11.2% m/m in April (consensus -12.1%), which was the largest monthly drop in the 101-year history of the index. The capacity utilization rate fell from 73.2% to 64.9% ( consensus 64.0%), which is 14.9 percentage points below its long-run average and a record-low in a series that dates back to 1967.
- The key takeaway from the report is that it is a reflection of how industrial production cratered amid shutdown orders designed to contain the spread of COVID-19. On a yr/yr basis, industrial production was down 15.0%.
- The University of Michigan's Index of Consumer Sentiment rose to 73.7 in the preliminary reading for May (consensus 67.4) from 71.8 in April.
- The key takeaway from the report is that attitudes about current conditions improved while sentiment surrounding the outlook continued to deteriorate, pinched by concerns about financial prospects that were most notable among upper income households. That is apt to be a headwind for a pickup in consumer spending.
- The Empire State Manufacturing Survey for May checked in at -48.5 (consensus -58.0) following the prior month's reading of -78.2.
- March job openings decreased to 6.191 mln from a revised 7.004 mln in February (from 6.882 mln).
- Business inventories decreased 0.2% in March, while the February reading was revised down to -0.5% from -0.4%.
Looking ahead, investors will receive the NAHB Housing Market Index for May on Monday.
- Nasdaq Composite +0.5% YTD
- S&P 500 -11.4% YTD
- Dow Jones Industrial Average -17.0% YTD
- Russell 2000 -24.7% YTD
Covid-19 has strained most relationships, and U.S.-China tensions are now higher than they were before the trade deal. This time, the outlet for frustration isn’t tariffs but technology . The U.S. and China are locked in a race to dominate the next wave of wireless communications—and it just got ugly.
On Friday, the U.S. stepped up its efforts to block China’s development of fifth-generation, or 5G, communications, taking aim at Huawei Technologies, the privately held Chinese firm that’s now the world’s largest telecom-equipment maker and a leading supplier of 5G gear.
Communications, artificial intelligence, and data promise to shape the coming decades—and neither country wants to fall behind. It isn’t dissimilar to the U.S.-Soviet Union race into space and then to the moon.
So far, China is taking its moon shot more seriously. No other country comes near China in terms of broad 5G investment and infrastructure deployment. China has earmarked 1.2 trillion renminbi, roughly $170 billion, over the next five years to build its 5G network. By the end of 2020, China is expected to have 620,000 base stations to support advanced 5G capabilities.
The speed and low latency of 5G means that it’s well suited to power smart grids, self-driving cars, autonomous weapons, and robotic surgery. During the pandemic, China has used 5G infrastructure to power robotic ultrasounds for patients and driverless vans to clean the streets of Wuhan.
In the U.S., 5G progress has largely been limited to cities and sports stadiums, which are now sitting empty. Most U.S. 5G investment comes from the private sector. But observers say there’s another factor holding the U.S. back: a lack of wireless spectrum, or airwaves, devoted to 5G signals.
While China has quickly reallocated its spectrum, the U.S. airwaves have been tied up in disputes between the military and other federal agencies fighting for allocations. It could take another year for the Federal Communications Commission to solve the bottleneck. In the meantime, 5G service in the U.S. could be spotty, just as wireless carriers and hardware makers begin to market new 5G phones.
The U.S. is “nowhere near China’s investment so far,” says Paul Triolo, head of Eurasia Group’s geo-technology practice. (For a different view, see page 26.)
Falling behind on 5G is a worry within the Trump administration. Earlier this year, U.S. Attorney General William Barr described China’s dominance of 5G telecom networks as one of the top U.S. national security and economic threats, adding that “for the first time in history, the U.S. is not leading the next technology era.”
U.S. efforts to catch up with China on 5G—and the inevitable Chinese pushback—could force the rest of the world to choose sides in a tech cold war.
U.S. officials have cautioned companies that Huawei’s gear could be used by the Chinese for intelligence efforts. In February, Defense Secretary Mark Esper warned European countries that they could jeopardize their alliances with the U.S. if they used Huawei gear in their 5G networks. While some countries, like Australia, have heeded the U.S. warnings, others including the United Kingdom and Saudi Arabia continue to work with Huawei.
Huawei has repeatedly denied espionage-related charges. The company didn’t respond to Barron’s request for comment.
Last year, the U.S. restricted Huawei’s access to some components made by U.S. suppliers, including Intel (ticker: INTC), Qualcomm (QCOM), Broadcom (AVGO), and Xilinx (XLNX). For now, those rules have been loosely applied, with several of the companies getting licenses to continue selling to Huawei. The Chinese telecom giant reported slightly slower revenue growth for 2019, but sales still hit a record $121 billion. Huawei has overtaken Apple as the world’s second-largest smartphone maker behind Samsung Electronics.
The hammer dropped on Friday, when the U.S. Commerce Department amended export rules, curtailing Huawei’s access to global chip makers that use U.S. technology. The move largely affects Taiwan Semiconductor Manufacturing (TSM), which makes advanced chips for 5G smartphones; Huawei is the largest customer for those Taiwan Semi chips.
The move is a “major blow to both Huawei and China’s 5G ambitions, and will be consequential to the course of the U.S.-China relationship in the near term,” says Triolo, who calls the move “nuclear.” He expects China to respond by putting a narrow group of U.S. companies on its “unreliable entity list.”
There could still be some wiggle room from the U.S., though, with foreign companies like Taiwan Semi potentially getting export licenses in return for promises to invest or create jobs in the U.S., says Rory Green, an analyst at independent research firm TS Lombard.
Ultimately, the U.S-China divide will slow innovation globally, as both nations try to become more self-sufficient. “The bottom line is that this is highly inefficient, and we will need two of everything,” says longtime Asia strategist Paul Schulte of Schulte Research. This past week, Taiwan Semi announced that it will spend $12 billion to build a chip factory in Arizona, though production won’t start till 2024.
Investors responded to trade-war changes on a daily basis last year, but even as the 5G battle brews, tech stocks have rebounded sharply from their virus selloff. The iShares PHLX Semiconductor exchange-traded fund (SOXX) fell a modest 2% on Friday, despite the latest U.S. escalation.
“These kinds of measures may seem technical and fly below the radar screen of many in the U.S., but they represent long-term structural shifts,” says Nathan Sheets, chief economist at PGIM Fixed Income.
Investors ignore the tech cold war at their own peril.