The U.S. unemployment rate dropped to 13.3 percent in May 2020. This number still remains quite elevated when compared to the previous recessions of 2000 and 2008.The Congressional Budget Office expects unemployment to remain elevated at a 10.1% level through 2021 and only decline to 9.5% by the end of 2021.Notable large companies have already started laying people off. This will likely only accelerate and not reverse trend as companies deal with shrinking revenues.
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I will provide some background on unemployment numbers, then talk about how the unemployment rate will affect the stock market, and then share with you some notable examples of companies that have announced job cuts already.If you're new to the channel, please know that I work on financial videos that cover the stock market, economic activities, and also other relevant financial news. If that sounds interesting to you, then please hit that subscribe button.
Unemployment Rate Likely To Remain Elevated For A Few Years
Based on the latest unemployment rate number from the U.S. Bureau of Labor Statistics, the U.S. unemployment rate dropped to 13.3 percent in May 2020 from 14.7% in April. This number still remains quite elevated when compared to the previous recessions of 2000 and 2008. There were a total of 20.5 million jobs lost in the month of May.
Here is a nice graph by the Department of Labor that shows you the monthly change in different industries for the month of May. No surprise to see retail and also other professional services down in numbers. Every company right now is busy figuring out how to do more with less. And once they figure who the less is, those jobs are not coming back. The leisure and hospitality industry is the hardest hit, with over 7.6MM jobs lost. Many businesses have indicated that employees can work from home throughout the summer, hurting sales at downtown restaurants. Meetings and conferences have been put off as well, reducing demand at hotels and other gathering places. And the longer the pandemic lasts, the more businesses will fail, deepening the downturn.
What Do The Congressional Budget Office And Federal Reserve Predict?
The Congressional Budget Office is a federal agency within the legislative branch of the United States government that provides budget and economic information to Congress. The Congressional Budget Office expects unemployment to remain elevated at a 10.1% level through 2021 and only decline to 9.5% by the end of 2021.The U.S. Federal Reserve's prediction is that the unemployment rate will average 9.3% in 2020, and that it will drop to 6.5% in 2021 and 5.5% in 2022. Overall, investors should know that this will take time.
How Does Unemployment Affect the Stock Market?
The vast majority of Americans rely on their paychecks to support their lifestyle.The more people who are unemployed, the fewer people who can spend money. Consumer spending contributes to 70% of U.S. GDP. And the ability of Americans to spend money is a major factor in corporate earnings and therefore stock prices. For example, if people aren't getting a paycheck, it is unlikely they will splurge as much on brands such as Coca-Cola (NYSE:KO), or buy the latest $1,000 iPhone, or buy luxury goods such as Yeezys (OTCQX:ADDYY). Unemployment benefits help, but they typically aren't comparable to one's income from a job. And the current $600-per-week increase in unemployment benefits is scheduled to disappear after July.
Notable Large Companies That Have Already Started Laying People Off
Deloitte will start laying off workers in the U.S. in the coming weeks, a sign that the widespread shutdown of businesses is spilling over into industries where people have been working remotely.
Dan Helfrich, who oversees more than 50,000 workers as chief executive officer and chairman of Deloitte's consulting arm, said on an internal call Friday that the cuts will affect about 5% of workers, according to two employees with knowledge of the call. Although an exact figure wasn't given, that would suggest about 2,500 jobs could be eliminated.
HSBC (NYSE:HSBC) is resuming plans to cut around 35,000 jobs which it put on ice after the coronavirus outbreak, as Europe's biggest bank grapples with the impact of its already falling profits. It will also maintain a freeze on almost all external hiring, Chief Executive Noel Quinn said in a memo sent to HSBC's 235,000 staff worldwide.
According to compensation consulting firm Johnson Associates, Inc.: "Wall Street is likely to cut bonuses this year by 15-20% and make significant layoffs." "Technology has shown us that we don't need as many people, don't need as many management levels...and in many places there is going to be job insecurity," Johnson said. The ratio between CEO and worker pay, which banks publish annually, will receive significant attention this year as advocates for greater equality bring mainstream focus to the figures, Johnson wrote.
According to a Reuters article, "Emirates Group is planning to cut about 30,000 jobs to reduce costs amid the coronavirus outbreak, which will bring down its number of employees by about 30%." Emirates Group is a state-owned flag carrier airline based in Garhoud, Dubai, United Arab Emirates. Emirates mentioned that a recovery in travel was at least 18 months away.
Delta Air Lines (NYSE:DAL) will inform almost 2,600 pilots about a possible furlough while encouraging a total of 7,900 eligible aviators to accept an early retirement package, according to a memo sent to staff on Friday.
"Even with the increased travel demand we've seen in recent weeks, we expect revenue to be at only 25% of what it was last summer and that a return to pre-COVID levels will likely be at least two years away," John Laughter, Delta's senior vice president of flight operations, said in the memo.
According to a Bloomberg's article, even the Trump golf resort has resorted to job cuts due to the unexpected duration of the shutdown.
Nissan Motor Co. (OTCPK:NSANY) is planning to cut more than 20,000 jobs across the world, as the Japanese carmaker grapples with factories and showrooms that have been shut down due to the coronavirus pandemic, Kyodo News reported.
The outbreak is forcing Nissan to cut back on production, and restructuring measures in Japan are also being considered, the news agency reported. The job reductions are part of a mid-term reorganization plan that Nissan is due to unveil on May 28, Kyodo said.
The company declined to comment on how many jobs are affected, though The Wall Street Journal reported it will affect several thousand employees. IBM (NYSE:IBM) had more than 350,000 full-time employees as of the end of 2019 when it reported its last official employee headcount. Due to the coronavirus pandemic, the company will be offering subsidized medical coverage to its affected U.S. employees through June 2021.
The job cuts were in the works for a while, the company said. On both its fourth-quarter 2019 and first-quarter 2020 earnings calls, IBM said it could take additional structural actions that could lead to cost savings.
The reality is that it will take a few years for the unemployment rate number to dwindle down. There is no V-shape recovery here. These jobs are not temporary, but more likely to be permanent, as companies learn to be more efficient and operate more lean. Since workers are getting fired, they will have less income to spend to purchase consumer goods at places such as Gap (NYSE:GPS), Nike (NYSE:NKE), Apple (NASDAQ:AAPL), etc. These corporations should expect earnings decrease as a result.Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.