Yahoo Finance’s Alexis Christoforous and Brian Sozzi break down this week’s jobless claims with Michael Gapen, Barclays Chief U.S. Economist.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to dig a little deeper into this morning's economic data now with Michael Gapen. He is chief US economist at Barclays. Michael, good to see you again.

I want to start with these jobless claims. We see that they are trending down. So I guess they're moving in the right direction, but what do you read into this? I mean, are we seeing light at the end of the tunnel here now for the labor market?

MICHAEL GAPEN: I think so. I think you got the balance correct in the lead-in, which is the bad news is another 2.1 million Americans filed for initial claims, but the continuing claims number came down about 4 million, which would suggest the June unemployment rate should show a decline relative to wherever we end up in May. We think the reported unemployment rate may be around as high as 20% in May, but this would suggest that as states have moved to reopen some of their economies on a gradual phased basis, we are seeing some re-employment. So I do think that there's some silver lining or at least consistency with the idea that the economy should be expanding and adding jobs as we move into the June-July period.

BRIAN SOZZI: Michael, I really like how you and your team follow Google mobility data. What is that data telling you right now about the state of the US economy, and when do you think we return to growth?

MICHAEL GAPEN: So it's telling us that the unwind from social distancing is happening, but it's happening gradually. And so obviously there's mobility statistics across of a range of indices. And we can look, for example, at returning to retail or recreational establishments. That is now starting to rise. But if you look at, say, the return to the workforce-- who's returning to work or offices-- that number is still quite low.

So it suggests the economy troughed in mid to late April, and as we've moved into May, things have gotten a little bit better. But in terms of relative to the baseline, we're still down a lot. So the May data in absolute levels is still horrible relative to January and February, but it suggests a turn in the trajectory. And in terms of quarter-on-quarter growth rates, it should-- it would suggest that the third quarter should be better than the second. It's consistent with the idea that the economy would be contracting in the first half of the year with an unprecedented contraction in Q2 but a recovery taking place in the second half of the year, a resumption of growth.

BRIAN SOZZI: Michael, where do you fall in the camp-- and it is split-- on the unemployment insurance, the top-ups? The top-ups are set to expire on July 31. Unclear if they'll be extended with that extra $600. Do you think those checks, that top-up, is holding the recovery back?

MICHAEL GAPEN: No, I don't. I think it's part of the social safety net here that's important. It's less about fiscal stimulus from a traditional kind of Keynesian sense. It's more about while we're in a period of lockdown and encouraging people to keep distance so we can control community spread that we want to support income and support revenue at business.

So it's income replacement. It's revenue replacement. The idea would be to hold as much of household and firm balance sheets in a suspended state of animation as is possible. I don't think it's really holding the recovery back. I think when you look at it from a longer period of time, it's the right policy. Focusing on the social safety net makes a tremendous amount of sense from my point of view.

ALEXIS CHRISTOFOROUS: You know, Michael, as the economy continues to open up, do you think we're really going to see that pent-up consumer demand and people are going to go out and spend? I mean, already we've seen the savings rate top 13%. And if we look back after the Great Depression, the savings rate was quite high. I mean, do you think that when economies start to open people are going to start hoarding their money just because of fear about, you know, what comes in the next few months and we're going to see the savings rate go even further higher?

MICHAEL GAPEN: I think when we move into the third quarter, the savings rate will start coming down. But I think all else equal, we're expecting the consumer to remain cautious. So I think you'll see a blend-- some return to normalcy, but it'll take time.

So, for example, we think the economy may contract by about 40% at an annualized rate in the second quarter, but it could grow, say, 25% in the third and 8% in the fourth. So I think you'll still see a cautious household coming out of this, but I would expect the savings rate to come back down.

It will move higher again when we get the personal-income and spending data tomorrow. So I would expect it to ratchet even a little bit higher because incomes have not fallen as much as the spending has. But I would expect spending to pick up, pull the savings rate a little bit lower, but you make a good point. There is negative wealth effect still at play. Equity markets are doing well, but the average household may not feel that. And I do think that there will be caution and a preference for saving.

But I still think you can have a recovery in consumption while households remain cautious. It's just consistent with kind of whatever alphabet-soup description you want to call the recovery, whether it's kind of a Nike swoosh or kind of a J-style recovery. We'll be recovering, but we'll finish the year with lost output.

ALEXIS CHRISTOFOROUS: Yeah, we're looking at all different letters of the alphabet for what people are trying to call this possible recovery. But did I hear you right? Did you say a 40% drop in GDP?

MICHAEL GAPEN: At an annualized basis. So it would be-- it would be roughly-- our GDP tracking estimate was running at about minus 42% for the quarter on an annualized basis. It would kind of suggest things were off about 10% or so in the quarter. And then we make up a lot of that as the economy reopens, as we re-employ people, and as households spend.

So in some respects, this is just the effect of the statewide stay-at-home orders where the activity in April plummeted, and we'll get a gradual resumption in May and June. But yes, it could be as much as a 40% annualized decline in the second quarter.

ALEXIS CHRISTOFOROUS: All right, but you did say a bounce back, 25% up on the back end, right, in the following quarter?

MICHAEL GAPEN: That's right. That's right.

ALEXIS CHRISTOFOROUS: All right.

MICHAEL GAPEN: For the year, we think we'll be down around 6.3%, 6.4%. So still a lot of lost output as we get to the end of the year.

ALEXIS CHRISTOFOROUS: Yeah, definitely a roller-coaster ride. Michael Gapen, Barclays chief US economist, always a pleasure. Good to see you this morning.

MICHAEL GAPEN: Thank you.