Declining claims are probably ‘overstating’ how robust labor market recovery is going: Economist

Deutsche Bank Senior U.S. Economist Brett Ryan joins Yahoo Finance Live to discuss the latest unemployment claims and the outlook for the U.S. labor market.

Video Transcript

AKIKO FUJITA: Let's move onto our next story here. The data out this morning, the number of Americans filing for unemployment benefits rising unexpectedly last week. 742,000 workers filed for those initial jobless claims, signaling a slowdown in the economic recovery. With the federal program, we're talking about expanding and enhancing those benefits set to expire at the end of the year.

Our next guest says workers could be headed for $150 billion shortfall in reduced income. Let's bring in Brett Ryan. He is a senior US economist at Deutsche Bank. And Brett, the number we got out this morning seems to sort confirm the concerns that have been emerging over the last several months, which is that the momentum in this economic recovery is slowing.

BRETT RYAN: Good morning, Akiko and Zack, and thank you for having me. Part of the increase in initial claims this morning was due to the state of Louisiana. So I don't want to overstate the weakness in today's initial claims. But I think the more concerning trend that you're seeing is that the decline in continuing claims at the state level is probably overstating how robust the labor market recovery is going, because what you're seeing is an increase every week in pandemic emergency unemployment compensation, which is the extended benefits program. And there is still a significant amount of people, it's a little under 9 million, on Pandemic Unemployment Assistance, PUA.

Those two programs, PUA, and PEUC, are set to expire on December 31. So right now, they're about-- a little bit around 13 million people PUA and PEUC. You would expect that to drop to somewhere between 10 to 12 million by the end of the year. But for those 10 to 12 million people, their income will go to zero if Congress does not re-approve these programs. That could cost you around $150 billion in the first quarter. It's not going to be offset by job creation and labor income. That's where you can get some weakness in the first quarter.

ZACK GUZMAN: And Brett, I mean, when we talk about that, obviously, we've been seeing those numbers grow when we talk about people who have exhausted their unemployment benefits and the PEUC. We've seen that grow in the last four weeks by about 1 million claims. So I mean, there is more people shifting in that direction. We've seen that. But when it comes to the overall number here, I guess when you look at the broader implications, a lot of people are debating right now if this was just kind of a fluke number in terms of the overall initial claims or if this is the beginning of a trend to show weakness is here and here to stay?

BRETT RYAN: Yeah, I think that you are going to see a little bit of a pause in the near term, especially with the rise in case growth that you're seeing. 95% of GDP is in counties which rise in case growth. You're seeing renewed restrictions across the board, especially with the closing of indoor dining. So to give you an idea-- food services and accommodations have accounted for about 35% of the employment gain. 4 million jobs-- over 4 million jobs over the past-- since April.

With indoor dining being shut down again in many cities, soon to be in New York City, it's already been in other states, you're going to see definitely another wave of layoffs in that space. So it's unfortunate, but we are going to be dealing with these near-term disruptions to high contact service industries, especially like those that employ a large number of people like restaurants and bars until we have a vaccine-- a widely available vaccine. That's what we're going to be living with.

AKIKO FUJITA: How much worse are things going to get, then? I mean, you've already pointed to the $150 billion shortfall in terms of income for workers. You know, you said, look, this is about 1% off of growth. So this comes at a time when we still don't have any kind of fiscal relief. How much worse do you think things could get?

BRETT RYAN: Yeah, so I mean, the loss of income for those people-- number one, from humanitarian perspective, 10-- 10 to 12 million people that are stuck out of work in this environment. To cut them off like that would be wrong. The second thing is you don't know what's going to happen-- the knock on effects are going to be via missed rent payments, missed credit card payments, missed student loan payments. And you have rent moratoriums that are expiring at year end as well as student loan forgiveness that's expiring at year end.

These are all things that Congress needs to get done now sooner rather than later. And you can't leave it until the next president comes in, because then you're going to have a gap over a month. Those knock on effects-- auto loan defaults, credit card defaults-- that could send-- could have a bit more of a risk off tone that feeds into negative sentiment. And that's, I think, the broader concern.

ZACK GUZMAN: Yeah, when you talk about negative sentiment, I mean, is the broader concern there that it would finally start to trickle into consumer spending? I mean, we got the retail sales number-- that was weaker than expected. Heading into holiday shopping season, you know, that's going to send some tremors there and fears that they might continue. I mean, when you look at the largest chunk of the economy here and the state of the consumer here, how is that held up? And where do you put it here as being prepare to kind of get ready for 2021 when there's hopes that that vaccine is going to be coming through to help those industries you're talking about that are hardest hit?

BRETT RYAN: You know, without question, the consumer has been much stronger than most have anticipated. The savings rate, nonetheless, still remains high. But the savings is concentrated amongst those that have the lowest marginal propensity to consume. People still have jobs and aren't able to-- you know, they're consuming just fine. But what we're seeing now is that the pent up demand for goods is going to start to slow. Vehicle sales have spiked higher. I think they're going to see them slow going forward.

And as that-- what you need to see happen in terms of consumer spending is services come back. That has really been the biggest hit to overall consumption-- has been services, particularly health care services, surprisingly. And so what we need is-- it's going to take more time. Again, it's vaccine that's going to be able to allow a normal-- full normalization of services, especially health care services, going to the doctor's office, dentist's office. Allowing them to return to full capacity as well as hotels, accommodations, restaurants, and travel, like we talked about previously. That's still going to be some time away.

So in the near-term, you're going to see good spending start to revert back to its pre-virus trend, because you've had the overshoot from pent up demand from lockdowns. That begins to slow a bit. And I think it's really important, because we're expecting weakness in the next two quarters for consumer spending, I think, significantly below consensus. We see real PCE growing about 2% versus consensus of closer to 4%.

And just for these reasons. You know, good spending is set to slow. We have income-- a potential hit to income if Congress doesn't do anything. At the same time, we have rising restrictions on services. So, you know, we're kind of left with a weaker forecast near term.

AKIKO FUJITA: Yeah, an indication of more pain to come, as you point out, until a vaccine does come to market. Brett Ryan, senior US economist at Deutsche Bank. It's good to talk to you today.

BRETT RYAN: Great. Thank you for having me.