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The 'silver lining' of the April jobs report, according to Deutsche Bank Chief U.S. economist

In the month of April, the U.S. economy lost a record 20.5 million payrolls and the unemployment rate jumped to 14.7%. Yahoo Finance's Alexis Christoforous and Brian Sozzi break down the report with Matthew Luzzetti, Deutsche Bank Chief U.S. Economist.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to dig deeper into this report now with Matt Luzzetti. He is Chief US Economist at Deutsche Bank. Matt, thanks so much for being with us this morning.

It is hard to wrap our heads around numbers that are just so awful. Do you believe, though, that this report accurately shows us the pain in the labor market, or are things going to get worse?

MATT LUZZETTI: Thank you for having me. I think you're absolutely right. It does show how devastating the collapse in economic activity has been and how devastating it has been for the labor market.

But there's some reasons to think that things like the unemployment rate, which we tend to focus on, are underestimating the pain out there. Two things that I would highlight-- the BLS, who collects the data, said that the unemployment rate could have been five percentage points higher if it were not for classification issues.

And as was noted, I think the U6 underemployment rate gives a better picture of how much slack there is out there in the labor market. It's how many people are working part-time for economic reasons or how many people are out of the labor force but want a job but they just can't look for a job right now, and that was above 22%. So I think those two things are giving you a better picture of the pain.

If you do want to find a silver lining within the data, almost all of the increase in people that lost their jobs believe that the layoff is temporary at this point, about 97% of [INAUDIBLE] that lost [INAUDIBLE]. If that proves to be accurate, it is a positive sign, but we'll to see how reopening the economy goes.

BRIAN SOZZI: Matt, scrolling through this report, one number among many that stood out to me, teenage unemployment, 31.9%. What does it mean as you zoom out, just bigger picture here? You're going to have a whole crop of teenagers that won't have a summer job this go round.

MATT LUZZETTI: Absolutely. You know, it's-- going through the report and all the details, there are so many things that stick out. Certainly the younger unemployment is one of them. You will see, I think, pain throughout the entire age distribution due to the people that have lost their jobs. And the reopening of the economy, the pace at which that happens I think is most important.

You know, we've seen the Paycheck Protection Program, this program which allows small businesses to keep people on their payroll. There's been significant uptake there, and it does tell you that from the firm side, they want to maintain their payrolls if they can, but that depends on how quickly the labor market reopens-- the economy reopens over the next few months.

One data point that I would point to is aggregate hours worked. So how many hours work did people actually do in the month of April? That fell to the level of 2011. So just to give you a sense, we were working the same amount as nine years ago for an aggregate economy. That's just an absolute devastating collapse in activity.

ALEXIS CHRISTOFOROUS: Matt, how long do you think-- I mean, it's hard to make a prediction like this, but how long do you think it might take to gain back most, if not all, of the jobs we are losing during this pandemic?

MATT LUZZETTI: We think it's going to be slow. We think that the unemployment rate is going to decline relatively slowly. We think by the end of the year, you're still in double digits, but there's obviously risks around that on both sides.

And I think to the positive side, again, it's the temporary view from a lot of these people that are losing their jobs that, you know, their sense from their employer is that this is a temporary phenomena. It's an exogenous shock, and as we reopen, they may be able to bring the jobs back.

My concern is that reopening is not flipping a switch, and it's not just going back to 100% for a lot of these businesses. It'll be a much slower process, and it will mean that these businesses are operating at less than full capacity for a long period of time.

And so I think that [INAUDIBLE] unemployment is going to be gradual. It's going to be slow. And we think that rate falls about 7% by the end of next year, by the end of 2021. So still well above the levels that we saw just two months ago.

ALEXIS CHRISTOFOROUS: So, Matt, to be clear, you're saying that even at the end of this year we're still going to have double-digit unemployment in this country?

MATT LUZZETTI: That is our forecast. And, you know, today's unemployment rate was not as bad as we were expecting, but there's two things. One, since the April jobs report, we've seen significant increase in jobless claims. So that has not been reflected in this data yet. And two, there was potentially this classification issue where the unemployment rate could have been significantly higher than what's reported.

But, you know, if we are able to reopen more quickly, there's obviously a demand for small businesses to get back up and running and to bring people back onto the payrolls. And if these people that believe it's temporary are proved to be correct, we could see a much more rapid decline in the unemployment rate. We don't think that's going to happen, but that's clearly an upside risk at this point.

BRIAN SOZZI: Matt, do you think we will need a massive retraining of America's workforce? And if so, whose responsibility is it to do that?

MATT LUZZETTI: Yeah, I think you will see that there's a lot of industries going forward where it's unlikely that we're operating at where we were previrus levels for, you know, so many months to come if not years to come. And that will mean that, you know, those people that have been working those jobs, we need to find work elsewhere. And so a retraining process and policy from a national level I think in that sense certainly makes sense. That is a fiscal decision. It's a congressional decision.

So far we've seen a very, I would say, robust fiscal response. You know, we've seen about $3 trillion legislated already. We think the deficit to GDP ratio is going to be 23% this year, which is just absolutely massive. But I think we've seen a response which is predicated on this being a V-shaped recovery. In a world where this is not a V-shaped recovery, we're going to have to retraining. We're going to have to think about extending the Paycheck Protection Program. Policy-- you know, the scope and the views on policy are going to have to change, and I think that's probably where we are moving over the next several months.

ALEXIS CHRISTOFOROUS: Matt, where do you think we're going to see job opportunities in this postpandemic world? Are there going to be new sectors created, new job opportunities for folks who are going to be desperately looking for work?

MATT LUZZETTI: Yeah, I think it's hard to know, you know, well down the road. In the near term, it's obvious that things like e-commerce and stuff have been significantly benefiting from the idea we can't go out. You know, we can't go out to grocery stores to the extent that we could previously. We can't go out to restaurants. And the other things-- stay-at-home entertainment obviously have been benefited a lot. So those types things near term, as long as you are seeing these containment measures in place, social-distancing measures remaining, you know, those types of industries and occupations you would expect to be-- you know, benefit significantly in the near term.

BRIAN SOZZI: Matt, help investors. Frame this for investors here. Is this peak job loss? You know, I think the market has been really quick to write off that some of this data is backward looking, but it's very important too, I think, for investors that were betting that the market continues to go higher that this might be the worst it can get, but what does May look like?

MATT LUZZETTI: Yeah, I think it's definitely the peak job loss [INAUDIBLE]. You know, I would not anticipate that we're seeing more than 20 million jobs lost again in May. It's an open question about whether this is the peak in the unemployment rate or not. At this point, I think it's not just given the pickup in jobless claims that we've seen since the survey week for the April jobs report, given this classification issue. And so at this point I would anticipate that the unemployment rate moves a bit higher as we get into May.

But then as we get into June and, you know, for this Paycheck Protection Program, those firms need to rehire back those people by the end of June to turn the loan into a grant. And so to the extent that they are doing that, we may see a more meaningful pickup in employment and a decline in the unemployment rate. But again, you know, if these businesses are not able to operate at 100% going forward, it's going to be hard for them to maintain those payrolls on an ongoing basis.

ALEXIS CHRISTOFOROUS: Matt Luzzetti, chief US economist at Deutsche Bank, thanks for helping us dissect this historic jobs report today.

MATT LUZZETTI: Thanks very much for having me.

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