Why unemployment rate is a 'head fake' as PPP loans hit 8-week mark: El-Erian
The U.S. economy unexpectedly added 2.5 million payrolls in May. Allianz Chief Economic Adviser Mohamed El-Erian joins Yahoo Finance’s On The Move to weigh in on the latest jobs report.
Video Transcript
- President Trump just took a victory lap regarding the jobs report this morning. And here's what he had to say.
DONALD TRUMP: When we had a problem, we were able to cut it off, stop it, just like this. Stop it. Keep everyone inside, keep them away, keep them together, away, uninfected. And we saved millions of lives, and now we're opening. And we're opening with a bang. And we've been talking about the V. This is better than a V. This is a rocket ship.
- Joining us now to discuss the employment report is Mohamed El-Erian, he is Allianz Chief Economic Advisor. And Mohamed, good to see you.
MOHAMED EL-ERIAN: Thanks for having me.
- So you wrote this morning, or you tweeted, quote, "in sum, a head-scratcher that needs analysis." Why are you scratching your head on this jobs report?
MOHAMED EL-ERIAN: I'm still scratching my head. I don't think I'm the only one because it is inconsistent with every other data point that we've had as of mid-May. And it's important to remember that this captures the situation as of mid-May. It is also inconsistent with everybody's expectation. No one was looking for an uptick in jobs. Now, it may be that the economy has picked up in a major way-- that's the hope, and that's certainly what the market has embraced-- or it may be two other things, that government policies were very effective in reducing those who were officially unemployed, or it may be that the data is very, very noisy. So we won't know, and unfortunately, we won't know till the next month.
- Mohamed, I-- besides the headline number-- it's good to see, it's Julie, by the way-- besides the headline number, I was also looking at U6, which includes the so-called discouraged workers, folks who maybe are no longer looking for work, that at 21%. So I'm curious if there's anything to read into the other data, aside from the headline numbers in the unemployment report, that gives us any more clarity.
MOHAMED EL-ERIAN: So labor force participation went up. As you point out, the U6 number, it did come down. So it's not inconsistent, but it's a lot higher. I think where the clarity is-- and it speaks to this moment we're having in society-- is that, while the unemployment rate for whites came down significantly, for Hispanic came down, that for blacks went up. So we are seeing that the social issues continue, even when we get a shock surprise on the upside.
- Mohamed, the way they do this report, they literally call people when they ask them if you were working in the weeks past. And they do that in the middle of the month when they're gathering the data. Is there a potential for someone to fudge these numbers or to throw a wrench into the numbers to get an outcome they might desire?
MOHAMED EL-ERIAN: So fudge is a strong word. There is a significant potential that your survey is misleading and there's a significant potential that the models underpinning your survey are misleading. So that's why economists right now are saying we just don't know. It could be this, but it could also be this and this. Adam, what is really striking is, if you look at continuing claims, they went up, not down.
So every other indicator you look at suggests that the labor market is not as healthy as these numbers suggest. Everybody's hope is that we are getting healthier. And certainly, the reopenings have been going better than expected. But the other thing that's really important is, Adam, the market isn't waiting. This has reaffirmed a hypothesis that was floating around the marketplace for the last few weeks. And the market has taken off on this news across the board, in both stocks and in fixed income.
DAN ROBERTS: Mohamed, Dan Roberts here. As you said, the market is trying to celebrate this as good news. President Trump right now celebrating this as a good indicator that jobs are coming back. But I just wonder how much you think the PPP loan process might affect things moving forward, especially because we've heard from a lot of companies and business owners that got a loan and said, well, wait a minute, the fact that I have to use 75% of it on payroll within eight weeks, when I might not even be ready to bring workers back, well, some of those business owners that got a PPP loan or a stimulus check are now hitting that eight-week mark, and you wonder how might that next jobs number be affected.
MOHAMED EL-ERIAN: Yeah, so the big risk, then-- and thank you for raising this-- is that this is a head fake, a major head fake, that we are picking up the impact of both data distortions and policy distortions. And politically, that means that Congress does less in terms of relief and in terms of repair. And we find out-- and that's the nightmare scenario-- we find out, in a few weeks' time, that it was a head fake, but the political process has moved away from relief and repair, because at that point, as you say, Dan, the relief stops. And then we're in big trouble. So we've got to understand these numbers better and we've got to continue with the message to Congress that it's still a big hole we find ourselves in, even if you believe these numbers.
- Mohamed, just wanted to mention, by the way, President Trump in his comments said he is going to sign the new paycheck protection bill that the Senate passed last night that has to do with sort of giving people who are borrowing money a little more clarity, a little more leeway when it comes to repaying it. I want to get back, though, to something that you were talking about with regard to social issues and what we're seeing across the country right now, because even as we're trying to address an economy that's reeling from shutdowns because of the pandemic, we are also trying to address-- many folks are calling attention to decades of structural racism and inequality, and the effect that that has on the economy. Do you think that this is a moment where Congress, policymakers have the capacity to address both? And if so, what should they be doing on the economic side?
MOHAMED EL-ERIAN: So we should-- we certainly should be. I think the data is unambiguous that the COVID-19 crisis has amplified a social problem. Wealth inequality has gotten worse because financial assets are owned by the rich, not those that are less privileged. Income inequality has gotten worse because unemployment has hit the most vulnerable segments of population. And the inequality of opportunity has gotten worse because lockdowns have harmed mostly the less fortunate. I mean, simple things like kids not being able to go online and continue with their education. This is serious. So we have unambiguous evidence that the inequality trifecta-- income, wealth, and opportunity-- is bad, and have gotten worse.
We also have the tools, Julie. And that's really important. People understand that you've got to attack it via opportunities. Labor retooling, labor retraining, education reform. It just requires a political will. My hope is this is the so-called Sputnik moment, when we wake up to a reality that we need to do something about it. But again, it's something that's far from automatic, unfortunately.
- Having said that, Vice President Mike Pence was asked about this issue this morning, and said that the administration's policies have actually moved the needle in reducing income inequality. So clearly, they are not seeing the data, or interpreting it in a different way. So I'm wondering what you see as the role of corporate America in the face of that void that we're seeing from the very top.
MOHAMED EL-ERIAN: So let me start with a very simple example. And that's a well-known example. There was a real puzzle as to why were orchestras dominated by men when, if you look to art school, there are so many women preparing to go into orchestras. And it turns out it was unconscious bias. The simple act by the Cleveland Orchestra was putting a screen in front of the audition-- people auditioning resulted in many more women being hired. We've got to take seriously that we've got both unconscious and conscious biases operating in corporate America, and we have to make a major effort to overcome it. It's not easy. It's deeply ingrained.
Again, social responsibility matters, and increasingly, stakeholders are putting pressure on companies to overcome conscious and unconscious biases. And I think that will help. So corporate America has a huge role to play, and it has a huge role to play in terms of opportunities, as well. Make more opportunities available. Take more risks. And you can do also more in terms of public/private partnership.
- Mohamed, you alluded to something regarding the markets about the wealthiest among us are the ones who are gaining as markets grow higher. And I want to pull up a graphic we created, which show the closing highs for both the Dow, the S&P 500, and the NASDAQ, because we're approaching those highs not seen since February. What's the danger for investors? Might the markets be, you know, to quote Alan Greenspan, a little bit of irrational exuberance?
MOHAMED EL-ERIAN: So I think the markets have been betting, and correctly so far, on the win-win. The first win is if you bet that-- if you look through all the bad data and bet on a recovery, and the second win is it doesn't matter if you're wrong because the Fed will come in. And we have-- we've gotten stuck into this mindset by the Fed that, in order to get to the economy, you go through the financial asset markets, and you boost asset prices very high.
And we've seen this by the Fed going into high yield. That was unthinkable, but the Fed is actually buying high yield bonds right now. And if you're in the equity market, there's nothing more comforting than the notion that someone with a printing press in the basement and an unlimited ability and willingness to buy is your backstop. And that's what the equity markets truly believes after the Fed went to high yield.
So we've got to understand that this notion that you can get to people through markets and company involves lots of leakage. So we've got to get other things going. Main Street program is still not initiated. Everything else has started. Not the Main Street program. And yet, that's the one that gets to people more directly. So I think it's important to think of that. The big risk for the markets is that it turns out that this decoupling between fundamentals and elevated asset prices cannot be closed from the bottom. So what we want is fundamentals to improve and validate asset prices. That's how this is an ugly outcome. If that doesn't happen at some point, fundamentals will assert themselves.
- Mohamed, and what's the risk that we eventually see, as well as fundamentals reassert themselves, a default rate that's going up and then spirals into some kind of contagion within the financial system? It seems as though, overall, there has been less concern about that in this bout of economic uncertainty, but we did talk with someone from the Association of Risk Professionals yesterday, who raised an alarm about a potential 25% default rate for leveraged loans, for example.
MOHAMED EL-ERIAN: And that is critical, Julie, because the Fed can be a backstop for liquidity risk, for credit risk, but when it comes to outright default risk, massive bankruptcies, then that's capital impairment. And capital impairment is a non-recoverable investment mistake. Most investment mistakes are recoverable with time. Capital impairment is not. So that is a big risk, Julie, and we have to keep an eye on the wave of bankruptcies. But the marketplace right now isn't looking at this. Between the tailwind of healthier reopenings and the tailwind of a Fed fully engaged and an ECB quite engaged, they care less about capital impairments right now.
- Mohamed, I want to follow up on that in just a second, but first gotta let everyone know that President Trump has indeed signed the update to the Paycheck Protection Program bill. So that has been signed into law. But along the lines of what Mark Carey was telling us from GARP, and what Julie was just referencing, he actually responded to a question about does that potential default pose a systemic risk to the system. And he said yes. You say that Wall Street isn't paying attention to that right now, but if Mark Carey is right, we are ignoring something that could really undermine us. Do you agree with him?
MOHAMED EL-ERIAN: We are. But again, if it turns out that the financial markets are good forward predictors, and if it turns out that they have priced in a growth spurt that avoid bankruptcies, markets will be proven to be right. I'm not comfortable making that bet. I'm really not comfortable doing it.
And I'm so happy I'm not managing other people's money, because I would be so torn right now between simply following the herd, because after all, technicals are very favorable, and on the other hand, being influenced by fundamentals. As a personal investor, I'm fundamental based. I don't like moral hazard. I don't like betting on things I don't understand. But I completely understand why others that are managing people's money feel that they need to be part of this herd.
- Mohamed El-Erian from Allianz, the chief economic advisor, always good to have you here. Have a wonderful weekend, and stay healthy.
MOHAMED EL-ERIAN: Thank you so much.
