There was good news on US jobs last week which provided hope of a sharp economic recovery. There was a snag with the data, however. But I am more worried about data on Covid infections in a region of the world and which hardly anyone is talking about.
US jobs report provides hope for recovery, but what about the second wave?
Will the economy see a sharp recovery post-Covid? If it does, then recent rises in stock markets are justified. The FTSE 100 has risen by around 28% since Covid lockdowns were imposed. The S&P 500 has seen sharper rises.
Such stock market recovery is only justified if we see a rapid economic recovery. The latest data out of the US does indeed point to sharp recovery, at least it does at first glance.
US unemployment fell in May — non-farm payrolls increased by 2.5 million. Very few economists were expecting that. Okay, the month before saw non-farm payrolls fall by 20 million, but even so, a recovery, when all around people were expecting falls, is very encouraging news.
Then it emerged that things weren’t quite so good. There was a data-classification error.
The error related to data in the US jobs report referring to people temporarily unemployed for what the compiler of the data, The Bureau of Labour Statistics, or BLS, describes as ‘other reasons.’ Normally this category applies to people on holiday, jury duty or engaged in child care. But should this category have applied to people who are unemployed because of Covid?
The data pointed to US unemployment at 13.3%, but the BLS says that the true figure for May was 16.3%.
However, the same anomaly applied to data collected in the two previous months, so while US unemployment was higher than the data suggested, it was nonetheless lower than the month before.
So should the markets be buying or selling? I would have said that when US unemployment is in excess of 15%, it would be difficult for it to fall much further. A recovery from such an enormously high level of unemployment is a statistical probability. I still think the markets are being too optimistic.
But the debate about US jobs data is a sideshow compared to what I see as a bigger risk.
During the Spanish flu outbreak of 1918-1920, the second wave, which began in the Autumn, was by far the most serious phase.
I have been worried about a second phase of Covid for some time.
So to check-out on this risk, maybe we should look at countries that were among the first to experience an outbreak of the virus. If there is a danger of a second phase, then theoretically it should occur first in countries that were early victims of Covid.
Such a country is Iran — you may recall senior politicians were getting the virus before there were any reported cases in the UK. At the end of February there were over 200 reported infections a day in Iran, a week later the number topped a thousand. The UK didn’t start seeing reported cases until the second week of March, and daily infections topped a thousand at the end of March. I would have said that the UK was three to four weeks behind Iran.
The number of Covid infections in Iran dropped off rapidly in May, but over the last couple of weeks the daily infection rate has been rising. Last Thursday it rose to over 3,000, higher than at any point during the first phase.
I know some people will respond by saying Iran is different, but I think we have already made that mistake. One of the reasons why the virus has been so bad in the UK and US is that we looked at China and then Iran and said ‘yes, but it wouldn’t happen here.’
I think there is an extremely high risk of a second wave, beginning at the end of this month.
If I am right, markets have got much further to fall.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees