In less than two months, we have gone from an unemployment rate of 3.5%, a 50-year low to probably over 20%, the worst level since the Great Depression. Today’s Unemployment Insurance filings were 3.2 million, higher than economists’ consensus expectations. The number of jobs created since the Great Recession that ended in 2009 have been wiped out.
In the seven weeks, since states instituted stay-at-home requirements due to the COVID-19 pandemic over 33 million Americans have filed for unemployment benefits. As I have written in the last few weeks, those numbers understate the severity of the crisis, because there are still millions of Americans who have not been able to file for unemployment benefits, due to overwhelmed resources at departments of labor around the country.
I expect unemployment to continue rising in the energy sector where the default rate is significantly above the average for all companies in America. As I wrote in mid-April, high yield energy bonds are now at a record $217 billion of outstanding volume. This sector was already being adversely affected even before the 2019 crisis. According to Eric Rosenthal Senior Director – Leveraged Finance at Fitch Ratings, the “energy default rate stands at 9.9% following Whiting Petroleum Corp. WLL ’s bankruptcy.
Fitch projects the 2020 sector default rate to reach 17% by year end, closing in on the record 19.7% mark set in January 2017.” He went on to state that “Several names on our Top Bonds of Concern could be imminent defaults including Ultra Resources Corp., Vine Oil and Gas LP and Jonah Energy Inc. along with Chesapeake Energy Corp. CHK , California Resources Corp., Denbury Resources Inc. DNR , Unit Corp., Bruin E&P Partners LP and Chaparral Energy Inc.” These default rates are much higher than for the average default rate for all junk bonds. And until industry and travel start up again, it is hard to envision when the energy sector will recover. Energy companies are the majority of new companies added to Fitch’s April list of bonds of concern.
After energy, the next sectors that are the most vulnerable to a rise in default and hence laying off workers are retail and leisure and entertainment.
More unemployment will be coming not only from the private sector, but also from municipalities as their financial stress increases. In a report released this week by Moody’s Investors Service, ‘Outlook changes to negative as coronavirus intensifies severity and length of recession’ analyst Natalie Claes, wrote that Moody’s “outlook for US local governments is changing to negative from stable as our expectation of the duration and intensity of the coronavirus impact on the economic downturn grows in severity. The slow recovery will impair revenue and pressure operating reserves.
The sector will face challenges for the remainder of 2020 and continuing into 2021 as the economy recovers, because trends in local governments’ primary revenue source, property taxes, lag changes in economic activity.” Additionally, she pointed out that “Sales and income tax revenue, a significant source of revenue for some local governments, is already declining sharply given a rise in unemployment, reduced consumer spending, and income tax filing extensions. Property tax revenue will not take as great a hit until 2021 because assessments are set before the collection year, but a rise in delinquencies will start to weigh on revenue this year.” Unfortunately, this means that the next tsunami of unemployment will be amongst municipal employees such as police, firefighters, and teachers.
Even if we are lucky enough to start an economic recovery this year, it is very unlikely that all workers will be able to regain their jobs. Many employers are likely to be very cautious about ramping up their businesses, especially if there is uncertainty about COVID-19 returning again later in the year. Unfortunately, we have many more weeks of millions continue to file for unemployment benefits.
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