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“HELP WANTED” Signs Replaced with “CLOSED” Signs at Record Pace
Initial jobless claims in the week ended March 21 soared to a record 3.3 million people. This was by far the largest weekly claim at roughly five times the previous record in 1982 and roughly 16 times the rate of recent weeks. Last week’s jump alone was enough to double unemployment rates to a level of almost 6%. The cause for the increase, of course, was the Corvid-19 virus that led to an unprecedented shut down of the economy. Many of the claim filers were workers in the travel and entertainment businesses. However, as the effects of the virus continue, almost all industries will start to feel the effects of the shutdown. Companies involved in manufacturing, retail sales, and the service economy have all begun announcing layoffs. This has led many experts to speculate that initial unemployment claims for the week ended March 28 could be even higher when reported on Friday.
How bad could next week be?
By most indications, last week was only the tip of the iceberg. State-ordered shutdowns have spread since the week of March 21 and people have begun adhering to shutdown orders more stringently. What’s more, companies that initially reacted by protecting their employees are now facing the grim reality that a drop in revenues must be countered by reducing costs. Anecdotal evidence indicates that many states had difficulties processing the large number of claims. Filers reported being on hold for days, making it likely that some gave up and will try again this week. Pennsylvania, which reports claims daily, indicates that claims have continued to grow this week. Other states such as Colorado and Oklahoma are reporting that claims are running two to three times that of last week’s. Moody’s Analytics predicts initial unemployment claims could be 4.5 million this week.
And that’s not the
worse part …
Ben Casselman of the New York Times points out that unemployment numbers underestimate the overall impact because they don’t include people who are self-employed and ineligible for unemployment benefits. There has been a large increase in the number of self-employed workers due to the creation of a gig economy in recent years. It should also be noted that there is an accelerator effect associated with unemployment that will lead to future unemployment claims. When businesses such as retail shut down, other business such as advertising become affected. And, as unemployed individuals cut back on spending, all industries are affected.
How bad could unemployment get?
Treasury Secretary Steve Mnuchin, in pushing Congress to pass a stimulus package, warned that unemployment could soar to as high as 20% because of the effects of the Coronavirus. The only time the unemployment rate has risen above 20% in modern American history was a four-year period during the height of the Great Depression. His estimate now looks tame in comparison to more detailed studies. Economist at the Fed’s St. Louis district believe 47 million people could lose their job, which would translate to an unemployment rate of 32.1%. The estimate is based on 66.8 million workers being in occupations with a high risk of layoff. James Bullard, President of the Federal Reserve Bank of St. Louis, estimates that $2.5 trillion in lost income in the second quarter noting that gross domestic product may fall 50%.
How about some good news …
The good news is that the cause of the rise in unemployment is clear and expected to go away at some point. The return to normal will not be as sudden as the impact of the virus, but things will get better. Individuals and governments are taking the virus more seriously and taking steps to contain its spread. Companies are rushing to manufacture kits to identify people inflicted with the virus and ventilators to aid people suffering from the virus. A vaccine for the virus will be tested this fall. While steps to limit the spread of the virus are progressing, government has been very proactive in addressing the impact of the virus through fiscal and monetary stimulus. The government passed a $2 trillion relief package and the Fed has authorized a $500 billion treasury purchase package. The stimulus package should offset a drop in consumer and business confidence and help individuals and companies offset the impact of the virus in the short term. Of course, it comes at a cost as the national debt will rise in excess of $3 trillion to a level nearing $25 trillion.
What does it all mean?
The economic impacts of Covid-19 are severe and likely to get worse. The recovery will be slow and uneven. A study by McKinsey describes five stages of the virus: 1) spread, 2) containment efforts, 3) health care treatment response 4) health care prevention response, and 5) emergence of herd immunity. McKinsey indicates that experts believe that more than two-thirds of the population would need to be immune to contain the spread of a virus. This can be done by developing an immunity naturally or developing a vaccine. Development of a vaccine will have a big impact on whether an economic recovery take a v-shape, a u-shape, or a slow recovery with roller-coaster-like bumps on the way back up. Meanwhile, companies making employment decisions face a stark reality. They are seeing revenues and profits decline with no sense of certainty as to when they will return. Companies may be able to weather losses for a short period but will have no choice but to reduce costs including employment costs if the effects carry into the summer.
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Sources:
https://www.kmov.com/news/unemployment-claims-could-reach-million-according-to-experts/article_70c07088-72e5-11ea-9f01-03ae8466f754.html, Anneken Tappe, CNN Business, March 26, 2020
https://www.cnbc.com/2020/03/30/coronavirus-job-losses-could-total-47-million-unemployment-rate-of-32percent-fed-says.html, Jeff Cox, CNBC, March 30, 2020
https://www.vox.com/2020/3/29/21198580/unemployment-insurance-claims-record, Matthew Yglesias, Vox, March 29, 2020
https://www.kcra.com/article/what-a-20-unemployment-rate-would-mean-for-america/31746821#, Show Transcript, KCRA Television.
https://www.bloomberg.com/news/articles/2020-03-22/fed-s-bullard-says-u-s-jobless-rate-may-soar-to-30-in-2q, Steve Matthews, Bloomberg, March 22, 2020
https://www.mckinsey.com/business-functions/risk/our-insights/covid-19-implications-for-business, McKinsey, March 2020
