Back in late March, a time that seems an awful lot longer ago than the nine weeks it actually was, we recall viewing the St. Louis Federal Reserve’s predictions for the US jobs market in a state of shock.
Using a self-described “back of the envelope” forecast based on jobs in at-risk industries, the St. Louis Fed, one of 12 regional branches of the US central bank, forecast a staggering 47m people would lose their jobs, taking unemployment to a terrifying 32.1 per cent during the second quarter.
This was far worse than others, such as Morgan Stanley – who at the time also seemed relatively bearish – were forecasting, with the investment bank predicting that unemployment would hit 12.8 per cent.
It appears, however, that the St. Louis Fed’s forecasts are proving rather more prescient. Initial claims for jobless insurance, published weekly, show that as of May 23, 40.8m workers had applied for unemployment support –a little lower than the 47m expected, but more than three times the figure Morgan Stanley’s estimates implied.
We are still some way off knowing where the unemployment rate will peak – so far we only have the April data, which showed a record rise from 4.4 per cent to 14.7 per cent, so will have to wait and see what happens in May.
However it’s worth emphasising that, whatever the figure is, it’s likely masking the true extent of the labour market’s troubles. As St Louis Fed president James Bullard pointed out on Thursday evening, lockdown policies will mean that the official unemployment rate will look lower than it would otherwise (our emphasis):
If people say that they are not working and also say that they have not searched for a job in the last four weeks or are not available to work, they are categorized as out of the labor force rather than unemployed, and therefore not included in the unemployment rate. One caveat to this longstanding approach is that during a pandemic like COVID-19, people who recently lost their jobs due to state and local requirements to shelter in place or enforce physical distancing may not be looking for work in this environment, which would leave them out of the unemployment calculation.
The labor force participation rate declined by 2.5 percentage points from March to April, which represented the largest monthly drop for this series on record. At the same time, the number of people counted as out of the labor force but wanting a job (though not seeking a job or not available to work) rose significantly, from about 5.5 million in March to 9.9 million in April.
We don’t want to be overly pessimistic here. Restrictions are being removed across the US. And as lockdowns ease, openings will likely soar – not least because of the bridging measures that the Federal Reserve Board and the US Treasury have provided to keep viable businesses alive.
There are hopeful signs that, as restrictions ease, people are returning to places where the workforce was hit badly, such as restaurants. Via Deutsche Bank’s Thorsten Sløk:
We do not, however, share Mr Sløk’s confidence that this trend will continue all the way up to pre-Covid levels of activity as soon as September. Chiefly because, at some point, restaurants will feel too crowded for people to want to spend that much time in them. In turn, that inability to hit pre-Covid levels of capacity is likely to force some in the industry out of business. All of which will leave unemployment way above levels seen earlier this year for some time yet.
How bad could the US jobs market become? – FT Alphaville
Is the virus, not lockdowns, doing most of the economic damage? – FT Alphaville
An absolutely enormous output gap is forming – FT Alphaville