Unemployment caused by coronavirus will leave deep scars in US

The surge in unemployment in the United States caused by the Covid-19 pandemic shatters all previous records. In its time, the world’s biggest economy has seen some savage shake-outs of its labour market but nothing that remotely compares to what has just happened.

Jobless claims in the week ending 21 March surged to almost 3.3m, which was double what Wall Street analysts had collectively been expecting. The previous worst total in October 1982 was just one fifth of last week’s level.

That, though, was during a recession engineered by the then chairman of the Federal Reserve, Paul Volcker, who used ultra-high interest rates to squeeze inflation out of the economy. The pain in the early 1980s gradually ratcheted up: this time it has arrived overnight, with whole sectors of the economy shutting for business last week.

As a result, it was an absolute certainty that jobless claims would smash all known records this week. In truth, the actual number was probably closer to 4m because government offices struggled to process the deluge of new claimants. As Paul Ashworth, a US economist at Capital Economics, noted, the increase in California was put at 200,000, whereas more up-to-date information suggests that the layoffs in the country’s most populous state have hit the 1m mark.

Further big weekly rises in jobless claims can be expected over the coming weeks – although they seem unlikely to be quite as big. That’s because the sectors that felt the impact of the shutdown of the economy first – such as retailing and hospitality – are also the sectors that employ Americans in their tens of millions.

Before the Covid-19 pandemic struck, the US had its lowest unemployment rate since the late 1960s. That is now history. The official jobless rate is about to rocket from just under 4% to at least 10%.

Unemployment will start to come down again once the economy is out of lockdown and starts to recover. But it will come down less rapidly than it is going up and – on past form – it will leave deep scars.

Rising unemployment is not helpful to sitting US presidents seeking re-election, which perhaps explains why the US government’s stimulus package contained more generous benefits for those losing their jobs. And why Donald Trump is so keen to get the economy going again.

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Coronavirus could expose the hollowness of America’s boom

Chaos on the stock markets, Europe in crisis, emergency interest-rate cuts from central banks – those with clear memories of the 2008 financial crisis and the crushing recession that followed could be forgiven a shudder of deja vu. But this time it is different – if not necessarily better.

Since the US economy crawled from the wreckage of the last meltdown, it has enjoyed its longest period of expansion in history. US unemployment has hit record lows and stock markets have hit record highs even as Europe has continued to suffer and growth has slowed in China. Plenty of problems remain but, if you squint, the US economy has looked rosy.

Now the Covid-19 pandemic looks set to bring that all to an end. But how badly and for how long? “The tornado is in our backyard,” said Mark Zandi, the chief economist at Moody’s Analytics – and until we know how long that tornado will last, the depth and severity of any recession are hard to predict.

“At this point, this feels much worse than 2008,” Jason Furman, Barack Obama’s former economic adviser, said on Friday. It has hit everyone all at once, unlike the financial crisis, but he too concedes it is all about how long it goes on.

The 2008 crisis caused a recession that rivalled the Great Depression of the 1930s, drove US unemployment up to 10% and burst a housing bubble that was both tragic and almost beyond parody: people with no income, no job and no assets were being given mortgages to buy homes they couldn’t afford. US household debt climbed close to 100% of GDP, according to the Federal Reserve. At the same time, Americans were saving just 3.6% of their income in 2007, leaving them little room to manoeuvre when they lost their jobs or had their wages cut.

This time, the US has learned some lessons. Household debt as a percentage of GDP has fallen sharply since 2008 to 76% of GDP at the end of 2019. The savings rate has risen to 7.9%.

The last financial crisis also led to mass layoffs in construction, banking and property, and spread through the entire economy. This crisis comes as employers are still fighting to hire workers, the banking sector seems secure and the housing market is far from overinflated.

As a result, this recession may not spread as wide or end up being as deep. The last recession officially lasted 18 months – from December 2007 to June 2009, the longest since the second world war. Gus Faucher, chief economist at the US bank PNC, thinks this one is more likely to last “closer to six months than a year”. If the outbreak proved brief, the US could bounce back fast, he said.

However, while this time it may be different, there are worrying factors that could trigger a longer-lasting recession, and the downturn is likely to expose fault lines that the good times kept hidden.

Central bankers rode to the rescue after the last crisis, cutting rates close to zero and pumping money into the economy via stimulus packages. The Fed is cutting rates again – even before any recession has been declared – but now it has little wriggle room. The interest rate is now 1%-1.25% after it made an emergency cut earlier this month, and another reduction is expected.

Corporate debt is another concern. Zandi describes it as a “barbell”: at one end there are highly profitable companies with mountains of cash that have taken advantage of low interest rates to raise even more money. At the other end are a lot of highly risky companies that have been financially engineered to exist on loans that are hovering close to “junk” status.

For now Zandi thinks it doesn’t present the sorts of issues the US experienced in 2008. But the political impasse in Washington and the Trump administration’s – until recently lackadaisical – response to the pandemic could worsen the situation. Also, the coming recession – if it happens – is likely to expose the fact that many of the jobs added since the last downturn have been low-wage, and that so much of the economic gain has gone to the top 1% that even they are worrying about economic inequality.

For many Americans, while “the best of times” may be over, a recession may finally expose something they felt all along. “We have just had the best stock market we have ever seen,” said Scott Nyerges, a writer and editor in Austin, Texas. “And still my friends are worried about whether or not we will ever be able to retire.”

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