Historic Collapse in USA Jobs in April!

·         U.S. nonfarm payrolls plummeted by 20.5m in April, largely erasing the 23m gain from the ten-year expansion. The Bureau of Labor Statistics’ (BLS) estimate of the unemployment rate jumped to 14.7% from 4.4%, the biggest monthly jump ever and the highest rate since the Great Depression peak of 26%. High initial jobless claims through early May point to further significant increases in the unemployment rate. History suggests that it will take several years for employment to return to its pre-recession level. We expect an unemployment rate of 9% at the end of 2021, more-than-double the 3.5% pre-crisis rate.

·         The greater the share of layoffs that are temporary, the faster the labor market recovery. The number of persons on temporary layoff/furlough increased by 16m to 18m in April, accounting for the bulk of total unemployment. Some of these persons will return to work once businesses reopen, but some temporary layoffs will become permanent as businesses face soft demand, close permanently, or as they operate at reduced capacity to ensure social distancing.

·         The government is providing generous income support for the unemployed. The Cares Act boosts unemployment compensation by an additional $600 per week for up to four months, closing the gap between the state unemployment benefit (average of $387bn nationwide weekly) and pre-crisis average weekly earnings ($981). We estimate that total unemployment compensation increased by close to $50bn in April and that the government’s one-time payment to households (up to certain income thresholds) totaled roughly $160bn. These income support programs are likely to offset the decline in total wages and salaries in April.

·         It is too early to evaluate the effectiveness of the Paycheck Protection Program (PPP). If firms rehire workers by June 30, 2020, the portions of eligible loans from the Small Business Administration (SBA) used for payrolls will be forgiven. As economies reopen and as the June 30 PPP deadline approaches, unemployment should recede, but business rehiring decisions depend critically on product demand and cash flows. 

·         Economic and labor market recoveries will be led primarily by health care developments. Household confidence in resuming normal spending activities hinges on an effective therapeutic and eventually a vaccine for COVID-19. Until then, demand for a wide array of goods and services will remain low, even as “nonessential” activities are allowed to resume. Even as recovery increases the demand for labor, the enhanced unemployment compensation will reduce labor supply in some sectors. Labor market dislocations will take a while to sort.

Dr Mickey D. Levy, Chief Economist US, Americas and Asia – Berenberg