US Unemployment Rate: 
Jobs Report Yesterday's News.
Look at Tomorrow

By Dan North, Chief Economist of Euler Hermes North America | Published April 3, 2020

That was yesterday. Look at tomorrow.

Today’s employment report was worse than expected.  The data was gathered on the week of the 12^th of March, which was before the massive layoffs started, so it was expected that it wouldn’t be nearly as bad as the weekly jobless claims report from yesterday (or the week before that).  Nonetheless, this report does, in fact, show a dramatic decline in the labor market, even before the flood of job losses which began in the second half of the month.

The report is full of negative records.

• The economy lost -701,000 jobs, the worst since March 2009, 11 years ago in the Great Recession.
• It was the 8th worse monthly loss of the 974 months going back to 1939.
• More than half the losses, -459,000 came in the single industry of “Leisure and hospitality services” (casinos, sports, bars, restaurants, hotels). That was by far the largest on record since 1939 with the previous record being -83,000.
• The unemployment rate leaped from 3.5% to 4.4%, the biggest increase in 66 years.
• The broader U-6 unemployment rate jumped 1.7% to 8.7%, the largest increase on record going back to 1994.
• The decline in the labor force of -1.6 million was the largest in the 72 years of records going back to 1948.
• Weekly hours shrank by -0.6%, tied for the second-biggest decline on record going back 14 years.
• Since most of the job losses were in lower-paying industries, hourly wages actually grew +0.4% m/m to 3.1% y/y.

Despite all of the record negative data in this report, in a sense it doesn’t matter too much – that was yesterday.

What matters is tomorrow. What matters is when the jobs will come back.

I’ve been trying to strike an optimistic tone in my last few reports, and I will continue to do so because we have those massive monetary and fiscal policy packages in place which will buffer the damage to the economy, help stem the job losses, and help get the economy restarted. In fact, there’s even a fourth fiscal package in the works, and the Fed announced yet another liquidity enhancing program this week.  As I had previously mentioned, it’s a nuclear-powered response.

Here is what the Fed has done so far:

1. March 3rd: cuts interest rates 50 bps
2. March 11th: increases repo offerings from $200 billion to $500 billion (a repo is a type of loan to banks and other financial institutions)
3. March 12th: offers a new $500 billion three month repo
4. March 13th: offers a new $500 billion three month repo
5. March 13th: offers another $500 billion one month repo
6. (March 13th: Continues to offer at least $175 billion in overnight repos and $45 billion in two-week operations)
7. March 13th: Announces it will modify its $60 billion of purchases per month from short term T-bills to include longer-term bills, notes, inflation-protected securities, and other securities 
8. March 15th: Announces plans to increase Treasury holdings by $500 billion, and mortgage-backed securities by $200 billion.
9. March 15th: cuts interest rates 100 bps to a range of 50bps-0bps.
10. March 15th: Announces coordinated action with the central banks of Canada, Japan, England, Switzerland, and the European Central Bank, to enhance the standing U.S. dollar liquidity swap line arrangements
11. March 16th: Encourages banks to borrow at the Discount Window
12. March 17th: Encourages banks to use capital and liquidity buffers, reduces reserve requirements to 0%.
13. March 17th: Establishes a $10 billion Commercial Paper Funding Facility (CPFF).
14. March 17th: Establishes a Primary Dealer Credit Facility (PDCF) 
15. March 18th: Establishes a Money Market Mutual Fund Liquidity Facility (MMLF)
16. March 19th: Establishes temporary U.S. dollar liquidity swap arrangements with nine other central banks
17. March 20th: Coordinates actions with major central banks to enhance liquidity and increases the frequency of swap lines from weekly to daily.
18. March 20th: Extends MMLF to include state and municipal money markets
19. March 31st: Establishes lending facilities to other central banks to ease global credit conditions.

On the fiscal policy side, the Coronavirus Aid, Relief, and Economic Security (CARES) act provides $2.1T to the economy.

 

Even before the CARES act, Congress had passed two other measures:

• March 5^th: $8 billion to fund health agencies
• March 18^th:  $100 billion for emergency paid leave and free coronavirus testing

So that’s about $2.2T in total.  How much is that?  A lot. It’s a massive 47% increase in government spending. And as mentioned, Congress is now considering another $800B in stimulus spending for infrastructure.

To be sure it is going to be a very ugly time for the US economy over the next few months, so please do not be surprised that economic reports will be dismal for a while – we know it’s coming. The economy’s decline will be much sharper than that of the Great Recession – GDP could shrink perhaps as much as -30% q/q annualized in Q2.

But the Great Recession lasted six quarters. We think it’s possible that this one will be over much more quickly than that.

Given that the economy has collapsed in less than a month, it can rebound in a quarter.

In the meantime, CARES will help small businesses stay afloat with grants and loans, particularly to those businesses, which keep people on the payroll. The checks going directly to families will help tide them over, even if they don’t arrive for several weeks. The Fed has created record amounts of liquidity to the financial system and has signaled that it has virtually unlimited capacity to continue doing so. So we think many of the jobs are likely to come back by the end of the year, although admittedly it could take much longer to get them all back.

I can’t sugar-coat the grim realities of the virus, but we do have tools to fight it.