Last week’s incoming labor-market data indicates a sizable blow to the US economy from coronavirus-related shutdowns and restrictions. We had been working with the idea of a 7.5% first-half 2020 gross domestic product (GDP) contraction, but based on new data that seems optimistic.
We now expect the shock to be at least 10%–12%. Incoming labor and government-spending data will help us refine the estimate, but a shock of that size would push down our 2020 GDP forecast. Of course, we expect that forecast to change repeatedly during the course of the year as information about the shape of an eventual recovery begins to trickle in.
Beginning to Fill In the Economic Picture
There are three big questions about the economic outlook for this year: How deep will the recession be? When will the recovery start? What will it look like? The recovery aspect is still a riddle, since it depends on the path of the coronavirus (officially COVID-19) and the public health responses. But at least we’re starting to get some information that will help us understand how much economic activity has been lost.
The best high-frequency data point we have right now is initial unemployment claims. We can use it as a rough proxy for the number of job losses. Over the past four weeks, more than 22 million workers have filed claims—and given delays and backlogs, the actual number of lost jobs is almost certainly higher. With more layoffs coming, 25 to 30 million seems like a reasonable ballpark estimate.
Unemployment Rate Could Climb as High as 20%
To put that number in percentage terms, there were slightly fewer than 152 million people employed in the US at the end of February. A net loss of 25 to 30 million jobs would translate into losses of 15% to 20% of the total work force in just six weeks. Calling that level unprecedented doesn’t quite do it justice (Display); by comparison, the global financial crisis (GFC) experience looks like a rounding error.
With unemployment claims in hand, we can estimate the unemployment rate. Simple math would tell us that if 15% to 20% of the workforce has been laid off and the starting unemployment rate is 4.4%, the current unemployment rate is around 20%. The official unemployment rate (due in early May) will likely be lower—to be counted as unemployed, people must be looking for work, which is a challenge during an economic shutdown. However, the official rate will certainly be well over 10%, probably somewhere between 15% and 20%.