The first dust is beginning to settle. We are starting to get a better picture of how fiscal and monetary policymakers in the United States and elsewhere are responding to the coronavirus crisis. In the coming days and weeks, a lot of attention is likely to focus on the developments in U.S. labor markets. "Initial claims, participation rates and, of course, unemployment rates will be the economic equivalent to infection rates looking ahead," observes Christian Scherrmann, U.S. economist at DWS. The rise in initial claims for unemployment benefits from 280k to 3.2 million within one week gives an indication of the troubles to come. If history can serve as an example, we know that unemployment is not just a function of how strong the economic activity contracts during a recession. Another important driver has typically been how long it takes until growth finally turns positive again.
This week's "Chart of the Week" compares the relationship between the duration of a recession and the increase of the unemployment rate during that time. We think that the worst will probably be over for the U.S. economy in a relatively short period of time. Partly this is because the policy reactions have been unusually swift and decisive. This could pave the way to a recovery, which might be relatively fast as well. If so, history suggests a rather moderate increase of the unemployment rate once the crisis is over compared to the pre-crisis levels.
Of course, early numbers indeed could still be dramatic in the coming days or weeks. After all, this particular shock, is hitting the supply and demand side at the same time. However, we would caution not to overinterpret prelimnary or partial, let alone anectodal data. In the end, all depends on how long it will take until we can get back to normal – and how the new "normal" might be different from the old one, not least in terms of the sector composition of employment or the wage levels of system-relevant and less relevant professions.
* during the recession
Sources: Refinitiv, DWS Investment GmbH as of 3/25/20