Two weeks ago, we asked: "How much should we expect unemployment rates to rise in the aftermath of the coronavirus pandemic?" Sadly, the emerging picture is as grim as we anticipated, if not worse. "The current official data release only partly reflects the dramatic situation in the U.S. labor market," explains Christian Scherrmann, U.S. economist at DWS.
Take last week's monthly report on the employment situation by the U.S. Bureau of Labor Statistics (BLS). Much of the survey data used predated the coronavirus-related lock-down measures. Making matters worse, the BLS itself acknowledged that new interview guidelines for the household survey apparently confused interviewers and interviewees alike. As a result, the reported increase in the unemployment rate from 3.5% for February to 4.4% for March probably understates matters dramatically. The critical question is by how much.
Our "Chart of the Week" takes a first stab at answering it, by quantifying potential measurement errors and including other data sources with less of a time lag. In the week ending March 28, initial jobless claims almost doubled compared to the previous week. In total, almost 10 million people lost their jobs within these two weeks. Including this, as well as potential measurement errors, suggests a hidden unemployment rate of just over 11% already. That compares to the Great Financial Crisis peak of 10% in October 2009. How much worse it will appear in official figures will depend on a whole host of factors, including, not the least, methodological choices by government statisticians. The more interesting question is what might happen next in terms of the underlying jobs situation.
As we previously explained, history suggests that the eventual jobs recovery could prove significant, provided the coronavirus shock proves short-lived. There are two important caveats, however. First, labor markets tend to be lagging indicators. And it might be a while yet for the U.S. economy to find its footing again, as the pandemic continues to spread. Second, recent job losses extend well beyond such obvious areas as leisure and hospitality. This suggests structural adjustments, not just cyclical changes. If so, the healing could take quite a while. The chances of the official unemployment rate falling back below 4% again any time soon look increasingly dim.
* Change compared to the February report. Adjusted for potential measurement errors
Sources: Bureau of Labor Statistics, Haver Analytics, DWS Investment GmbH as of 4/7/20