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Bruno Cavalier
Chief Economist at ODDO BHF

The lockdowns being implemented in the US will upend the labour market. Its flexibility, which is normally an advantage, will facilitate the adjustments and cause new jobless claims to skyrocket. They were around 200,000 before the coronavirus shock; they could quickly number in the millions. There will be no valid historical comparisons. The scale could be that of the Great Depression, except the shock is expected to last a few weeks this time, not several years. The fiscal stimulus just voted is aimed at cushioning the fall in revenues and preserving consumer spending.

The week's focus

According to the US Treasury Secretary, without a massive stimulus plan to counter the coronavirus shock, the unemployment rate in the US could surge to 20%. The previous peaks, reached in 1982 and 2009 in severe recessions, were in the region of 10%. The 20% level is only comparable to the Great Depression in the 1930s (chart lhs). A stimulus has been approved (see p.2) but the labour market nonetheless looks set to undergo a brutal adjustment due to the closure imposed on numerous sectors. With a labour force currently at 165 million (incl. 5.8M unemployed), a jobless rate of 20% implies 27M additional unemployed. Is such a scenario possible? Unfortunately, it is.

As a result of light-touch regulations, the US labour market is extremely fluid in terms of entry and exit. In the near future, increasingly stringent confinement will have devastating effects on employment conditions. Already, sporting events and political meetings have been suspended. Air transport has been significantly reduced. The closure of restaurants and tourist accommodation is accelerating rapidly. This sector has 14 million employees. The education sector is also likely to be affected, here again with around 14m employees concerned. To this must be added, the halt in production at automotive plants, numerous construction sites and retail premises. Social distancing is an unprecedented shock. In some states (Pennsylvania, Connecticut, Ohio, etc.), compensation claims have soared. This will become visible at the national level as of the data taken at 19 March (published on 26 March), but already on 12 March, the rebound was beginning to materialise (chart rhs). The baseline assumption is that confinement will last for a number of weeks, too short a period to record a durable rise in unemployment¹. However, there will be a period of uncertainty during which households will see their revenue decline but will have expenditure that cannot be reduced. And on top of the sudden stop in employment will come the loss in value of financial assets...

¹ If the people at risk, knowing that they will return soon to their jobs, do not actively seek employment, they will not be categorised as unemployed but they will exit the labour force. This would then massively reduce the rise in the unemployment rate.

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