Job seekers stand in line at the employment help center in Miami, Florida.
Anywhere between about 1 million and 4 million people were expected to have filed for unemployment benefits last week, the largest number ever in such a short time.
The filings figure, which will be released Thursday morning before the bell, are the first indication of how hard the labor force is being hit by the abrupt shutdown of a large part of the U.S. economy after President Donald Trump warned Americans not to go to restaurants and states ordered people to stay home to stop the spread of the coronavirus.
“It’s the tip of the iceberg, and they’re going to be ugly. It depends on the speed at which the claims were filed, and the next week will probably be worse,” said Diane Swonk, chief economist at Grant Thornton. Swonk expects between 1 and 2 million claims were filed in the week ended March 21, a sharp jump from the slightly elevated 281,000 filed the week earlier.
“It will be closely watched as a measure of how violent the shutdowns have been to the labor market,” said Jon Hill, fixed income strategist at BMO. “You have 15.8 million people working in leisure and hospitality, and you just shut down the industry.”
The speed at which the economy shut down is unprecedented, and economists usually look to a slow build in weekly unemployment claims as an early warning signal of an economic slowdown. But this sudden, unprecedented spike whether its 2 million, as expected by Barclays, or 4 million, expected by Citigroup, is signaling that the unemployment rate will also leap from February’s 3.5% to estimates that go as high as 10%.
“There’s nothing to compare this to. It’s why we need extensions and shoring up of unemployment insurance and expanding it to a wider group of people,” Swonk said. “This will be the first shock and awe…It’s terrifying, but it’s why nobody is going to tell Congress they did too much.”
Congress is in the process of adopting a $2 trillion stimulus package.
“This shouldn’t be an economic figure that sends the stock market plummeting. Most economists have already written off the second quarter as ‘Great Depression’ style economic growth,” said Chris Rupkey, chief financial economist at MUFG Union Bank. He said it would not be surprising to see unemployment spike temporarily to 10 million, given that the restaurant industry has said it could lose 5 to 7 million jobs.
“Whether the job losses go to 3 million unemployment claims this week, 4, 5 or 6 million in coming weeks, its pretty much besides the point there,” he said. “Probably the most immediate figure that matter is the daily count of coronavirus cases. That’s probably more important.”
Economists now expect the economy has entered recession and the trough will be in the second quarter, with many forecasts of a record double-digit decline in GDP. The economy is expected to be less impacted or recover in the third quarter, and then rebound in the fourth quarter.
When will the jobs return?
The speed at which employees can return to their jobs, and the economy rebound, will depend on how quickly the virus can be stopped from spreading. The duration of the shutdown and job losses will also determine how many of them become more permanent.
Swonk said with 40% of the U.S. now in shelter in place mode, it will be difficult to navigate the return to work by even those who have not been unemployed. “The problem is, as we ramp up, it’s not like turning on a spigot,” she said. She said the return to work could be staged and require testing and other measures. Some businesses may also open up again but with fewer workers.
“With the passage of these fiscal support bills, the attention is going to shift back to two things. Is it working to prevent large scale layoffs? And are the quarantine efforts working?” said Michael Gapen, Barclays chief U.S. economist. “If there are layoffs, but it doesn’t look draconian, if it looks in two to three weeks time, most of the hot spots are under control, then it’s a better outlook. Then its a significant but transitory event for activity.”
Gapen said he expects GDP to trough in the second quarter with a decline of 7%, but if the virus is more severe, it could decline by 10%. By the same measure, he said unemployment could be about 7% or as much as 9%.
Gapen expects 2 million claims this week. The claims number released Thursday will reflect the filings through Saturday, March 21.
“The highest they were ever at was just a little under 700,000 in 1982. In the peak of the global financial crisis, they were approaching 650,000,” he said.
“Certainly 10% unemployment is a forecast that has a great chance of becoming fact. But I still don’t know what it means because this is still a coronavirus recession. There isn’t a housing bubble that burst. There isn’t a stock market bubble that burst, signaling underlying problems,” said Rupkey. “It’s really the economy has caught this deadly virus cold, and we’re waiting for the symptoms to subsist. The theory is it could be the deepest recession since the Great Depression in terms of output and job losses, but it could also be the quickest downturn. If the virus stops spreading and the self-isolation strategy works, it’s more a question of is the virus count of positive cases going to be limited in for more weeks? Five weeks or will it take 12 weeks?”