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Job Market Ice Breakup

'We're Hiring' sign on the exterior of a Walmart store.
photo by Mike Mozart

When ice melts on a frozen lake after a long winter, it does not simply dissolve into the water; it often breaks up with a gunshot-like sound that echoes off the hills and rattles nearby homes.

To economists, business leaders and America’s legion of the newly unemployed, Friday’s jobs report brought the sound of early spring to a labor market flash-frozen by the COVID-19 pandemic. The Labor Department’s report that nonfarm payrolls increased by 2.5 million jobs last month came as a complete surprise. Until the news embargo ended at 8:30 a.m. Eastern time, analysts had forecast another major loss of jobs. On Thursday, Marketwatch pegged the consensus at a net loss of 7.25 million.

Some predictions suggested that the unemployment rate might touch 20%. Instead, it fell from April’s record high of 14.7%. (The statistics only go back to 1948, and thus omit higher rates in the Great Depression.) Friday’s report offered an initial estimate, subject to future revision, of 13.3%.

The report came one day after another Labor Department release that showed initial claims for unemployment benefits continued to decline from the sky-high levels attained right after the nationwide shutdown in late March. The figure reported in most news outlets, about 1.9 million claims in the prior week, reflects typical seasonal adjustments that have consistently overstated the actual number of humans claiming benefits in this anything-but-typical season. The actual number of claims was 1.6 million in the week ended May 30.

The total of seasonally adjusted unemployment claims since the pandemic began is more than 40 million. This is another figure that does not reflect actual human reality. In the latest report, just under 30 million Americans were receiving some sort of unemployment benefits, including more than 10 million self-employed individuals not normally eligible for such payments who were covered under the federal Pandemic Unemployment Assistance program.

Objectively, no matter which statistic we prefer, the employment situation is still terrible. Unemployment of 13% and 30 million people receiving benefits is light years from the record-low unemployment and steady wage gains we experienced at the start of 2020, before COVID-19 shut down millions of workplaces.

Still, things had to stop getting worse before they could get better. Thursday’s unemployment claims data showed that things had stopped getting worse. Friday’s figures demonstrated that they have started to get better now that businesses in most of the country are moving through increasingly permissive stages of the reopening process.

The speed and extent of any improvement will depend on decisions yet to be taken and events yet to occur. A resurgence of COVID-19 cases might be enough to trigger renewed curtailment of activity. I would guess, however, that this will only happen in places where a surge in cases brings a corresponding surge in deaths or in hospitalizations that threaten to overwhelm a health care system’s capacity. It is not just a question of how many people get sick, but of who gets sick, given the pandemic’s disparate impact on people who are older and less robust.

On the other hand, development and deployment of effective vaccines (none of which have yet been proven safe and effective in clinical trials) and treatments for COVID-19 could shorten the timeline for getting back to a pre-pandemic version of normal life. Failure to achieve these goals will slow it down.

Civil strife like the looting and arson that struck some places after recent demonstrations against police mistreatment of African Americans could also have an impact. It is too soon to say how long this unrest, or its economic aftereffects, will last. Yet history has shown that such effects tend to be local even if they are long-lasting. Riots in the 1960s through the 1990s tended to push activity to suburbs, exurbs and Sun Belt cities. This hurt some urban neighborhoods for years afterward but did not notably depress overall economic prosperity.

The decisions that will have by far the greatest impact on the economy, in 2020 and in the years that follow, will be political. The November presidential election looms above everything else. President Donald Trump, who in the past has suggested that employment data might have been politically manipulated, lost no time in celebrating Friday’s jobs report. Instead, it was New York Times columnist Paul Krugman – an economist and Nobel Prize winner who is no fan of Trump, nor of virtually any other Republican economic policy – who cast doubt on the figures’ veracity. He later apologized.

Democrats have dreaded exactly the kind of news that Friday’s report generated. POLITICO reported two weeks ago that because the economic news this spring has been so spectacularly bad, data showing a rebound in the second half of the year is apt to be stunningly good. This is a nice scenario if your name is Trump and you are running for president.

This puts a particularly partisan spin on congressional Democrats’ push to extend supplemental federal unemployment payments – an enormously generous $600 per week boost on top of regular state-funded benefits – through the end of the year. Those benefits are currently scheduled to expire on July 31.

As I have noted in this space, and as many others have noted elsewhere, these benefits make it more profitable for many unemployed individuals to stay on the dole than to take up new work. Accordingly, these benefits make it much harder and more expensive for businesses to restart and restaff. The Congressional Budget Office estimated last week that if Congress extends the supplemental benefit through the end of the year, roughly five out of every six unemployment recipients will be making more money by staying home than by returning to work.

The CBO also estimated that overall economic output will be higher in 2020 if the benefits are extended, because the extra cash will be turned into extra purchases of goods and services. But this pattern would reverse itself in 2021, as the diminished availability of workers translated into reduced demand for their services as businesses replaced them or shut down.

Extending the supplemental unemployment benefits would toss a wet blanket on an economy that is beginning to heat up. It would slow business recovery and keep unemployment higher than it otherwise would be. This may not be the sole motivation of Democrats who are advocating for the payments to continue, but it would be an undeniable boost to their hopes of displacing Trump in November.

Friday’s jobs report will likely fortify Senate Republicans’ reluctance to extend the benefit. Similar news next month, in the final report before the current enhanced payments expire, will probably seal the benefit’s fate. That would mean the labor market’s ice may be gone before summer comes to an end.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s most recent book, The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book, Looking Ahead: Life, Family, Wealth and Business After 55.

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