The U.S. Is Battling Two Recessions, Not Just One
(Bloomberg Opinion) -- The U.S. is in a very odd situation. Even as the official unemployment rate falls, the health of the underlying labor market is deteriorating as the coronavirus pandemic drags on. The country is in the middle of two simultaneous downturns -- a short-term seizure caused by fear of coronavirus and a longer-term slump that will look more like a traditional recession. Unfortunately, the latter is just beginning.
The good news is that more Americans returned to work in June, continuing the trend that began in May:
This is true whether or not workers who are still receiving a paycheck for their employer, but who aren’t coming in to work, are classified as unemployed:
That the adjusted jobless rate has fallen faster than the unadjusted version offers a clue to what’s going on in the labor market. Many employers were engaged in what economists call labor hoarding -- keeping workers at home until the shock passes, then bringing them back. Some of these workers were getting paychecks the whole time, and these were the first to be called back; that’s why the adjusted unemployed rate fell faster than the unadjusted rate.
But some businesses are clearly maintaining unofficial relationships with their laid-off workers; the workers aren’t necessarily on payroll, but there’s the understanding that they’ll be hired again as soon as there’s work for them. The rehiring of these workers probably accounts for most of the drop in the unadjusted jobless rate. Just as labor hoarding by large manufacturers tended to shorten recessions in the mid-20th century, pandemic labor hoarding is causing what looks like the start of a V-shaped recovery.
That recovery will now probably be interrupted. A huge new wave of coronavirus cases is hitting states in the South and West. Fear of coronavirus is already returning:
This will result in more labor hoarding; workers will be told to stay home, with or without a paycheck, for another month or two. The abrupt seizure paralyzing the U.S. economy will drag on.
But eventually that seizure will end (perhaps with the help of monoclonal antibody treatments in the fall) and businesses will call workers back. That, however, won't return the U.S. economy to full strength right away. A deeper, more lasting recession is brewing -- one that won’t be as acute, but which has the potential to last much longer.
One reason is business closures. Lack of demand during the pandemic will simply make a lot of businesses vanish. Even if the demand for their goods and services returns, it takes time to start and expand new businesses to replace the ones that died. During that time, workers will be out of work. This will produce a fairly traditional Keynesian demand shock, as those unemployed workers have less money to spend.
A second reason is sheer pessimism. Seeing the entire economy seize up for months will probably have a chilling effect on investors and consumers, further depressing demand.
A third factor will be a shift in the industrial mix of the U.S. economy. Businesses such as movie theaters could be headed for the scrap heap, and many colleges are set to suffer as well. This is not a normal reason for a recession, and it could create a supply shock that partially negates the deflationary effect of falling demand, while adding to unemployment. A supply shock might not be enough to push the economy into stagflation comparable to the 1970s, but it could make the Federal Reserve more cautious about using bold monetary policy to fight the downturn.
These patterns are already showing up in the labor market data. The number of temporarily unemployed people is falling, but the number of permanently unemployed people is rising:
Other measures of the permanent unemployment rate are also rising rapidly.
This slowly building recession will be all the more dangerous because it’s so sneaky. The end of temporary unemployment and the acute damage of the pandemic will lull some policy makers into thinking that the government’s mission has been accomplished. If permanent unemployment continues to rise at half a percentage point every month, it could be at Great- Recession levels by the end of the year.
The government needs to be preparing to counter this longer-term downturn. A vigorous program of infrastructure building, a huge investment in research and more aid for the states would all be smart policies. The good thing about traditional recessions is that we know how to fight them; we just have to be ready and willing to do so.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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