The death of the ‘hot’ economy is chilling

The U.S. economy has taken a turn for the worse — much worse. The collapse of the job market in late April and early May raises the question (for which there is no clear answer) of whether the economy has fallen into a depression or, if not, faces a long stretch of slow growth, high unemployment and stagnating incomes.

The job numbers, as released by the Bureau of Labor Statistics (BLS) on May 8, are chilling. In April, the economy lost 22.4 million jobs, as the number of employed Americans fell from 155.8 million to 133.4 million — the largest one-month decrease since 1948, when the statistics were first reported in this way, according to BLS.

Meanwhile, the number of unemployed increased by 15.9 million, and another 6.6 million dropped out of the labor force, because they weren’t actively looking for work. The unemployment rate jumped from 4.4% in March (and 3.5% as recently as February) to 14.7%.

Nothing like this has been seen since the Great Depression of the 1930s. Indeed, the speed with which the economy responded to the coronavirus is probably unprecedented in American history.

“I struggle to even to put into words how large this drop is,” economist Elise Gould of the Economic Policy Institute, a left-leaning think-tank, wrote in a commentary. “It’s as if all the gains in employment since 2000 were wiped out ... [or] if all the jobs in all the states beginning with the letter ‘M’ simply disappeared in the last month. That’s all the jobs in Maine, Maryland, Michigan, Minnesota, Mississippi, Missouri and Montana combined.”

The explosion of unemployment seems to end an economic and social experiment to run the economy “hot,” an approach embraced by both President Trump and Federal Reserve Chair Jerome Powell. The general idea has been to keep unemployment low for groups — unskilled workers and minorities — who in the past have suffered from high unemployment rates.

These have now returned. The unemployment rate among African American workers jumped from 6.7% in March (and 5.8% in February) to 16.7% in April. The rate for Hispanic workers increased from 6% in March (and 4.4% in February) to 18.9% in April.

As has been widely reported, the largest job losses occurred in various service sectors: -7.7 million for “leisure and hospitality,” which covers hotels, restaurants, movies and sports events; -2.5 million for the retail and wholesale sector; -2.5 million for education and health care; and -2.1 million for professional and business services, consisting of lawyers, accountants, advertising salesman and computer experts.

Virtually every business sector experienced some losses, and many standard relationships held.

It is hard to find good news in the jobs report. Two candidates are misleading. One is a sharp increase in wages, up 7.9% in the past year. This suggests a continued strong demand for workers from employers. The other bit of misleading good news involves the distinction between temporary and permanent job loss. In response to one question on the unemployment survey, about threequarters of respondents (78%) said they had been furloughed and expected to return to their previous employer. Again, there’s skepticism among economists.

“Lots of these [furloughed] jobs will also turn into permanent losses as businesses realize that demand for what they produce isn’t fully coming back,” says economist Mark Zandi of Moody’s

Analytics. “There also will be a surge of business failures and bankruptcies.” Zandi thinks unemployment will peak at 17%.

It is still too early to grasp the full consequences of the job collapse. But what is already among the saddest side-effects is the demise of the “hot economy.” Since the mid-1960s, economic policy has tried to reduce unemployment sufficiently so that more low-skilled workers would get jobs that would raise their incomes. But the fear or reality of higher inflation repeatedly caused the Federal Reserve to pull back.

This time seemed different. The unemployment rate dropped below 4%, their lowest levels since the 1960s. Inflationary pressures were low. None of this guaranteed success, but it did create an opportunity to test the hypothesis that truly “full employment” and meager inflation were compatible. Now that opportunity is lost. Who knows when, if ever, it will return?