Digging out of the gigantic economic hole
Imagine you are asked to fill a 12-foot-deep hole. Now imagine that the hole is only 11 feet deep. Feel better? Of course 11 is better than 12, but the task ahead is immense. That massive hole is the U.S. economy, and right now, although it may be shallower than first feared, it is still gigantic.
Two recent examples underscore the point. The May jobs report was better than expected — yes, the rate was understated, but 2.5 million jobs were added, which is an unambiguous good sign. Still, employment remains down by nearly 20 million jobs (13%) since February. To put that staggering number in context, the US labor market lost about 9 million jobs during the last recession (between December 2007 and February 2010).
Similarly, retail sales soared by 17.7% in May from April, the largest monthly increase on record. But April and March results were awful and sales were still $42 billion lower than February, before the pandemic caused national lockdowns. In addition to jobs and retail sales, there is also evidence that the most beaten down sectors like air travel, train traffic and even visits to the dentist, may have bottomed. But the hole is still deep.
The sudden drop in economic output led the National Bureau of Economic Research to declare that the economy officially entered a recession in February. How long the downturn lasts remains the big question. In conjunction with its two-day June policy meeting, the Federal Reserve released its economic projections. Central bank officials predicted that the U.S. economy would shrink by 6.5% this year. That would be the sharpest annual decline since GDP fell 11.6% in 1946, when the nation was demobilizing after World War II. The unemployment rate will drop, but it will likely remain above 9% by the end of the year. As analysts from Capital Economics noted, “things aren’t quite as bad as we feared, but they are still potentially worse than at any time since the Great Depression of the 1930s.”
It’s going to take time to dig out of this gigantic hole — we’re probably not going to fill it until the middle of 2022, according to Fed Chair Jay Powell. In his press conference after the Fed meeting and then again during his Congressional testimony, he reiterated that millions of Americans will become permanently unemployed from this crisis, as the companies they used to work for go out of business or their old jobs are eliminated. And while the pandemic impacts all Americans, it does not do so equally. Powell underscored, “The rise in joblessness has been especially severe for lower wage workers, women, African Americans and Hispanics.”
The pandemic is laying bare income inequality that already existed. U.S. median household income was $63,179 in 2018, the most recent year for which there is data. The Census Bureau also drills down to racial income levels and the difference is vast: median income for white households was $70,642, for Hispanic households, it was $51,450 and for black households, it was $41,361.
A new paper from the National Bureau of Economic Research finds that the inequality is also apparent with small business failures. Over the past three months, 3.3 million small firms shut their doors — that’s more than all of the 17-month Great Recession. But, the closings disproportionately hit minority- and immigrant-owned firms, and “may portend longer-term ramifications for job losses and economic inequality.” African American businesses were the hardest hit.
The gigantic hole is deeper for some Americans than others. We are all going to have to grab a shovel and pitch in to fill it.