The outbreak of the coronavirus pandemic and measures to contain it led to a dramatic collapse of economic output – in the first half of 2020, the U.S. economy contracted by more than ten percent (the annualized rate would be higher than 35 percent). Millions of employees have at least temporarily lost their jobs since the middle of March. The unemployment rate rose to 14.7 percent in April (from 3.5 percent in February), which is the highest rate since this time series was started in 1948. But it has rather surprisingly already started to decrease in May to 13.3 percent. The recovery continued in June (11.1 percent) and July (10.2 percent), but the pace of the recovery got slower. I think two factors explain the slower recovery. First, the partial reopening of the economy in May and June had a considerable effect on economic activity and employment (although economic activity and employment remained well below their pre-pandemic levels). Second, an increase in Covid-19 cases in several U.S. states over the summer led to stricter containment measures there, which dampened the recovery.
The evolution of the unemployment rate clearly shows that we are not facing a usual recession. In a “normal” recession, the increase in unemployment would be more gradual because firms will over time learn that demand for their products decreases. In the current recession, the pandemic and the lockdown led to a sudden and mostly unexpected drop in economic activity and a surge in unemployment. The situation is now gradually improving.
One should also bear in mind that the “true” number of unemployed persons is probably higher due to misclassifications and other measurement challenges (I have the impression that the “true” number might have been at 18-20 percent in April and in July at around 11 percent). Nevertheless, the gradual decrease in the unemployment rate is a sign of hope that the worst is over. But it is also quite certain that the recovery will probably last for a long time and will be painful for the persons involved. Higher number of Covid-19 cases in some U.S. states might slow down further improvements. Companies in different sectors are struggling to survive and might reduce the number of workers. And other companies could now invest even more in automation.
Job growth since May occurred in most sectors of the economy and were particularly strong in sectors such as hospitality, leisure, food services and drinking, retail trade or health services, which were all hardly hit by the pandemic and the lockdown. Let me repeat that employment levels in most of these sectors remains well below their pre-pandemic levels. At the moment, it look like the female unemployment rate is recovering at a slower pace than the male unemployment rate. The reason is that female employment Is typically higher in sectors such as leisure and hospitality that most suffered from the pandemic and the lockdown. Unemployment rates for Black or African American, Asian, and Hispanic or Latino ethnicity was higher than for whites in July.
For the next months, I do expect a gradual, but not rapid reduction in the unemployment rate; unemployment will remain elevated until 2022. Obviously, forecasts are extremely difficult at the moment and I hope to be too pessimistic. In my baseline scenario, I expect the unemployment rate to fall below 10 percent in the autumn of the current year. A further decline may then be expected in 2021 in the wake of the economic recovery. On average, I expect an unemployment rate of around 7 percent in 2021. But only towards the end of 2022 will the unemployment rate again be in a range of four to five percent, which could be described as “normal”. Against this background, wage developments are likely to remain subdued for the coming years. Needless to say again, however, that any economic assessments and forecasts are associated with a high degree of uncertainty. There is, in particular, the risk of a second wave of the pandemic (as mentioned above, the number of cases in some states has increasing fast recently). In addition, global tensions between countries could increase.
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