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 around ten percent (the annualized rate would be at around 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 over the summer and the unemployment rate decreased to 7.9 percent in September. There are two factors that 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). In the meantime, the recovery has slowed down. 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 was probably higher in the spring (also to a lesser extent in the summer) due to misclassifications and other measurement challenges (I have the impression that the “true” number might have been at 18-20 percent in April). 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. In addition, a higher number of Covid-19 cases in some U.S. states 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. Unemployment rates for Black or African American, Asian, and Hispanic or Latino ethnicity was higher than for whites in August.
For the next months, I 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 7.5 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 6.5 percent in 2021. But only towards the end of 2022 will the unemployment rate again be in a range of four 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 large further wave of the pandemic. In addition, global tensions between countries could increase.
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