Framing the Fed’s Policy Responses

Bloomberg has a nice rundown of the Fed’s aggressive policy responses, framed as falling into one of three categories:

  1. Lender of Last Resort
  2. Fiscal Partner
  3. Investor of Last Resort

Recommended reading:

The line between “investor of last resort” and “fiscal partner” is often blurry. For instance the new Municipal Liquidity Facility for buying up to $500 billion in municipal debt involves the Fed acting as an investor of last resort (directly buying bonds in the primary market, as opposed to merely lending against municipal bonds) to provide fiscal relief, with some financial backing provided by Congress via the CARES Act. And the novel lending objectives seem more important than Congress’s blessing and partnership.

I would underscore that the Fed quickly reactivated its 2007-09 playbook for lowering both short- and long-term interest rates as well as relaunching its alphabet soup of credit facilities—rather than having to invent the wheel—and then veered aggressively into the unchartered territory of buying loans and bonds directly (not merely conducting open market operations and lending against a wide array of collateral).

To the former point, “They have in a matter of weeks rolled out every program and more that former Federal Reserve Chair Ben Bernanke worked years to develop,” as economist and venerable Fed watcher Tim Duy aptly put it.

And if you’re interested in following the Fed’s moves more closely, Tim Duy’s Fed Watch blog is a must-read.

Over 20 Million Workers Have Filed for Unemployment in 4 Weeks

In the last four weeks, a staggering 20.1 million initial unemployment insurance (UI) claims have been filed. Ignoring seasonal adjustments to the data, the Bureau of Labor Statistics (BLS) reported this morning that another 5.0 million Americans lost their job and filed for UI in the week ending April 11, the fourth straight week of unprecedented job losses. This follows 6.2 million initial claims filed the week ending April 4, 6.0 million claims filed the week ending March 28, and 2.9 million claims filed the week ending March 21. The full BLS report can be found here.

With seasonal adjustments, today’s report showed another 5.2 million initial claims, bringing the total to 22.1 million in the past four weeks. It took a full year for cumulative jobless claims to hit that mark during the Great Recession. In a truly unprecedented fashion the U.S. labor market is unraveling in the blink of an eye.

As the Economic Policy Institute pointed out, nearly 750,000 initial UI claims have been filed on average every day for the past month:

Put in perspective, the March jobs report showed 701,000 job losses for the month—based on survey data collected before these four weekly claims reports. During the Great Recession, job losses averaged 743,000 per month during the worst six months for the labor market. And now we’re seeing a comparable number of UI claims filed daily, on average, over the past four week: 719,000 on an unadjusted basis or 787,000 on a seasonally-adjusted basis.

Before the coronavirus started catching up with the U.S. economy, 152.5 million people were employed in February. Just subtracting the 20.1 million workers who have filed for UI in the past four weeks from March employment levels suggests that employment has fallen 13.7% in just two months. Put in perspective, employment cumulatively fell 6.3% during the Great Recession, over a span of 25 months. So we’ve seen more than twice as much job loss as during the Great Recession, in less than a twelfth of the time. 

Big numbers and percentages have a tendency to dehumanize our lived experience in the economy: More than one in eight workers who were employed in February have since lost their job and filed for unemployment, and others have involuntarily lost hours or lost their jobs without qualifying for unemployment benefits. Terrifying.

If the 20.1 million workers who filed for unemployment in the past four weeks, since the March jobs report, were counted as transitioning from employment to unemployment, we’d be looking at an unemployment rate in the ballpark of 16.7% come the April jobs report. That would be roughly in line with the 16.2% unemployment rate the U.S. averaged in the decade following the Great Crash of 1929, and the highest rate since May 1939. The unemployment rate may register somewhat lower, because workers who have lost their jobs but are not actively looking will be counted as leaving the labor force, as we saw early evidence of in the March jobs report. For this reason, the cumulative percentage change in employment or the share of the adult population that is employed will be better gauges of labor market distress (as they were during the Great Recession).

On the other hand, economists Alexander Bick and Adam Blandin have been conducting timely online labor market surveys, and recently estimated that U.S. unemployment had already hit 20% by the first week of April. Recommended reading: “Real Time Labor Market Estimates During the 2020 Coronavirus Outbreak

Big Picture: Recovery in the U.S. labor market is not going to happen until the pandemic is under control and nonessential economic activity can be safely and sustainably resumed—essentially meaning either the rollout of widespread testing or a vaccine or other form of treatment. The ongoing collapse of the U.S. labor market has been greatly exacerbated by the federal government’s continued failure to ramp up testing; and the longer the public health responses languishes, the deeper the hole we will find ourselves digging out of and the slower the pace of recovery (more to follow on that latter point).

It’s also worth pointing out that no country in Europe—where the policy focus has been government wage-sharing agreements to keep workers on payrolls, as opposed to providing emergency unemployment benefits to separated or furloughed workers—has seen job losses well exceeding 10% of their workforce. Minimizing the destruction of employee-employer matches and keeping more businesses afloat will make for a faster labor market recovery, whenever it’s safe to reopen. It’s a safe bet that, one year from today, Germany’s labor market is going to look far healthier than that of the United States, largely because of differences in both labor market and public health policies.

More Worse-than-expected U.S. Economic Data for March

A slew of data releases for the U.S. economy all came in worse than expected this morning. As a reminder, the New York Fed’s Economic Indicators Calendar and MarketWatch’s Economic Calendar are great tools for tracking upcoming data releases and following data in real time.

Retail Sales: The advanced March retail sales report showed retail and food service sales crashing 8.7% relative to February, the largest month-over-month on record. The report came in slightly worse-than-expected, as MarketWatch reported a median forecast of a 7.1% decline. If 8.7% doesn’t sound like a lot, we’re talking a decline of $46 billion in one month; consumption accounted for 68% of U.S. GDP in 2019. The U.S. Census Bureau’s data release can be found here.

Visualization via Ben Casselman of the New York Times:

Big ticket “durable goods” (expected to last three years or longer) are the most volatile component of retail sales, and often the first to get walloped in recessions. Excluding auto & parts sales, which plunged 25.6%, retail sales fell by a more muted 4.5%. Unsurprisingly grocery sales surged, up 26.9%, as people stocked up for stay-at-home orders. Restaurant and bar sales were down 26.5% and clothing sales halved, declining 50.5% relative to February. Expect the April numbers to be way worse.

Industrial Production: The Federal Reserve’s indices for industrial production and capacity utilization were also released for March, and came in worse-than-expected. Industrial production fell 5.4% for the month, while the share of industrial capacity being used fell from 77.0% in February to 72.7% in March. These are also preliminary releases and will be subsequently revised. The Fed’s data release can be found here.

Caveat: These March data releases largely predate stay-at-home orders and closures of nonessential businesses, as discussed in this post on the March jobs report. California was the first state to issue such an order on March 19, with Illinois and New Jersey following suit on March 21 and New York doing so on March 22. Speaking of New York…

April in the Empire State: The only report on economic conditions for April was far more bleak, but also reflected regional heterogeneity and the staggered spread of the coronavirus across the country. The New York Fed’s Empire State Manufacturing Survey—like it sounds, a gauge of manufacturing activity in New York State—plunged 57 points to -78.2 in April, the lowest level on record; the low recorded during the Great Recession was -34.3. Negative values for this index indicate that economic activity and business conditions are worsening. The NY Fed’s data release can be found here.

Upcoming: Tomorrow brings data on initial unemployment insurance (UI) claims for the week ending April 11; MarketWatch is reporting a median forecast of another 5 million UI claims, above and beyond the staggering 16.8 million claims from the previous three weeks. We’ll also get March data on housing starts and building permits, as well as the April reading of the Philly Fed’s regional Manufacturing Business Outlook Survey.

A Novel Work-around to Data Availability Lags

Data availability lags pose a significant problem for policymakers in the midst of a recession or financial crisis. The U.S. economy is surely careening into a deep recession, but we have no clue how deep the hole will be. For what it’s worth, JP Morgan recently revised their forecast to a -10% annualized contraction in the first quarter and a -40% annualized contraction in the second quarter, for a cumulative decline of ~15% for the first half of the year (take such ad hoc forecasts with a huge grain of salt). Preliminary data for U.S. real GDP in the second quarter of the year won’t be released until July 30.

Notwithstanding the fact that the last three reports showed a staggering 16.8 million unemployment claims since mid-March, these data availability lags are one reason that weekly initial unemployment insurance (UI) claims—a leading economic indicator—get so much attention during recessions.

Economists Daniel Lewis, Karel Mertens, and James Stock have an interesting new data project and related working paper, “U.S. Economic Activity During the Early Weeks of the SARS-COV-2 Outbreak,” that tries to work around data availability lags in our headline economic indicators. The authors also published a shorter, more accessible overview of their work on the New York Fed’s blog:

The authors have constructed a new Weekly Economic Index (WEI) to track real economic activity closer to real time; the index is being updated every Tuesday and Thursday. The WEI is constructed using data available at a weekly frequency or higher, including UI claims and measures of federal tax withholdings, retail sales, railroad traffic, steel production, and electricity usage, among others. The index is extracted from these high-frequency data series using a method called principal component analysis.

Scaled to U.S. real GDP growth, the WEI suggests that we experienced a collapse in U.S. economic activity by the week ending March 28 equivalent to a 6.2% annualized contraction in real GDP—if that lower level of activity persisted for a full quarter:


As you can see, that would be a more abrupt and far steeper rate of decline than we ever experienced during the Great Recession. Stay tuned for more updates…

State Budget Cuts and Fights Over State Fiscal Relief

Additional state fiscal relief is one of the major sticking points in Congressional negotiations over the “phase four” coronavirus relief package: Democrats are trying to tie $150 billion in grants to state and municipal governments and $100 billion for hospitals to a $250 billion expansion of the small business loan program, whereas Republicans only want the latter. A bipartisan group of state governors led by Governors Larry Hogan (R-MD) and Andrew Cuomo (D-NY), respectively the Chair and Vice Chair of the National Governors Association, are now pushing Congress for a larger package of $500 billion in unrestricted fiscal relief for states and territories. Related reading:

State budget cuts were a major headwind blowing against U.S. recovery from the Great Recession—and would have been an even bigger drag without the state fiscal relief provided by the American Recovery and Reinvestment Act of 2009. Adjusted for inflation, state and local government spending cumulatively shrank 9.1% between 2009Q2 (the recession’s technical end) and 2012Q4. Without the drag from these budget cuts, U.S. real GDP growth would have averaged 2.7% annually over this period, instead of growing at the anemic 2.0% annual rate we experienced; the U.S. economy was growing roughly at its trend rate—way too slow to get the economy recovered back to its pre-crisis trend and quickly bring down unemployment. State budget cuts proved the difference between progress toward recovery and treading water, and we regrettably opted for the latter.

Federal grants to states, territories, municipalities, and tribal governments is the most assured way to prevent such a drag exacerbating this recession and impeding eventual recovery. Unlike the federal government, most states are legally prohibited from running budget deficits, so they start axing spending when their tax revenue craters, e.g., because of mass layoffs, furloughs, and closures of non-essential businesses. The economic fallout from the coronavirus is already walloping state budgets and, regrettably, triggering state budget cuts, including cuts to Medicaid programs and hospitals. The Center on Budget and Policy Priorities (CBPP) has a new, timely report out on the rapid deterioration in state budgets:

Emerging projections of state revenue shortfalls, via CBPP:


Related news coverage of state budget cuts continue to pop up left, right, and center:

Congress would be wise to quickly heed the call of Governors Hogan and Cuomo, before state budget cuts begin to seriously impede our public health response to the pandemic and worsen the economic downturn.

The U.S. Labor Market is in Shambles (Unemployment Claims for 3/29-4/4 Edition)

Another 6.6 million Americans lost their job and filed for unemployment insurance (UI) in the week ending April 4, the third straight week of absolutely staggering and heartbreaking job losses. Unemployment insurance claims for the week ending March 28 were revised up to 6.9 million, and 3.3 million claims were filed the week ending March 21. On a seasonally adjusted basis, 16.8 million adults have filed for unemployment in the last three weeks. The weekly Bureau of Labor Statistics (BLS) report can be found here.

The staggering number of claims in either of the past two weeks are an order of magnitude worse than the worst week of the Great Recession. During the Great Recession it took 44 weeks for cumulated weekly initial claims to hit the 16.8 million mark (weeks ending December 8, 2007 thru October 4, 2008). In just three weeks the U.S. labor market has fallen off a cliff, unlike anything we’ve seen before. Via EPI:

Key Takeaway #1: 


Key Takeaway #2: “Given the extraordinary upending of the labor market we’ve already experienced and the fact that the situation is still deteriorating, federal policymakers absolutely need to do more. The next relief and recovery package should provide aid to state and local governments, extend unemployment insurance benefits, and provide better protections for workers.” The scope of “Phase 4” relief being negotiated is far too small.

It’s easy to lose sight of the human element and widespread degree economic hardship at hand with numbers this large. My partner pointed out, in horror, that the number of Americans who have lost their job and filed for unemployment in the past three weeks is equivalent to roughly half the population of her native Canada.

Remember: These UI claims are a floor for job losses, because not all workers who lose their jobs qualify for and file claims (e.g., part-time employees,  workers who recently moved between states, or anyone who quits a job to care for family). And none of these job losses were reflected in the March unemployment report released last Friday.

In that report we saw the U.S. unemployment rate jump from 3.5% in February to 4.4% March, or 7,140,000 unemployed people relative to an adult labor force of 162.9 million. Holding the size of the labor force constant, if we see an additional 16.8 million workers transition from employment to unemployment in April, the unemployment rate would surge from 4.4% in March to 14.7% in April (23,940,000/162,913,000=0.147). That would be the highest rate since June 1940, when the U.S. economy was still recovering from the Great Depression. The April report will undoubtedly come in as the worst in post-war history, surpassing the 10.8% unemployment rate we hit during the 1981-82 recession.

The BLS unemployment series only dates back to 1948 (our government statistical services improved astronomically in response to the Great Depression and WWII). Here’s the U.S. unemployment rate during the Depression from an older data series, via FRED:

Economist Aaron Sojourner at the University of Minnesota had a different take on how the labor market is deteriorating to a new post-war low: We’re almost certainly looking at a record-low share of the adult workforce that is employed come April.

The BLS seasonal adjustment process is pushing up the March claims and pushing down the April claims a bit, relative to the unadjusted number of claims. Stripping out the BLS seasonal adjustments we nonetheless see a staggering 15.1 million adults filing for unemployment in the past three weeks. The back-of-the-envelope math for the April jobs report would suggest the U.S. unemployment rate surging to 13.7% instead of 14.7% using the not-seasonally-adjusted volume of initial claims. Still horrific and higher than anything since the Depression.

These past three UI reports have been painful and depressing to read. And the April jobs report is going to be worse. Our woefully threadbare social safety net and haphazard unemployment insurance system is really not equipped for the U.S. labor market falling off of a cliff like this, CARES Act notwithstanding. As we shutter large swathes of the economy to keep our fellow citizens alive and our hospitals from imploding it is imperative that Congress extend a better lifeline to all workers who lose their job and income through no fault of their own, in the name of fighting a pandemic.

Where are the checks?

Fed Chair Powell on COVID-19 (4/9/20)

Federal Reserve Chair Jerome Powell will be joining a Brookings Institution webinar on Thursday to discuss the economic fallout from the coronavirus and the Fed’s myriad of recent policy actions:

You can also submit a question for Jerome Powell when registering or via Twitter. Brookings, another DC-based think tank, will later post a recording of the webinar, if 10am EDT isn’t a convenient time for you.

Update: You can watch the webinar or listening to the audio here and the full transcript of Powell’s remarks are available here.

From Powell’s prepared: “All of us are affected, but the burdens are falling most heavily on those least able to carry them. It is worth remembering that the measures we are taking to contain the virus represent an essential investment in our individual and collective health. As a society, we should do everything we can to provide relief to those who are suffering for the public good.” He’s right, and it’s a subtle push for Congress to do more.

And a from his Q&A with moderator David Wessel of Brookings (see min. 23:17): “We need to have a plan, nationally, for reopening the economy, what we all want it to happen as quickly as possible. We all want to avoid a false start, where we partially reopen and that results in a spike in coronavirus cases, and then we have to go back again to go to square one. We all want to avoid that.” Let’s avoid shooting ourselves in the foot by prematurely trying to reopen the economy and exacerbating the public health crisis

Back to the Fiscal Drawing Board!

Thankfully it didn’t take Congress and the U.S. Treasury Department too long to reach the conclusion that the lifelines in the CARES Act would prove inadequate. (The $2.3 trillion CARES Act was enacted Friday, March 27, just under two weeks ago.)

The Treasury Department is requesting an additional $250 billion for loans to small businesses that will be forgiven if they maintain payrolls. The $349 billion earmarked to date for the Small Business Administration’s new Paycheck Protection Program (PPP) already looks at risk of falling shy of loan demand. The high application volume for this lifeline is encouraging, but the program has struggled out of the gate with its web system crashing, application form and documentation issues, and a first-come, first-serve queue that is surely disadvantaging many struggling businesses.

To that last point, Congressional Democrats are seeking a provision in the supplemental funding package to ensure that at least half of the additional PPP loan funds are administered through community-based financial institutions serving women, minority, and veteran-owned businesses, as opposed to being channeled via commercial banks.

Congressional Democrats also want to tie a larger, broader package of economic aid to the Treasury’s requested funding for small business loans, specifically an additional $100 billion for hospitals and health centers, an additional $150 billion in grants to state and local governments, and a 15% increase in Supplemental Nutrition Assistance Program (SNAP) benefits. This proposal would double the amount of emergency funding for hospitals and fiscal relief for state and local governments, relative to similar funds already appropriated by the CARES Act. We’re already seeing a concerning number of news reports about states starting to cut their budgets, threatening cuts to Medicaid and hospital budgets in the midst of a pandemic (crazy!) in addition to more layoffs.

Senate Majority Leader Mitch McConnell (R-KY) wants to move a bill with only the small business loan funding, but has no leverage to force Democrats’ hand here.

The $1-for-$1 opening gambit of tying $250 billion in grants to the requested $250 billion in loan funding is an unforced error—aim for the scale and nature of the crisis at hand, not “even” headline numbers. I would much rather see Congress increase federal matching rates for state Medicaid programs—which are faster to implement, more directly aimed at preventing Medicaid cuts, and more easily conditioned on economic conditions, say remaining in effect until unemployment falls back to 4%—and only direct grants to municipal and tribal governments. I also worry that further, necessary expansions of emergency unemployment benefits will not be enacted without similar bipartisan legislative vehicles (a repeated tragedy of the Great Recession). And it seems crazy not to use such a legislative vehicle to prevent the dangerous, anti-democratic travesty we saw in Wisconsin’s primary from being repeated elsewhere.

All that said, expanding food assistance and providing an additional $250 billion for hospitals, states, and local governments would be a timely step in the right direction. Recommended reading:

Bungling the U.S. Emergency Response: An Infuriating Chronology

I highly recommend this comprehensive, infuriating chronology of the administration’s denial and dithering nonresponse to the looming and inevitable spread of the pandemic:

The administration’s bungling of the emergency response—and squandering two months’ heads-up—will greatly exacerbate the loss of life and economic fallout from the coronavirus in the United States.

Update: The Associated Press (AP) has a new, related piece out about the federal government squandering two months that should have been used to rebuild our Strategic National Stockpile of emergency medical supplies and equipment, such as N95 masks and ventilators, which is rapidly dwindling. As the Post article noted, the emergency stockpile was “already woefully inadequate after years of underfunding” and replenishing these critical supplies has been impeded by supply chain disruptions, as much of the equipment is manufactured in China. Time was of the essence. From the AP: “More than three months after China revealed the first COVID-19 cases, Trump finally relented last week, saying he will order companies to ramp up production of critical supplies. By then, confirmed cases of COVID-19 within the United States had surged to the highest in the world.” 

And turning abroad, the New York Times has a related article out surveying Germany’s relative successes in combatting COVID-19—they have the fourth most cases, but the lowest fatality rate, at 1.4%. The chief medical factors identified by epidemiologists: “early and widespread testing and treatment, plenty of intensive care beds and a trusted government whose social distancing guidelines are widely observed.” Germany had developed a test in mid-January and began stockpiling test kits before their first case was reported in February. “By now, Germany is conducting around 350,000 coronavirus tests a week, far more than any other European country. Early and widespread testing has allowed the authorities to slow the spread of the pandemic by isolating known cases while they are infectious.” Quite the striking and lamentable contrast with the United States.

Subsequent recommended reading:

Lighter, Longer Reading: Econ Book Recs for the Age of Social Distancing

The last few posts have been err, not exactly uplifting.  Here’s a lighter post for the age of social distancing.

I offered to share some econ book recommendations with my students, on the off chance they find themselves cooped up, with ample free time on their hands, or discover a newfound imperative to support their local independent bookstore. Here’s my current running list, which is admittedly reflective of my research and teaching fields:

Contemporary Econ:

  • The Great Reversal: How America Gave Up on Free Markets by Thomas Philippon (industrial organization, America’s abandonment of anti-trust, and consequences of market consolidation)
  • The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay by Emmanuel Saez and Gabriel Zucman (income/wealth inequality, tax shelters, and progressive tax policy)

 Macroeconomics/Financial Crises:

  • The Big Short: Inside the Doomsday Machine by Michael Lewis (the subprime crisis compelling told through the lens of a trio of characters traders betting against subprime—the book is better than the movie, but I’d recommend the movie as well)
  • Irrational Exuberance 3rd ed. by Robert Shiller (behavioral finance and economic bubbles from the prescient, authoritative expert on the subject)
  • The Return Depression Economics and the Crisis of 2008 by Paul Krugman* (macroeconomic crises and policy mismanagement: a 20th century survey)
  • After The Music Stopped: The Financial Crisis, the Response, and the Work Ahead by Alan Blinder* (the best general survey of the causes and policy responses to the Great Recession, imho)
  • Freefall: America, Free Markets, and the Sinking of the World Economy by Joseph Stiglitz (an excellent tomb on the Great Recession, a bit more of a polemic and broadside to the economics profession)
  • In Fed We Trust: Ben Bernanke’s War on the Great Panic by David Wessel* (great inside account the financial crisis of 2007-09 unfolding and policy responses through the lens of the Bernanke Fed)
  • Hall of Mirrors: The Great Depression, the Great Recession, and the Uses-and Misuses-of History by Barry Eichengreen (fascinating comparison of the Great Recession and Great Depression by one of the world’s preeminent macroeconomic historians)
  • The World in Depression, 1929–1939 by Charles Kindleberger (excellent global take on the Great Depression from more of an international political economy and institutionalist angle)
  • The Great Crash: 1929 by John Kenneth Galbraith* (great narrative of the stock market crash and onset of the U.S. Great Depression, witty and acerbic to boot)

 Public Finance/Political Economy/Inequality:

  • The Fifth Risk by Michael Lewis (U.S. federal budget policy through the lens of defunding public goods/emergency response capacity, and terrifyingly prescient)
  • The Color of Law: A Forgotten History of How Our Government Segregated America by Richard Rothstein (U.S. housing policy and urban economics through the lens of government-driven segregation and institutionalized racism)
  • Shaky Ground: The Strange Saga of the U. S. Mortgage Giants by Bethany McLean (U.S. housing finance policy and the mortgage meltdown through the lens and fascinating histories of Fannie Mae and Freddie Mac)
  • Concrete Economics: The Hamilton Approach to Economic Growth and Policy by Stephen Cohen and Brad DeLong (U.S. economic history and growth through the lens of American industrial policy)
  • The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity by Robert Kuttner (U.S. political economy and a remarkably prescient pre-Great Recession take on structural problems with America’s economy, corporate sector, and political institutions)
  • Winner-Take-All Politics: How Washington Made the Rich Richer–and Turned Its Back on the Middle Class by Jacob Hacker and Paul Pierson (two renowned political scientists weigh in on how systemic failures of the U.S. political system have contributed to rising income inequality)
  • Capital in the Twenty-First Century by Thomas Piketty (blockbuster tomb on income and wealth inequality in the advanced economies)


*These books are also on my Econ 418: Macroeconomics of Depressions reading list.

March Jobs Report: Ugly Numbers, Ugly Foreshadowing

The Bureau of Labor Statistics (BLS) monthly jobs report showed the U.S. unemployment rate shooting up from 3.5% to 4.4% in March, and non-farm payroll employment falling by 701,000 workers. The 0.9 percentage point increase in the unemployment rate is the fastest increase for a single month since the 1973-75 recession. The drop in employment abruptly ends 113 months of consecutive employment gains, and is the worst monthly drop in employment since April 2009, in the depths of the Great Recession. The full BLS summary can be found here:

The report was simultaneously 1) much worse than expected and 2) a frightening indicator of how much worse things are going to get in the April report.

To the former point, the median private sector forecast for this report was 82,000 job losses and a much smaller uptick in the unemployment rate to 3.7%, as reported by MarketWatch. Job losses came in worse-than-expected by almost an order of magnitude.

To the latter point, there’s a big caveat to this report: The BLS surveys for this report were conducted the week of March 8—March 14. That predates the recent staggering deluge of initial unemployment insurance claims: 3.3 million initial UI claims were filed for the week ending March 21 and 6.6 million initial claims were filed for the week ending March 28 (both on a seasonally adjusted basis, just like the headline BLS number in today’s report). Broadly speaking, the March jobs report essentially predates social distancing and stay-at-home orders. California was the first state to issue such an order on Thursday, March 19. As of yesterday, all but five states had issued some kind of lockdown order (six had ordered only partial stay-at-home orders). Related reading:

From the BLS: “It is important to keep in mind that the March survey reference periods for both surveys predated many coronavirus-related business and school closures in the second half of the month.”

Nonetheless, there were plenty of signs in the March report reflecting early yet severe economic fallout from the coronavirus. The leisure and hospitality sector got walloped, with 459,000 job losses, heavily concentrated in food services and drinking places (417,000 jobs). And the abrupt drop in payroll employment is especially staggering given that it effectively predates the rollout of stay-at-home orders. Visualization via Heidi Shierholz at EPI:

The BLS conducts two surveys: The Current Population Survey (CPS, or the “household survey”) and the Current Employment Statistics survey (CES, or the “establishment survey”). The employment figures I’ve quoted so far all come from the establishment survey of firms. (Here’s the BLS primer on comparing the two surveys.) The household survey showed the number of people self-reporting as employed plunge by 3 million, driven by 1.4 million people reporting as unemployed and another 1.8 million people leaving the labor force (this would include retirees, but could also include workers who lost jobs but are not counted as unemployed because they are not actively looking for work, thinking they will be rehired). During the Great Recession the biggest one-month drop in employment, as measured by the CPS, was 1.2 million jobs lost in January 2009.

And a lot of workers still classified as employed reported being absent from work. From the BLS: “If the workers who were recorded as employed but absent from work due to “other reasons”… had been classified as unemployed on temporary layoff, the overall unemployment rate would have been almost 1 percentage point higher.”

The household survey also indicated a big, unwanted cutback in hours for those still retaining a job: The number of people involuntarily working part-time for economic reasons (i.e., they want full-time employment) jumped by 1.4 million as well.

In another important caveat, the BLS warned that both the method and response rates for this survey were adversely affected by the coronavirus: “Data collection for both surveys was affected by the coronavirus. The household survey is generally collected through in-person and telephone interviews, but personal interviews were suspended during the collection period for the safety of interviewers and respondents. The household survey response rate, at 73 percent, was about 10 percentage points lower than in recent months… The collection rate for the establishment survey, at 66 percent, was about 9 percentage points lower than average.” So these data may be noisier and less of a clean apples-to-apples comparison with recent reports than usual.

Big picture: The U.S. labor market was deteriorating at a frightening and much-worse-than-expected clip even before the widespread rollout of stay-at-home orders. The April report will be astronomically worse. And labor market data to date only underscore that Congress is woefully far behind the curve…

Related recommended reading:

And So It Begins… State Budget Cuts Edition

Following up from my previous detailing why the CARES Act will provide an insufficient lifeline to state and local governments, among other sectors:

The rapid collapse of employment and forced pandemic pause in economic activity will induce a much faster deterioration in state and local public finances than we saw during the Great Recession. These state and local budget cuts will, in turn, further drag at economic output and employment, just as they chronically did during the anemic recovery from the Great Recession. Via FRED:

Congress could instantly alleviate pressure to cut state and local budgets by increasing the federal matching rates for state Medicaid programs, as we did in the Recovery Act of 2009. And the state fiscal relief provisions in the CARES Act don’t even pass the mediocre bar set by the Recovery Act.

Staggering 10 Million Jobless Claims in Two Weeks

Update: Seasonal adjustment factors to the UI data are pushing up the headline numbers a bit above the unadjusted number of initial claims in March. Without the seasonal adjustment, 5.8 million new claims were filed last week, on top of 2.9 million claims the week before. The loss of 8.7 million jobs is still a staggering clip, amounting to a little less than a 6% decline in U.S. employment in just two weeks. Seasonal adjustments generally make for much better data comparisons within a year, as the spikey unadjusted figure below suggests. Unless otherwise noted, all data presented here are seasonally adjusted…

Original Post: Another 6.6 million people filed initial unemployment insurance (UI) claims in the week ending Saturday, March 28. This follows an unprecedented 3.3 million initial claims filed the previous week, ending Saturday, March 21. This is truly unprecedented, as depicted by this graph via Heidi Shierholz, Director of Policy at EPI:

Scary contrast with job loss during the Great Recession via economist Martha Gimbel at Schmidt Futures, another great labor market expert to follow on Twitter:

In a recent post I did some back-of-the-envelope math for last week’s initial claims report: If we see, say, 4 million 10 million workers transition from employment to unemployment in March, the unemployment rate would surge from 3.5% in February to 5.9% 9.6% in March (15,787,000/164,546,000=0.096). That’s nearly the peak unemployment rate we hit during the Great Recession, of 10% in October 2009.

Not all of these job losses will be reflected in Friday’s release of the March jobs report by the Bureau of Labor Statistics, largely due to the timeframe for statistical sampling.  So some of these job losses will be reflected in the April report, which comes out in early May. On the other hand, remember that these UI claims understate the severity of job loss because many workers do not qualify for UI: Part-time workers not meeting hours requirements, workers who recently moved states, some independent contractors, and anyone who voluntarily quit a job, e.g. to take care of children or sick family members.

I recently noted that economist Miguel Faria-e-Castro at the St. Louis Fed has warned that, based on back-of-the-envelope calculations, the U.S. unemployment rate could rise to somewhere between 10.5% and 40.6% by June. Perhaps that sounded alarmist or sensationalist to some, when first reported. But based on today’s UI claims, the U.S. labor market will almost surely have deteriorated so much as to fall within that lower bound when the April jobs report is released.

A different way to think about the staggering and heartbreaking magnitude of job loss in the past two weeks is to look at cumulative changes in employment. U.S. nonfarm payroll employment totaled 152.5 million in February. Using 10 million job losses as the proxy for job losses to date, we’re looking at a 6.6% collapse in employment in just a month or two, if not substantially worse two months out. Here’s a comparison with other recent recession, again via EPI:

EPI Cumulative Job Losses

U.S. employment cumulatively fell 6.25% during the Great Depression over the course of two years. That was by far the worst of any downturn since the Great Depression. We’re now surely looking graver relative job losses in the span of just two months. Congress has much more work ahead in providing lifelines to households, states, and businesses—the CARES Act won’t cut it.

Further related reading:



Making Sense of the $2 Trillion

Does $2 trillion seem like enough to you?” That’s the two trillion million dollar question. I’m surprised that Congress passed a $2 trillion bill in just over a week, but no, it doesn’t seem like enough. Let me elaborate…

During the Great Recession, analysis of the economic effects of fiscal policies (mine included) would often go something like this:*

  1. Determine the near-term budgetary cost of each major provision of the bill
  2. Apply an appropriate “bang-per-buck” fiscal multiplier to the cost of each provision (essentially reflecting how well targeted the provision was to people with a high marginal propensity to spend) to spitball the GDP impact of each program
  3. Sum the likely GDP impacts from various provisions and calculate a total counterfactual percentage change in U.S. GDP from the change in fiscal policy
  4. Compare the boost/hit to GDP to the existing output gap—how far actual GDP was depressed relative to potential GDP, the level of output consistent with full employment and stable inflation. Does it close the hole, or make things worse?
  5. Use the estimated percentage change in GDP to make back-of-the envelope calculations about job gains/losses or changes in the unemployment rate.**

This doesn’t strike me as the appropriate treatment of the CARES Act, for two reasons.

First off, policies that stimulate aggregate demand (e.g., unemployment benefits, tax cuts) and thus boost employment will likely do the former to a lesser extent than usual, while the latter remains further constrained by public health policy (e.g., stay-at-home orders, closures of non-essential businesses). The Keynesian re-spending multiplier effect would almost certainly be dampened if factories, stores, restaurants, and bars must remain shuttered and if consumption preferences have been temporarily altered by health concerns. No amount of tax cuts (or interest rate cuts, for that matter) will induce a rebound in airfare sales until the health risks of flying greatly subside. And statistical relationships that were estimated from post-war, sans-pandemic data could be quite misleading when public health mandates are deliberately restraining the consumption of many goods and services we (normally) like to consume, or labor supply in many sectors.

Second, we have no idea how big the hole will be—in terms of the output gap or job losses—and we won’t for a while. Advanced estimates for 2020Q1 GDP (January—March, catching just the beginning of the U.S. crisis) won’t be released until April 30, and the advanced estimates for 2020Q2 GDP (April—June) won’t be released until July 30. (Preliminary GDP data are released as an advanced estimate, then a revised second estimate, then a revised third estimate, and later multi-year revisions; the Bureau of Economic Analysis release schedule for GDP data can be found here.) Job loss numbers for April—likely far worse than the March report due to the timing of layoffs and surveys—won’t be released until Friday, May 8. Macro forecasting models are also estimated from sans-pandemic data, and adaptation of such models to stay-at-home orders and an unknown duration of this pandemic pause is mostly ad hoc guesswork; take these forecasts with a considerably bigger grain of salt than usual. That said, here’s some suggested related reading on forecasts for the U.S. economy:

“But as usual, something can be said,” to borrow a line from John Kenneth Galbraith. With the CARES Act we’re looking at something more like a lifeline to the shuttered U.S. economy rather than a traditional stimulus package trying to jump-start economic activity (though much of the bill will still serve as traditional Keynesian stimulus). We’re deliberately trying to pause nonessential economic activity, to ameliorate the harm of COVID-19 to our population and our hospitals. And in the interim we need to cushion the loss of income for households and keep businesses from failing or firing everyone. (I would recommend Josh Marshall’s similar take from his perspective of running Talking Points Memo, a small business, for the last twenty years). Paul Krugman is aptly calling this “disaster relief with a dash of stimulus” (his recent, related column is also worth a read). But for thinking about the scale of policy responses to date, I think it’s perhaps more constructive to frame and separately analyze the CARES Act as follows:

  • Lifelines to households
  • Lifelines to state, local, and tribal governments
  • Lifelines to businesses, big and small
  • Emergency funding for hospitals and health-related agencies
  • A grab bag of corporate welfare and misc. business tax write-offs, sold as lifelines

Let’s think about the scale of the first three lifelines, then zoom back out to the whole package. (The fifth is too depressing to touch at the moment and I’m not the person to speak to the fourth.)

Household Lifelines: The major lifelines to households in the CARES Act are the $1,200 checks, expanded unemployment benefits, and increased safety net spending. These major income support provisions are estimated at $592 billion ($290 billion for the checks, $260 billion for unemployment benefits, and $42 billion for food security and housing programs). To put this in perspective, employee wages and salaries in the United States totaled $9.4 trillion in 2019Q4 (measured at an annualized rate). So the income support provisions would amount to transfers effectively replacing 6.3% of annual wages and salaries. But the emergency unemployment benefits only last for four months, and the checks and other income support measures will essentially be exhausted in the second quarter of 2020. So we’ll likely be be replacing 22.4% of wages and salaries in the second quarter but only 2.8% of wages and salaries in the third quarter.***

So if the pandemic’s forced curtailment of economic activity hasn’t ceased by mid-June, Congress will need to significantly expand such income support measures. A group of Senate Democrats recently proposed more comprehensive legislation for lump-sum payments that would send additional checks in July and October if 1) the public health crisis is ongoing or 2) the unemployment rate is rising. I’m a big fan of such automatic triggers for fiscal stimulus, rather than trusting Congress to enact subsequent stimulus measures as proves necessary (see discussion below of the Recovery Act of 2009).

State/Municipal Lifelines: State and municipal budgets are about to get absolutely walloped, likely way worse than they did during the Great Recession. The major CARES lifeline here is $150 billion in grants to state, local, and tribal governments and a $30 billion education grants fund. There’s also $25 billion for infrastructure grants, some of which will go to state and local governments. For a sense of scale, state and local budget expenditures totaled $3.1 trillion in 2019Q4 and their revenue collections totaled $2.8 trillion (both on an annualized basis). So the grant money in the CARES Act could offset a decline of up to 6.5%-7.4% in state and local government revenues, or help pay for an increase in state spending of up to 5.7%-6.5%—one or the other, not both. On this front, the CARES Act gets worse marks than the American Recovery and Reinvestment Act (ARRA) of 2009—the largest fiscal stimulus response to ameliorate the Great Recession—despite this state fiscal relief proving woefully inadequate during the Great Recession.

ARRA provided roughly $153 billion in additional grants and Medicaid funding for states, which could have replaced either 8.0% of state and local governments’ pre-recession revenue or 7.4% of their spending. Excluding those federal transfers, state and local tax revenue fell 6.8% during the Great Recession, while spending surged 9%. And these figures understate the severity of sub-federal budget shortfalls: States were actively hiking tax rates and slashing programs as their revenue base collapsed and safety net spending automatically increased. State and municipal budget cuts and tax hikes threaten to significantly compound the economic fallout from the coronavirus, just as they continuously slowed recovery for 3.5 years after Great Recession had ended.

The Fed’s forthcoming loan/loan guarantee program, which is being backed by $454 billion from the CARES Act, is supposed to support up to $4.5 trillion in lending to businesses, states, and municipalities. There’s not enough public information about this loan facility to assess its likely efficacy, or how much non-business lending to expect. Regardless, I think Congress will need to get serious about state fiscal relief by funding a greater share of Medicaid, as we did in 2009-11, and to refocus aid to municipalities from subsidized loans to grants. State fiscal relief via Medicaid matching rates also boasts the shortest policy implementation lag of any fiscal policy: The payment infrastructure is there to instantly bolster state budget coffers with just two votes and a stroke of a pen.

Small Business Lifelines: The U.S. Treasury Department recently released the details of its new Paycheck Protection Program, which authorizes $349 billion in forgivable loans to cover payrolls and incentive employment retention. This is a great policy, and I hope there’s a ton of take-up. But if the program does take off, I’m dubious that $349 billion will cover demand for long enough, as I loosely sketched out in this post. The Economist recently estimated that the program could cover compensation for at-risk workers for up to seven weeks. Regardless, I hope Congress is willing to satiate unlimited take-up so long as the pandemic pause must persist. And if take-up languishes, Congress will need to go back to the drawing board stat. (Federally subsidized mortgage refinancing programs struggled with take-up during the Great Recession, but we never revisited the issue.)

Zooming Back Out: The Committee for a Responsible Federal Budget’s budgetary analysis of the CARES Act suggests the price tag will total $2.27 trillion. To put that in perspective, U.S. economic output was $21.7 trillion in 2019Q4 (at an annualized rate), so the cost of the stimulus bill is equivalent to 10.5% of annualized U.S. GDP. Even netting out the loan/loan-guarantee fund and misc. business tax write-offs (provisions furthest from traditional Keynesian stimulus), the CARES Act totals $1.5 trillion, or 7.1% of GDP. That’s not chump change. But again I don’t think it will be enough, particularly for the three lifelines discussed above.

To put that overall price tag of the CARES Act in perspective, ARRA was initially estimated at a $787 billion price tag, amounting to 5.4% of U.S. GDP as of the quarter before its enactment.**** ARRA was effectively spread out across 2009-11, whereas the CARES Act will be heavily concentrated in 2020, so this is undoubtedly a larger near-term fiscal response. On the other hand, ARRA was way too small, which should have been obvious to policymakers in 2008-09, and was painfully obvious in 20/20 hindsight. Monetary policy remained stuck at the zero-lower bound until prematurely lifting off in December 2015, and the U.S. labor market had not fully recovered within a decade of the Great Recession’s onset. ARRA should serve as a painful reminder that it’s better to err on the side of bolder when it comes to U.S. fiscal policy: The risks from overshooting vs. undershooting are asymmetric, and much graver from undershooting.

More importantly, this isn’t a question of how much money we throw at the fallout from the pandemic. First and foremost it’s a question of providing all necessary resources to the public health response. And it’s a question of throwing adequate, sensible lifelines to those people, businesses, and sectors adversely affected by the pandemic pause required for the public health response. Neither the framing of the CARES Act as “Phase Three” stimulus (its predecessors were paltry) nor the initial discussion of “Phase Four” measures bode well on this front… but I’d be more than happy for Congress to throw another $2 trillion at infrastructure when inflation-adjusted U.S. Treasury rates are negative. Related suggested reading:

*See this EPI report by Josh Bivens for a great overview of methodologies for estimating GDP and employment responses to fiscal policies.

**As a rule of thumb, the U.S. unemployment rate falls about 0.4 percentage points for every 1% increase in output growth (a relationship known as “Okun’s law,” see pp. 180-181 in Blanchard’s Macroeconomics 7th Ed textbook).

***This BOTE calculation for 2020Q2 assumes 100% of the checks and safety net spending are distributed in between April and June, and that 75% of the four-month unemployment benefits are distributed between April and June.

****ARRA’s price tag was later revised up to $840 billion, or 5.7% of GDP. The price tag of the CARES Act will almost surely be revised up as economic forecasts used to ballpark mandatory spending, such as unemployment benefits, prove overly optimistic.

Environmental Regulations During the Pandemic

Guest post by my colleague and Assistant Professor of Economics Akhil Rao:

The Environmental Protection Agency (EPA) recently announced it won’t be enforcing environmental regulations during the pandemic. The announcement on March 26th (feels like it was at least a month ago) specified the following:

  • The EPA will “exercise enforcement discretion… for noncompliance” during and resulting from the COVID-19 pandemic.
  • States and tribes can take a different approach where they have the authorities to do so.
  • This doesn’t apply to any criminal violations, Superfund sites, or imports.

As usual, Vox has a nice summary article. The piece mentions some important context: Prior to the pandemic, the American Petroleum Institute (API) was among industry trade groups lobbying for laxer enforcement. And unless you’ve been living under a rock for the last four years, it’s pretty easy to see this as part of a pattern of the Trump administration reducing regulatory oversight, environmental and otherwise. The Trump administration has also been working to undercut states’ authorities to regulate emissions, e.g. the challenge to California’s vehicle emissions standards.

I think the API lobbying context is especially relevant here given the freefall oil markets are currently in. With prices in some areas going negative (subject of a future post), the U.S. oil and gas sector is experiencing unprecedented stress. That stress will continue while demand for oil products (e.g. airplane fuel) stays low. A number of producers will likely go out of business as deposits made economical by fracking and horizontal drilling become uneconomical. From a national security perspective, maintaining a healthy domestic energy production capacity is a plus. If you were really just trying to keep this sector alive till demand picks up and OPEC stops feuding, a targeted approach would have been better. But then there’s that deregulatory pattern from this administration…

A couple notes on incentives and externalities, taking the policy in good faith and at face value:

  • There are clearly worker safety issues here. Our electric grid, for example, is critical infrastructure, and many generating plants produce emissions. Sending workers to check on many plants could spread the virus to critical infrastructure. So far we haven’t seen a wave of illnesses force natural gas or coal plants offline. But were it to happen, it could be bad. Hospitals and ventilators need power. Electricity demand also seems to be falling as economic activity slows down, which may allow for some buffer against supply disruptions.
  • There are health concerns from pollution. Back on the energy example, coal plants are especially nasty for folks with respiratory or cardiovascular conditions (like a certain virus…). Power plants are intensive emitters, and where they’re in populated areas (e.g. Houston) the additional emissions will likely induce more asthma and heart attacks. So reducing monitoring and enforcement will add more stress on our medical infrastructure at a time when we can ill afford it, and in a way that could interact with the pandemic. As a health expert quoted in the article notes, “There is no known threshold below which air pollution has no effect.”

So even if you take this in good faith and at face value, it’s complicated and unclear you’d want to do something as sweeping as the current rule. We don’t want companies to face incentives to unnecessarily expose workers to pandemic risk (it’s not clear how the EPA will distinguish between virus-related violations vs. other violations). But we also don’t want to do things that might put more stress on medical infrastructure. Balancing these two externalities as the pandemic unfolds is not a trivial job, even for an administration with credibility on regulatory policy.