Summer of Discontent: Social Unrest, the Pandemic and the Shadow Cast by COVID-19


Read the June Economic Currents in PDF

COVID-19 has laid bare the inequalities that we knew existed and too many ignored. Low-wage households and minorities have been hit harder by the disease and economic losses triggered by efforts to mitigate its spread. Women have suffered the majority of job losses and, with children sent home from school, they could lose decades of their progress toward equal pay. As little as a three-to-six month break could deliver a permanent blow to their earnings relative to men.

Employment surprised with a rebound of 2.5 million jobs in May, but those gains likely overstated the actual improvement during the month. The Bureau of Labor Statistics (BLS) has been updating its estimates of new business formation weekly to better estimate changes in small business employment but has consistently chased the data lower. Revisions to March, which now top 1.4 million job losses, are double the initial estimate for the month. Those job losses occurred in late February and early March, before one state went into lockdown.

The BLS has struggled to get businesses and households to respond to surveys amidst the pandemic. Some businesses have disappeared entirely, which is further complicating estimates of the data.

Nearly all of the rise in payrolls can be attributed to the rehiring of workers who reported they were on temporary layoff in April. The small business Payroll Protection Plan (PPP), part of the CARES Act that passed in late March, contributed to that shift. The Small Business Administration (SBA) has approved more than four million loans since early April.

The bulk of the hiring in May was tied to the first tranche of loans, which was depleted by April 16. More than 1.6 million loans were issued by that date. The PPP loans mitigate job losses in some sectors, but the payoff in terms of rehiring was small relative to the number of loans issued.

Small businesses had a hard time using their loans to ramp up while the economy was still in lockdown. In response, members of Congress shifted course and lowered the amount businesses must use to rehire workers so that they can better cover overhead costs. Congress also voted to extend the window for businesses to rehire from eight weeks to as late as December to qualify for loan forgiveness. This, coupled with the extension of the loan payback period from two to five years, will spread out and limit rehiring tied to the PPP.

The unemployment rate fell to 13.3% in May after surging to 14.7% in April. Those figures understate the actual level of unemployment. An unusually large number of workers have said they were absent from work due to COVID-19 but they were actually unemployed. The BLS estimates that the misclassification added between 3% and 4.8% to the overall level of unemployment. That means the actual unemployment rate fell to 16.3% in May from 19.5% in April. The unemployment rate peaked at 9.5% during the global financial crisis in 2008-09. The unemployment rate for blacks and Asians continued to rise in May.

That said, the economy is reopening. High frequency data on credit card usage, mobile phone movement, vacation rentals, restaurant bookings and gasoline purchases rebounded from rock-bottom lows in April but remain a small fraction of the pre-COVID peak. Sadly, hospitalization and the number of new COVID-19 cases rose in the wake of Memorial Day celebrations. Arkansas, Arizona, North Carolina, Washington, Utah and Texas top that list.

The killing of George Floyd and outrage that followed could exacerbate the pace of infections and put a damper on efforts to reopen during the summer. States and municipalities, already strained by the pandemic, will be further set back by the need to repair communities. The protests, which became global in scope, and devastation to property from the violence that followed, will be felt for years to come.

The most vulnerable of communities during the riots of the 1960s and early 1990s took decades to recover. The only possible upside is if George Floyd’s death acts as a catalyst for institutional reforms and more equitable growth. Racism in this country is systemic, devastating and deadly.

Chart 1

Economic Outlook Long Road to Recovery

Hopes for a vaccine in 2021 remain high. Scientists are among the most optimistic about the breakneck pace of research. The problem is that what is a breakneck pace for science - 12 to 18 months - is an eternity for an economy struggling to reopen amidst requirements to maintain social distance. My head spins just thinking of all the individuals and business owners who could slip into default between now and then.

Dr. Anthony Fauci warned this week that any vaccine we do get for a coronavirus will likely be short-lived, lasting as little as a few months and requiring annual shots like the flu vaccine. That could leave an unusually large percentage of the workforce at risk for infection, which would mean longer sick leaves and more hospital stays. COVID-19 may not be as lethal as other diseases caused by coronaviruses - SARS and MERS - but the effects are still devastating, even to the most healthy of individuals.

Dr. Fauci started to lay the groundwork for staggered school reopenings in the fall; he suggested morning and afternoon shifts to limit the number of children in the classroom at one time. School reopenings are critical to getting workers who have dropped out of the workforce to care for and teach their children back to work, although it is unclear how much half days can help low-wage workers who lack the ability to set their work schedules.

This edition of Economic Currents takes a closer look at the struggle to recover. We need to rewrite the terms used for an economy emerging from a pandemic. Strong percentage gains in economic activity from the virtual standstill we saw in April will do little to regain ground lost. The economy could bottom out and enter what is technically termed a “recovery” as soon as May, but calling it that will not do justice to the pain many are suffering. We will not return to our previous peak of economic activity before 2022 given the prospects for limited additional fiscal stimulus. An inability to bend the curve on infections ups the ante on a second wave. A double-dip recession cannot be ruled out.

All that hasn’t stopped Wall Street from rallying. It seems as if investors are oblivious to the carnage on Main Street and the related blow to profits. There are many reasons for this, but none justify the lofty level of stock prices.

The 2020-2022 Outlook
More But not Enough Stimulus
Chart 1 shows the collapse in the level of real GDP during the first half of the year and the sluggish rebound expected to follow. The economy is forecast to contract by 9.4% on a fourth-quarter-to-fourth-quarter basis, the worst since 1946 when millions returned from WWII.

We do not expect the economy to cross the previous peak in overall economic activity until the second quarter of 2022. That assumes Congress approves $700 billion in stimulus this summer; that may be optimistic given the euphoria in the stock market over the May rebound in employment.

No, the stock market is not the economy but it is a focus of this White House. Our forecast shows that we need at least another $2 trillion to fill the hole left by COVID-19 over the next year.

The clock is ticking. Current expansions to unemployment insurance (UI) expire on July 31. The Congressional Budget Office (CBO) just came out with an assessment of the extra $600 per week payout the CARES Act provided to UI recipients. It concluded that five of six UI recipients collected more than they could earn on one job. That was helpful in enabling many families (millions are still waiting for checks) to cover necessities such as food and rent.

It also acted as a minor deterrent to some workers who were asked to return to work. What the CBO failed to assess is workers’ fear of returning to high-risk jobs during a pandemic or the role that school closures have played in preventing parents from returning to work.

Chart 2

Unemployment Remains Unusually Elevated

This is at the same time that many states will start their new fiscal years on July 1. Cuts in state and local government employment were a primary reason for the lackluster performance of job growth as we were emerging from the 2008-09 recession; those headwinds will hit sooner and be significantly worse if we can’t manage to fund transfers to the states this time around.

Congress is expected to roll back a portion of the additional $600 per week payouts after July 31 but retain the expansion of benefits for furloughed, gig and selfemployed workers. Members of Congress are expected to provide some funding for states and infrastructure spending. More testing and tracing will need to be funded. The White House is still pushing for tax cuts, which are much less stimulative than UI benefits. There now appears to be a bipartisan effort to rein in deficits down the road. I have been a lifelong deficit hawk but there is a place and time for worrying about the federal deficit; this is not it.

Unemployment Remains Stubbornly High Chart 2 lays out the forecast for unemployment between now and 2022. The unemployment rate is expected to hit a high of 13.8% in the second quarter but will remain elevated through year-end despite the rebound in employment in May. Manufacturing, construction, agriculture and professional services are the easiest sectors to reopen with social distancing. The rise in construction jobs last month was driven by an increase in specialty contract work, both residential and commercial. Home construction remains surprisingly strong, while businesses are scrambling to reconfigure their workplaces to reduce the pace of infections and comply with social distancing measures.

Services are a harder nut to crack. Health care is riskiest. My internist told me she has already had several patients lie about their COVID-19 symptoms and subsequently test positive since she reopened her office. Arts and entertainment are also difficult to reopen. I have a hard time imagining packed stadiums anytime but was impressed by how Germany filled stands for its first soccer game, post-COVID: Fans bought life-size cutouts of themselves to place in the seats. Now all they need is fans cheering for their teams on a real-time basis. That would alleviate a lot of stress and help sports teams to play as contagion rates remain high.

High frequency data on both job searches and job postings have come off the rock-bottom lows of April, but remain suppressed. Work done by Jed Kolko, the chief economist at, shows rural areas doing slightly better with new job postings compared to urban areas, which were hit harder by COVID-19 infections. “Job postings in hospitality and tourism centers have picked up a bit. But metros where more people can work from home -- like tech hubs -- are actually falling farther behind,” he said in a recent comment.

White-collar layoffs will be the next shoe to drop. Firms that cut wages as a temporary move to preserve cash now worry that the blow to profits will be larger.

The sheer volume of initial unemployment claims is also worrisome as it further underscores what we may be missing in actual job losses. More than 40 million people have applied for unemployment insurance since the start of March. Millions who qualify are still waiting for their checks. Some may be duplicate applications.

A larger miss not captured in the data is the UI benefits that now cover gig and self-employed workers; they are not counted as job losses in the payroll survey. Continuing claims also moved back up in the most recent week of data, suggesting that any ground gained to rehiring in mid-May has since reversed.

Chart 3

Corporate Profits After Tax

Jed Kolko did an analysis of the unemployment rate for those suffering permanent layoffs in May; it is still rising.

A Deafening Dissonance from Wall Street Wall Street is the one outlier as investors sail COVIDtainted waters, almost oblivious to the carnage many are suffering on Main Street. Chart 3 compares the performance of the S&P 500 index against profit growth since 1970. We have never seen such a large divergence. The rebound since March is breathtaking. I get more questions about that gap than any other single topic.

One reason is the composition of the S&P 500, which is now dominated by fewer firms and less reflective of the overall economy than it was in the past. The index disproportionately represents firms that are expected to benefit from COVID-19 and the further consolidation it is expected to trigger.

Interventions by the Federal Reserve have also provided financial markets with a sense of invincibility. The move to cut short-term interest rates to zero and provide a backstop for sinking financial markets inadvertently provided an additional boost to stock values. Stock valuations balloon when the rate at which we discount stock prices is close to zero. This could undermine financial market stability down the road, along with the pending blow to bank balance sheets from a surge in bankruptcies. Banks were among the largest winners in the rally in response to the rebound in May employment.

The Fed has flagged the risks to banks and is discouraging them from paying dividends. The Fed is now providing a backstop for consumer vehicle and credit card loans, Treasury bonds, mortgage-backed securities, corporate bonds (including junk-rated “fallen angels”), municipal bonds, money market funds and PPP loans. The Fed is buying back loans issued under PPP and guaranteed by Congress to ensure banks make the loans and to free up funds for additional lending.

The Fed has yet to launch its Main Street lending program, intended to keep credit flowing to businesses that are too small to gain access to the corporate bond market and too big to tap PPP loans. The Fed had a similar program that failed to provide much help in the 1930s; the worry is that the Fed will be too conservative in its lending to help companies most in need.

This is at the same time that foreign investors are fleeing emerging markets for the perceived safety of the S&P 500. This is a much more risky play than the flight to safety into the U.S. Treasury bond market that we saw during the height of the financial crisis.

Finally, but by no means least, there is the literal bubble in which Wall Street operates. The financial sector has been hit much less by layoffs (to date) than other industries and is, therefore, more confident about the economy and prospect for a rapid recovery. My own take is that investors should display more humility than hubris given the devastation Main Street has endured.

Bottom Line There is a tendency to benchmark our performance to past recessions, especially on Wall Street, which provides little insight for how the economy and profits will perform in a pandemic. We would all be better served to acknowledge the unique nature of this crisis as social distancing is likely to put a substantial damper on activity for some time to come.

Pandemics are no longer just a plot to a horror movie; they are real and future outbreaks could be more lethal than COVID-19. Much like the terrorist attacks of 9/11, they now represent a risk to be managed; those efforts will force firms to invest more in defensive than offensive moves. It could fundamentally change how and where we work, exacerbate inequalities and further undermine globalization. The economy that emerges on the other side of COVID-19 could be smaller and more concentrated among a few firms. That could make it less dynamic and generate fewer jobs. It will also further undermine globalization, despite the fact that even the most nationalized supply chains were disrupted.

Look for more detail on how we are expecting those structural changes to play out in the next edition of this publication that takes a closer look at the shadow cast by COVID-19. There is a glimmer of hope that the tragic loss of George Floyd’s life will act as a catalyst to more equitable and sustainable growth. My guess is that glimmer will flare over the summer because the pandemic has intensified outrage, given the pain and unemployment it has inflicted. Most young people I have spoken with see this as their chance to make a difference and find purpose in their lives.

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