Read the
November Economic Depths in PDF
As of October, the U.S. economy had regained about 12 million jobs lost to COVID during March and April. The problem is the more than 10 million people who are still out of work. The number is even larger when we add the self-employed to the mix. Worse yet, prospects for another round of layoffs are rising now that COVID cases have once again surged. Plummeting temperatures is another hurdle because it is forcing outdoor dining to close across much of the country. This is despite a run on outdoor heaters - they are out of stock across much of the country - and an attempt to keep diners eating outside for longer.
Chart 1
Many confuse draconian lockdowns with the behavioral pullback that occurs in response to the threat of infection. We lost 1.4 million jobs in March, the largest monthly decline on record, before a single state actually went into lockdown.
Consumers and businesses alike curbed travel, in-person meetings, conference attendance, eating out and going to doctor and dentist appointments. Jobs bounced back after cases receded only to slow again once cases mounted in the Sunbelt over the summer. Many states that experienced rapid recoveries have now hit a wall because of the economic losses due to a resurgence in COVID.
Chart 2
Sadly, I am not optimistic that we will come to a consensus on masking in time to avert the jump in cases and hospitalizations. Some states are already invoking curfews and restrictions on indoor dining and bars because of their outsize role in spreading contagion from an airborne virus. This will force more small businesses to close.
An aid package is desperately needed to offset the trauma created by COVID. The ranks of those who have run out of money for food and shelter are swelling, while risks of additional layoffs are mounting. A deal on more aid by Congress does not seem likely by year-end.
Chart 3
Senate Majority Leader Mitch McConnell
signalled he may be willing to cut a
deal. The gap between his offer and
what Treasury Secretary Steve Mnuchin
and House Speaker Nancy Pelosi have
been negotiating is still substantial. Add
in the divisive politics of a contested
presidential election and I have given up
holding my breath for a deal before the
next president is sworn into office. Even
then, it will likely be smaller than what is
needed.
This inaugural edition of
Economic
Depths takes a closer look at the
labor market and the wounds that this
pandemic could inflict over the longer
term. This report, divided into four parts,
takes a deep dive into what specifically
that means. The first part provides a
check on the labor market given the
hole punched by COVID. The second
examines racial, gender and generational
differences exposed and exacerbated by
the pandemic. The third looks down the
road: at the potential loss in educational
attainment. The fourth highlights the
impact COVID could have on the health
of workers, even after recovery. Mortality
is only the worst of health outcomes.
Chart 4
Why do we care? Because COVID has
proven more than a transitory shock
for the global and U.S. economies. The
wounds it has inflicted on the labor
market have begun to fester and could
deepen. The loss of earnings and
educational attainment could set us
back an entire generation. Inequality
could worsen, which will exacerbate
the political divisions we see and even
undermine the functioning of democracy,
thereby slowing the pace of the recovery
when the pandemic abates.
The economy can only grow as fast as
the labor force grows (it is slowing now
that baby boomers are retiring) and as
each worker becomes more productive.
Inequality creates hurdles to workers
achieving their potential, exacerbating
inefficiencies and mismatches in the labor
market; that undermines productivity
growth. Less diversity, notably in
leadership positions, undermines the
quality of decision making and in the
case of individual firms, the trajectory of
profits and ultimately, the bottom line.
Chart 5
Section I
Not Just a Low-Wage Recession
Chart 1 shows the distribution of
employment losses across sectors.
Overall losses are worse today than
during the trough of the Great Recession
in 2008-09. The COVID recession is the
first recession led by the service sector.
Low-wage workers in the leisure and
hospitality sector were hit hardest by
the initial pullback in activity and are
struggling to cover the basics.
Chart 2 shows job losses by wage
level. High-wage jobs recovered more
fully in the initial phase of the recovery
but have since lost momentum. The
bubble of working from home fueled
confidence for many, contributing to the
surge in spending on big-ticket goods -
boats, appliances, luxury vehicles and
even second homes - that high-wage
households engaged in as lockdowns
eased. There is something visceral about
actually watching coworkers clear
their desks and carry out boxes after
layoffs that has been absent during this
recession. The bubble created by work
from home and the seeming invincibility
of some workers to survive the crisis will
burst.
Chart 6
Working from home is sustainable only
as long as demand for that work remains
strong. That reality seems to be sinking
in as consumer attitudes about the
economy faltered in October as layoff
announcements picked up and prospects
for another aid package faded.
The unemployment rate has fallen from
its peak but remains extremely high and
is understating the actual pain in the
labor market. Participation in the labor
market has fallen precipitously since
February. We have 3.8 million fewer
workers in the labor force today than we
did then. Some people are not counted
because they are not actively looking for
jobs that are scarce; workers who have
not looked for work over the last month
are not classified as “unemployed” in the
official data. Others were forced to quit
to care for children who are no longer in
school but attempting to learn online.
The number of the long-term unemployed
and workers who are facing permanent,
as opposed to temporary, job losses is
rising. (See Chart 3.) That is beginning to
leave scars on the broader labor market.
Clusters of unemployment are
particularly bad; they can undermine the
social structure of entire communities.
Research on the unemployed shows
those who are unemployed for six months
or longer lose more than a paycheck.
They suffer mental and physical health
problems and are forced to accept lower
pay to replace the jobs they lost. This
reduces lifetime earnings and puts a
strain on families and children.
“Diversity improves the
quality of decision
making and boosts
profits”
The result is showing up in the ranks
of those who are unable to pay for
the basics of food and shelter and
the growing number of people who
have sunk into poverty. Tent towns are
already cropping up in some parts of the
country. A recent
study by researchers
at Columbia University suggests that
some 55 million people as of September,
including 8 million since May, are now
living below the poverty line in the U.S.
A family of four slips into the official
poverty data once its household earnings
fall to $26,200 or less a year.
Conditions could get materially worse
before they get better, given the current
surge in cases. Layoff announcements
mounted in September as airlines,
amusement parks and theaters were
forced to make permanent cuts; there is
pressure to make even more cuts.
The employment situation is likely
to worsen before it improves. Falling
temperatures and limits on indoor dining
are expected to result in another round of
layoffs and small business failures before
year-end. Exports will slow as lockdowns
abroad increase and intensify.
Holiday celebrations including travel
and large gatherings will have to be
dramatically scaled back or cancelled.
Section II
Downturn Exposes Racial Bias
Chart 4 shows the breakdown of
employment losses by race. Black,
Hispanic and Asian workers were hit
significantly harder by COVID-related
layoffs than whites.
The unemployment rate for Black workers
remains the highest and shows the least
amount of improvement. (See Chart 5.)
This is despite a drop in participation in
the labor force, which means fewer are
classified as unemployed.
“The dominance of women
among the unemployed
is so large that some
have called the COVID
recession a ‘she-cession.’”
The unemployment rate for Black people
is higher at every level of educational
attainment. White men were hired back
at twice the pace of Black men once the
economy reopened.
Discrimination in hiring is well
documented. A
study by Harvard in 2017
revealed that discrimination in hiring
practices against Black applicants was
not only prevalent but entrenched. It had
not changed since 1989 despite shifts in
the views of the broader population about
the need for more equity and inclusion of
Black workers in the labor market. White
workers received 38% more callbacks
than their Black counterparts and 24%
more callbacks than their Hispanic
counterparts. The discrepancy between
callbacks between white and Hispanic
workers narrowed a bit over that period
but did not move between white and
Black workers.
Significant biases emerged with job
applications. In one
study on the
retail sector, which honed in on same-race
preferences, whites were much
more likely to apply for jobs where the
manager was also white.
Another
study revealed that networks,
especially in high paying fields such
as finance, law and medicine, acted as
hiring hurdles for Black workers. White
people tend to recruit and hire people
who look like themselves, which excludes
people of color.
Research by the Federal Reserve Bank
of Minneapolis
found the disparities
between white and Black workers did not
close fully during boom times. Both Black
and Hispanic workers were forced to
take more part-time work when they were
looking for full-time compared with their
white counterparts, even when the rate of
unemployment plummeted.
This conclusion is backed up by
work done
at the Economic Policy Institute. Incomes
picked up across races since the turn of
the century by 2018, Black workers started
losing ground again, rather than narrowing
the income gap. The gap in annual incomes
between Black and white workers actually
widened, while the gap between Hispanic
and white workers narrowed. Black women
came in dead last.
The late-in-the cycle acceleration in wages
for low-wage workers and improvements
in opportunities for underrepresented
groups are two reasons the Federal
Reserve shifted its decision rule on interest
rates. The Fed is now willing to wait for
a modest overshoot on inflation and
unemployment before raising rates. Fed
officials reason that a prolonged period of
ultra-low unemployment is worth the cost
of a little inflation if it delivers for the most
marginalized of workers.
Chart 7
Fed officials actually use the word
“inclusive” when they talk about growth,
something that was conspicuously
absent from their rhetoric prior to 2019.
Last year, the Fed engaged in a series
of meetings to reassess its policy-setting
framework. Those deliberations were
heavily influenced by the progress that
community leaders reported they saw
when unemployment dropped below
what the Fed had once considered full
employment. Employers were finally
willing to look at Black and Hispanic
workers whom they had ignored until
their traditional labor pools dried up.
That said, it will take a long time - too
long - for unemployment to drop back to
the lows hit during the peak of the last
expansion to allow Black and low-wage
workers to gain bargaining power with
employers.
The cost of waiting is high. A recent
study
by Citigroup estimates that bias against
Black people alone cost the economy $16
trillion in overall GDP since the turn of the
century. That means the U.S. economy
could have grown more than twice as
fast during the last two decades if the
pervasive racism and related hurdles
erected to hold back Black people were
not in place.
Chart 8
A “She-cession” - Losses by Gender
Women have been hit much harder
than men by layoffs as a result of
the pandemic. Much of this has been
attributed to the fact that women tend
to dominate low-wage jobs. Black and
Hispanic women have suffered the worst
losses, which reflects their roles in the
service sector and the biases they face
by race and gender. The dominance of
women among the unemployed is so
large that some have called the COVID
recession a “she-cession.”
Chart 6 shows the distribution of those
who have left the labor market. Women
accounted for almost two thirds of
the losses. The trend accelerated in
September when children stayed home
from school because their districts moved
to hybrid or resumed in-person education
for fear of contagion.
The drop in participation by women
occurred across all races but has
disproportionately affected women of
color. Black and Hispanic women have
led the decline in labor force participation
since February when many service
companies shut their doors and schools
went online only. (See Chart 7.)
Chart 9
“High-wage jobs recovered
more fully in the initial
phase of the recovery”
Research by Rand showed that
participation varied by both the age
and number of children in a household.
Women with children between the ages of
two and six and with two children instead
of one were more likely to quit. This has
highlighted the need for more affordable
day care. Many informal networks
of older parents and relatives that
were historically tapped by low-wage
households as a stopgap for childcare
had to be abandoned due to the higher
risks that COVID carries for people 50
and up.
This is despite the
penalty women
pay for having children during their
professional careers. Much of the
gender pay gap can be traced to childbearing,
lack of affordable daycare and the
disproportionate role women play in
caring for children.
A recent
study estimates that the blow
to lifetime earnings for women could top
$64 billion. That is despite the fact that
women now attain a
higher level of education
than men on average and play
an outsize role in household earnings. It is
not a matter of whether COVID sets back
women; it’s a matter of how far back
COVID resets the gender gap. We could
see a loss of 10 to 20 years.
The blow to both race and gender comes
at a time when firms are finally realizing
what researchers already know. Diversity
improves the
quality of decision making
and boosts
profits for firms that embrace
it. Leaving women and minorities behind
could cost them current as well as future
earnings.
A Generation Gap
Millennials and
Generation Z are the
most racially
diverse parts of the labor
force. They are the hardest hit age group
by the recession. Millennials and Gen Z
are more likely than other age groups to
work in services and in the gig economy,
two sectors that have been heavily
disrupted. The Bureau of Labor Statistics
(BLS) shows that gig workers (also known
as contingent workers) are more likely to
be under the age of 25. In 2019,
workers
under the age of 34 occupied more than
a third of all service jobs. As services were
suspended and jobs cut, many fled to the
gig sector, which pushed down
wages.
The unemployment rate for 25 to 34-year
olds jumped to 14.5% at the height of
lockdowns (highest except for teenagers);
it sat at 8.7% in September, while older
age groups fell between 6.2-6.7%.
Those aged 25 to 34 outnumber the
unemployed in other age cohorts, with
3.3 million unemployed. (See Chart 8.)
Millennials make up the largest share
of the working-age population; they
overtook
baby boomers in 2013 and
Generation X in 2016. This cohort is
more educated than its baby boomer
parents, mostly because women are
achieving higher levels of education; they
have also
faced the largest increases in
costs for college and graduate school.
When the Great Recession ended,
older millennials graduated into a very
uncertain and slow-to-recover job market.
Many took on jobs below their education
and training levels. About a third
did not
view their jobs as careers.
Research by
the San Francisco Federal Reserve shows
a stark gap between millennials’ post-college
earnings compared to previous
generations’. COVID dealt another blow
to those life-time earnings. (See Chart 9.)
Research in other countries shows that
underemployment takes a toll on the
mental health and job satisfaction of
young adults. It also impacts physical
health. That is before any long-term
effects from COVID-19 are taken into
account. Younger adults account for
many of the super-spreader events;
they are far less likely to die than older
patients but can sustain complications
we are just beginning to learn about.
The scars of the Great Recession went
beyond a blow to earnings. They included
a larger
overhang of college debt than
other generations at the same age. This,
coupled with a later start to their careers,
delayed starting families and buying
homes. The two are often intertwined,
which has inhibited the ability to
accumulate wealth. (See Chart 10.)
The costs are already compounding for
young people. COVID triggered a surge
in delayed payments for student loans,
rent and mortgages. That could show up
as a surge in defaults and a hit to credit
ratings in 2021 after the moratorium on
those payments expires at the end of
December.
The blow to a credit rating tied to a
student loan default is particularly hard
to recover from; it acts as a permanent
stain on a credit record. That affects
the ability to access the broader credit
market, including mortgages. As credit
conditions remain tight in response to
heightened uncertainty, consumers will
need stronger, not weaker, credit scores
in order to participate in the housing
market or access other credit.
That could exacerbate the surge in
young adults who are not in school but
have been forced to move back in with
their parents since the onset of the virus.
By July, a
Pew study showed a record
breaking 52% of adult children were
living with their parents. (See Chart 11.)
Chart 10
Section II
A Blow to Education
K-12: By the peak of lockdowns last
spring,
estimates by
Education Week
suggest that at least 55.1 million students
in 124,000 public and private schools
were affected by the shift to online
education. Many schools that attempted
to reopen this fall have been forced
to close or will have to find ways to
better socially distance children in the
classroom. The
viral load in children
makes them much more effective “silent
spreaders” than first believed.
This means many students could lose
a year if not more of education in
person. Special needs and low-income
students, who already face major
hurdles, are suffering more than the rest
of the population. This is exacerbating
well-documented income and racial
inequalities in the education system.
Access to the internet, tablets and/or a
computer, are exacerbating the problem.
The problems occur among income strata
and geography. Many rural areas lack
the broadband necessary to learn online,
while public hotspots in urban areas are
shuttered. It is not uncommon for kids
to sit near or park next to a hotspot to
access the internet to take classes online.
Chart 11
Software for digital instruction and
assessment revealed that only 60% of
students from low-income households
regularly logged onto web-based
instruction last spring. When they did
log in, it was of low quality. Poor internet
connections, sharing of devices, lack of
quiet spaces to study in and parents with
lower levels of education compromised
their learning experience. The figures
were worse for Black and Hispanic
students than whites. (See Chart 12.)
Losses in learning were not for lack of
trying. The Household Pulse
survey in
May showed that parents from the lowest
income households spent the same
amount of time - about 13 hours per week
- as high-income parents spent with their
children online.
Disruptions to school and hurdles to
online instruction have caused declines
in enrollments. More than half of school
administrators reported a drop in
enrollments for preschool and elementary
school in a recent
survey; almost half
reported similar declines in secondary
school enrollment. The reasons span
the spectrum from access to outside
responsibilities. Participation in the labor
market by Hispanic teens is close to the
highs hit prior to the crisis as they have
rushed to get jobs to help make ends
meet as their parents were laid off.
Chart 12
Our experience with natural disasters
suggests that a good portion of older
student dropouts could become
permanent. This is in addition to the loss
in learning triggered by the disaster.
More than a
third of students in middle
and high-school were a year behind their
counterparts five years after Katrina.
A
study done by McKinsey estimates
that students enduring the crisis could
lose more than $100 billion in their
cumulative earnings over their lifetimes.
About 90% of those losses are due to
setbacks in learning; about 10% are due
to permanent dropouts. The losses vary
dramatically by household incomes
and race. Students from low-income
households suffer much more than
students from high-income households.
Black and Hispanic students suffer the
largest losses.
Higher Education: Many students
deferred and/or dropped out of college
when schools moved online last spring.
The number of students from low-income
households taking on debt to finance
their education dropped. Those students
will suffer a blow to their educational
attainment, their job prospects and
lifetime earnings. That will make their
student debts even harder to service in
the months to come and could set them
even further back financially.
Foreign students, who had already
been declining in response to new
limits for legal immigration, suffered
another setback from travel restrictions
and executive orders as a result of the
pandemic. Those students have played
a key role by filling graduate school
positions and feeding a pipeline of talent,
notably in the technology sector.
The loss of foreign students is a blow to
university revenues and the educational
attainment of young people. They are a
primary source of funding and subsidize
the costs of going to college for U.S.
students. In 2018, foreign students added
$45 billion to GDP, mostly through
tuition, fees and living expenses.
The change will exacerbate budget
cuts that colleges and universities
have already had to implement, which
include cuts to support and educational
programs. Some schools have suspended
offerings, consolidated departments,
frozen entry for graduate students and
even eliminated majors.
Medical schools have been hard hit by
the shift to dealing with COVID instead
of more profitable, elective surgeries.
This crimps their budgets, undermines
the pipeline of doctors and medical
professionals they can train and further
squeezes the budgets of the universities
that house them. University hospitals
transfer a portion of their revenues to
fund the overall university each year.
“If not treated, the wounds
created by COVID will
deepen and leave a
multitude of scars on the
complexion of the labor
market."
Many are already scaling back by cutting
employment and wages. Universities
are the largest employers in numerous
cities and sometimes entire states. Some
schools will be forced to close entirely.
How will students graduate if their
schools close?
Section IV
Health Consequences
As of the writing of this report,
officially
reported COVID cases in the U.S.
approached 10 million; deaths were close
to 240,000.
Studies on the antibodies
associated with COVID cases suggest
those figures are a large undercount,
especially during the early phase of the
pandemic. We were slow to ramp up
testing and when we did, many of the
initial tests reported a high incidence of
false negatives.
There is evidence of
reinfection, or
people who have contracted the disease,
experienced symptoms, tested negative
and then contracted the disease again.
This could further increase the count of
cases. It also ups the ante on the need for
therapeutics. At least one vaccine may
be as much as 90% effective, which is
a game changer, but is not expected
to be widely available until well into
2021. That is why the Center for Disease
Control and Prevention (CDC) warns that
masks will be necessary for some time.
Blacks and Hispanics, many of whom
work in essential services, are more
likely to contract and perish from COVID
than white people. Socioeconomic
factors including low wages, the rising
cost of health care, limited access to
health insurance, a higher incidence of
underlying health problems and higher
density housing have been blamed for the
disparities. A good portion of those gaps
are due to systemic bias in treatment for
people of color.
Bias in the health care system is
rampant, especially for Black people.
Their symptoms are not taken as seriously
and red flags are more often overlooked,
which raises the risk of mortality. Even
perceptions of bias can compromise the
quality of care, as slights in interactions
between patients and doctors can
undermine diagnoses. Black women
suffer the most, regardless of their
educational attainment and insurance
coverage.
Undercounts in the data early in the
pandemic were likely higher in the Black
community than in other populations.
The disproportionate toll that COVID
inflicted on Asian and Native American
communities also received less attention
in the initial reporting of cases and
deaths but has become clear now.
The data on the uninsured comes out
with a substantial lag, but it is a good
bet that those covered by employer-sponsored
health insurance has
fallen since the onset of the crisis. This
coupled with a dearth of hospitals in
rural areas is further compromising our
ability to combat COVID, even as more
therapeutics are becoming available.
COVID has proven to have long-term as
well as short-term consequences for a
person’s health. According to the Mayo
Clinic, these
include:
- Organ damage: hearts, lungs and
brains can suffer long-term damage
from a COVID infection, even in
children and people who have
relatively mild cases. The risks of heart
failure, breathing problems, strokes,
seizures and the threat of Alzheimer’s
and Parkinson’s are all greater among
patients who have had COVID.
- Blood clots and blood vessel problems,
all of which exacerbate long-term
threats to health.
- Problems with fatigue and mood.
People who experienced long periods of
time in the hospital and intensive care
units can suffer bouts of post-traumatic
stress, depression and anxiety. There
is also concern that people who
recover from COVID could also suffer
from chronic fatigue syndrome. This
occurred in people who recovered from
SARS, a related virus.
It will take time to determine the full
spectrum of long-term effects associated
with COVID and treatments that could
deter the worst of those effects from
occurring. The fact that they exist is
important, given the millions who have
already suffered at least one round of
COVID.
Sick days and time away from work
could rise along with health care costs
for employees and employers. Some
could be forced to move onto disability
and quit. Paid sick leave provided by the
CARES Act has also expired.
Bottom Line
COVID and the resurgence in cases is
further stressing the labor market and
the broader economy at a critical time.
The aid provided by the CARES Act
has lapsed. Too many households are
running on fumes. This increases the risks
we could suffer additional setbacks. The
costs have disproportionately hit low-income,
Black and Hispanic households,
but do not stop there.
If not treated, the wounds created by
COVID will deepen and leave a multitude
of scars on the complexion of the
labor market. Those scars will limit the
economy’s potential to grow and recover
from COVID for years to come. Some
losses could span a generation.
The longer Congress waits to act, the
larger the costs to the overall economy
and the harder it will be for all of us to
fully recover from the ravages of COVID.
We have already lost enough souls to this
devastating disease. Passing an aid bill
before year-end would represent a start.
Media Contact
Karen Nye
T +1 312 602 8973
Karen.Nye@us.gt.com
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Copyright © 2020 Diane Swonk – All rights reserved. The information provided herein is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic, financial, investment or any other decisions. This communication does not constitute an offer or solicitation, or solicitation of any offer to buy or sell any security, investment or other product. Likewise, this communication serves to provide certain opinions on current market conditions, economic policy or trends and is not a recommendation to engage in, or refrain from engaging, in a particular course of action.