Initial claims for unemployment insurance soared in the past week, as the spread of the coronavirus multiplies and the first tranche of service-sector layoffs floods state unemployment offices. This week’s initial claims increased to 3.283 million from last week’s 282,000, suggesting a substantial drop in income and household spending in the coming weeks and months, and the increased likelihood of the economy falling into recession.
The increase of 3.283 million implies that the April unemployment rate will rise to 5.75%.
The primary takeaway from the claims data from the week ending March 21 is that with each 1.5 million increase in first-time claims one should expect a 1% increase in the April unemployment rate that will be reported on May 8. The increase of 3.283 million implies that the April unemployment rate will rise to 5.75%.
Just as important, reports around the country, especially in New York, of states having difficulty processing the volume of claims strongly suggest that the shock to the labor market will be a multi-week or multi-month phenomenon in a way that policymakers and investors have not priced in.
The decline in weekly jobless claims during the decade-long economic recovery appears to have reached an inflection point in October 2018, when the effects of the U.S. trade war put the finishing touches employment in the manufacturing sector.
Before October 2018, initial jobless claims were trending lower as the service sector grew, with weekly claims lower than its 52-week moving average two-thirds of the time. Since October 2018, claims have been higher than its moving average just over half the time. Now, with the economy shutting down because of the de-facto public health policy of self-distancing, jobless claims should be expected to soar over the next several weeks. If the government fails in its responsibility to contain the virus, then there will be a Depression-like period of unemployment.
The potential impact of the virus on the economy can be monitored in real time by observing the weekly claims for unemployment insurance, which will also provide a baseline clue to the official monthly U3 unemployment rate. The Department of Labor calculates an unemployment rate based on the number of recipients of unemployment benefits (known as continuing jobless claims) as a percentage of the labor force.
This “insured unemployment” rate had been pleasantly stuck at 1.2% of the labor force since May 2018, while the headline U3 rate continued to drop to record lows. This suggests both a tightening of the labor force, with unemployed persons giving up looking for employment or, in the case of baby-boomers, choosing to simply retire; and a lower limit on the rate of unemployment and a candidate for a natural rate of unemployment in the new service-sector economy.
But the tsunami of recent claims has blown through all those averages and trends, with topline claims pointing to a monthly U3 unemployment rate of roughly 5.75%. (This assumes the U3 unemployment rate equals the insured rate plus 3.5 percentage points, which is the long-term average difference between the insured rate and the U3 rate.)
