Tonight we will get one of the first official reads on the impact of COVID-19 on the US economy, when the Labor Department releases initial jobless claims (unemployment insurance) for the week of 21 March.
As recently as January, initial jobless claims were at a low point for the economic cycle of 213,000, one of the lowest readings since the early 1970s, consistent with what was a tight labour market by historical standards. The US unemployment rate has been sitting around 3.5 per cent in recent months.
Initial jobless claims rose from 211,000 to 281,000 for the week of 14 March. This week, the median economist’s expectation is for claims to rise to around 800,000. However, some economists are expecting as many as 3 million claims.
The North American Derivatives Exchange offers binary option contracts on the weekly initial claims number. The market is somewhat illiquid, with very wide buy-sell spreads, but it can nonetheless be used to infer probabilities based on the option strike barriers.
The current bid implies around a 50 per cent chance of a number in excess of 1.8 million and a 17 per cent chance of a number in excess of 3 million. These are catastrophic numbers.
To put these numbers in perspective, in the wake of the global financial crisis, weekly claims peaked at around 650,000. During the double-dip recession of the early 1980s, claims peaked at just under 700,000.
The non-farm payrolls measure of employment is expected to fall by around 100,000 when it is released on 3 April, with the unemployment rate expected to rise to from 3.5 per cent to 3.9 per cent. However, the U3 measure of the unemployment rate is likely to understate the magnitude of unemployment.
To be counted as unemployed under the U3 measure, potential workers must still be actively engaged in the labour market, that is, looking for work. But labour market participation is precluded for many by the shut-down of swathes of economic activity. The U5 measure counts discouraged and marginally attached workers and will likely see a bigger increase.
The tragedy is that it is has taken 10 years for the US labour market to recover from the Global Financial Crisis, with the Federal Reserve having been reluctant until very recently for the labour market to tighten based on misplaced fears of inflation. All this progress will now be lost.
While the economic downturn will be temporary, past experience suggests the effect on the labour market will persist for much longer. The induced recession to contain COVID-19 will have a human toll greater than the virus itself.