April’s job numbers came in on Friday, and 20.5 million losing their jobs during the month should concern us plenty. Neel Kashkari of the Minneapolis Fed says it will get much worse.
Minneapolis Federal Reserve President Neel Kashkari certainly qualifies as one of the Fed’s most outspoken members, and readers might remember our doing an article about his extreme views on Bitcoin that we featured a while back, and he could even be said to carry the flag for the anti-Bitcoin movement.
Even though we intuitively would think that we have hit the bottom or at least be near to the bottom with the job crisis that our lockdowns have created, this is an issue of such monumental economic importance that we cannot afford to ignore points of view that may differ with this, such as those currently held by Kashkari.
As confused as Kashkari may be about cybercurrency, he is after all a Federal Reserve member, which does count for something, and although there is often a fair bit of disagreement about economic issues within the bank, we should want to consider all of them.
Forecasting the future involves looking at current data and then projecting this forward, accounting for whatever changes we expect and coming up with a view of what the future will look like and what we may have to do in order to improve it. This requires that we start with the current numbers and then make our best guesses as far as how this will continue to play out, and the second part is of course the tricky one.
Kashkari, during an interview on NBC’s Today Show on Thursday, didn’t have the benefit of the actual numbers from April, as the Department of Labor does not spill the beans to anyone prior to their giving them to all of us, including Fed presidents. If anyone doubted this, the fact that Kashkari told us all that unemployment rate in April would come in between 17% and 24% should put that idea to rest.
What stands out with this guess is how big of a range it represents, and how little we really know about how this lockdown is playing out, even at the Fed level. They have plenty of folks who look to work these things out, to make as educated of a guess as they can, and while each president is left to their own resources to make these guesses, the fact that this is not so easy to do is reflected by this 7% range.
The number actually came in at 14.7%, so Kashkari’s projections did come in pretty high, but we can’t really fault him for that because this is not an easy task by any means. Part of the difference at least may be explained by the number of workers who have not been laid off but have had their hours reduced, as well as seeing the participation rate decline as much as it has now.
While most look at what we could call the big number, called U3, there is more to the story than just U3, as important as it is to look at. Make no mistake though, this is a hideous number as far as these numbers go.
In the period between 1948 and 2019, a time where we have seen plenty of ups and downs with the economy, the average unemployment rate over this time has been 5.7%, and the highest that we got to over these 71 years has been 10.8% in 1982, driven this high due to the double-digit inflation we had to end the decade of the 1980’s.
When inflation runs as high as it did then, as high as 13.3% in 1979, the solution will always involve cooling off the economy and this means less people working. By 1982, Reaganomics got inflation down to a much healthier 3.8%, but the cost was this double-digit unemployment for a time.
This is one of the reasons why we and others are so concerned about all this stimulus out there now, and as painful as it to have this many people out of work now, getting back to normal doesn’t mean that it is over.
It’s hard to imagine our having the unemployment rate worse than it will be during the peak of this financial crisis, whether 14.7% is the low water mark or we see an even bigger number due to the lag involved in reporting these things, but there is no denying that May has seen us at least turn a new page on this and more people are returning to work now, albeit pretty gradually.
It’s hard to say what level of inflation we’re going to be seeing in the aftermath of this, and this is where the real risk lies, although we do know what 13.3% looked like, and going back to a U3 number that we’ve seen nothing anywhere near as high since the Great Depression doesn’t seem very likely at all, let alone the “much worse” that Kashkari has warned us against.
We do owe it to ourselves to look behind this number, and particularly at the U6 number, which includes those who have seen their hours reduced. As long as you are kept on the payroll, you aren’t laid off and don’t make it to the U3, but if we do want to get a good idea of how much this shutdown has impacted unemployment, we have to look at U6 as well.
The Good Thing About Hitting Rock Bottom is That Things Can Only Get Better
Without even looking yet, we know that the gap between U3 and U6 will be larger than normal, with so many businesses in partial shutdown. A lot of businesses will choose to keep more people on at reduced hours to spread things around more, and while some businesses do that anyway, and the majority of their workforce may not be full time with some businesses due to their not wanting to pay benefits, you just don’t see a transition to this like we’ve seen because we don’t normally cut back this much, or cut back at all beyond business needs.
The U6 number, which some believe is the more important one of the two, came in at 22.8% for April. We need to remember though that these are different numbers, and we can’t just say that the unemployment number is this bad comparing it to U3, and there is always a gap between the two. For instance, prior to all this, when U3 was the 3.5% that was so fabulous, U6 was 7%, as there will always be part-time workers even at the best of times.
It is the movement from 7% to 22.8% that matters, which provides us an increase of 15.8%, definitely higher than the 11.2% that U3 rose lately, but this is to be expected given the degree of migration from full-time to part-time that the shutdown has caused. Both of these numbers together tell the real story.
These numbers are all terrible of course, when you have to go all the way back to 1938, to the darkest days in the U.S. economy ever to find comparison. What’s done is done though, and it’s where we are headed from here that matters, how long it might take to get unemployment numbers back to only modestly bad at the very least.
While we may be eager to try to paint what the road ahead will be like, this is considerably more challenging than anything we normally do in economics, which can be challenging enough anyway. What makes this particular situation so challenging is that it takes more than our economic training to understand this well, as this significantly depends on other sciences such as epidemiology and psychology.
While we don’t necessarily need formal training in these other sciences to make projections, we will at the very least need a good idea of them, especially with the interplay of psychology and economics, to come up with even reasonable ideas.
Kashkari has been sitting on the far end of the bench as far as now our recovery may play out, not unlike his positions on cybercurrencies, although this time he’d got plenty of folks sitting with him. He has told us that he expects that it will take 18 months to put this behind us, and regardless of whether he ends up being right, it’s not so much about how long it takes to get back to normal, it’s the path that we take that matters the most.
At the center of this battle is the progress of the outbreak itself, which in the United States, is still raging. The numbers have come down a little but not by all that much yet. As we observe this play out, we want to guard against both trying to understate this as well as overstate it, and base our guesses more on what is going on now.
In particular, we need to observe the interplay between the changing landscape of the outbreak and the impact of both the changing economic situation and the psychology that will also guide us toward more normalcy. The fact that, with the outbreak waging on as it has, more and more people are demanding to return to work, and more and more people are at least a little more comfortable with doing so, as well as being more comfortable being out in the world in general, forms a better base for our projections than guessing does.
Even more important is the changing attitudes that we have seen at the state level, where even the hardest hit states such as New York are at least devising recovery plans, even though they may choose a more cautious approach than elsewhere.
It is one thing for states to allow more businesses to operate though, and quite another to expect participation rates to resume, which is what concerns Kashkari the most. We do need to account for the way that all of these influencers will play out over time though to get as good of an idea of what the future will look like later on at some point in the future, like 18 months from now.
We also need to account for all of the things that may have us more comfortable being in more proximity with one another, where we go from the social distancing that is being so widely promoted today to the normal distancing that we have used throughout human history.
We Honestly Don’t Know How Long This Will Last
The beliefs we have today, such as those shared by Kashkari and a great many others, that we will need either a vaccine or a treatment to be safe from this, are both subject to plausibility and change. We also need to account for the effect of other possibilities such as achieving herd immunity or simply seeing the outbreak die off, and can’t therefore just assume that it will take 18 months to get a vaccine widely distributed and then assume that’s how long it will take to get comfortable, as this is just one among several ways we may achieve this.
Kashkari wonders just how long it will take for people to be comfortable going to the movies again, and is certainly correct in that the transition will be a gradual one. However, we do need to realize that our current beliefs about this and the ones we may have in a few months involve a dynamic process as well, and we need to continue to compare the situation with current beliefs to measure this progress. The little progress that we’ve made over the past week or two is at least encouraging.
What we are seeing more now is the economic part of the equation stepping more to the front, where not very long ago it was not seen as appropriate by most to even discuss. Now, we’re seeing this concern push us even more towards the gradual resumption of normal life, at a pace that has exceeded the small improvement at best that we are seeing with the magnitude of the outbreak.
We want to give Kashkari the benefit of the doubt here and assume that he surely did not mean that the unemployment rate will get “much worse,” as this can only improve as the lockdown we’ve been under goes from its extreme not long ago to being lessened already, with plans on doing much more in the coming weeks. When you have already put the maximum amount of people out of work that we dared, and then allow at least some to return to work, this can’t make the unemployment rate worse and especially much worse.
Our experience with this lockdown can only improve as well, although we could frame this as the overall effect of this on our economy, measuring the cumulative impact, just like we will need to measure the cumulative impact of all that stimulus upon both the economy and the debt problem.
This is a double-edged sword, even though it is certainly needed at such a dire time, and without it, April’s unemployment numbers as well as the level of economic decline could be made far worse. Once this is over though, it will cut us both on the debt side and on the stimulus side, where the stimulus side of the blade will be turned toward us as well, and we will need to constrict our economy at least somewhat to combat these very inflationary measures if everything were more normal.
As well, each month that our economy is held back, and by the degree that it is, will add to the overall pain and the overall cost. From a cumulative perspective, this situation not only might be made worse, it surely will be.
Kashkari is right in believing we have a long way to do, which hardly anyone would doubt, even though the timeframe here just isn’t clear enough to be able to say too much and especially not claim that we have mapped this out with as much certainty as he and a lot of others believe.
When we add in the residual effects of all this, including both a percentage of the people who may remain afraid when most of us aren’t anymore, as well as the inflationary wave that all the stimulus will cause, it may take considerably longer than even Kashkari believes to truly return to normal.