Depression Versus Recovery in Employment

A V-shape recovery is possible if employment quickly rebounds. The initial wave of job losses were in service industries such as restaurants. I don't want to downplay the economic hit from these job losses, but these jobs can come back very quickly if the lockdowns lift and restaurants re-open. Then comes the question of how quickly people will return to normal behavioral patterns. This should create a lamba-shaped Λ decline in unemployment.

The middle scenario of a temporary or normal recession will happen if the recovery takes longer than expected. This scenario is looking more likely with lockdowns extending into mid-May and with substantial job losses piling up, now more than 30 million over the past six weeks. If some restaurants go out of business, it will take longer for new ones to open. If some people decide to sit on unemployment because they get higher benefits, some restaurants may close. (See: A problem for NY businesses: Workers won’t return when they can get ‘unemployment on steroids’) I personally know of a Subway franchise that closed years ago because the owner couldn't find reliable employees. If millions of people are paid not to work, it could damage the recovery. Unemployment would come down over time, but it would have a lower-case n shape in this case, with the final drop probably coming as the federal cash payments disappear.

The depression scenario comes into play if job losses do not experience a quick decline to below prior recession peaks. The 4-week moving average of initial claims has declined, but this past week's number was 3 million job losses. At the peak of the 1980s recession, the worst recession since the 1930s, the 4-week moving average of initial claims peaked at 674,250. Adjusted for roughly 50 percent growth in the labor force takes the peak number to around 1 million job losses. A depression scenarion might look like a capital-N shape, where job losses fall because the coronavirus burst fades, but if new job losses start piling up, the number could turn up again. Pay attention to reports of job losses tied to the economy and not coronavirus, that's a sign that a recession has taken hold. The depression risk is elevated because of front-loaded losses. Having a normal recession now would be like a depression because unemployment is starting from 10 percent.

Continuing claims show the same situation. It's not simply that this number needs to peak and turn lower, it's that it needs to fall below prior peaks. Otherwise, the economy will "recover" into a recession.

It's hard to make a comparison with the early 1980s because that was the end of a long bear market, the peak of inflation, the peak in interest rates, etc., but stocks did drop more then 20 percent during the recession. If there is a V-shape recovery, the case can be made that the lows are in. If the recovery is more of a U-shape, the lows probably aren't in. Furthermore, the odds that this is the start of a bear market start rising rapidly if this turns into a 6-month or longer recession because "recovery" may not complete until sometime in late 2021 or into 2022 in that case. Finally, it's worth noting that labor force participation has fallen. It is too early to say anything other than, a bunch of people have stopped looking for work. Hopefully, it's because they're getting paid better to stay at home (and hopefully that policy ends). Otherwise, it's worth remembering the labor force needed nearly 4 years to retake the October 2008 level.

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