As feared, the coronavirus crisis has caused unemployment claims to surge: This morning, the US Labor Department revealed that 3.283 million Americans applied for unemployment benefits last week, up 282,000 from the week before. This is the highest figure ever recorder, beating the previous record of 695,000 set in October 1992.
However, it is believed that a significant number of people who got laid off last week haven’t been able to register because the phone systems and websites are saturated. Further, many workers who are not employees on company payrolls, such as free lancers, gig workers and the self employed, are not currently eligible for unemployment benefits even though their work has essentially dried up.
In sum, the real unemployment rate is much higher than what the official figures suggest.
A recession is looming
Restaurants, hotels, theaters, airlines, fitness studios and other businesses across the US have seen their cash flows disappear in the space of just a few weeks.
Some economists predict that unemployment could reach 13% by May; During the Great Recession (2007-2009), the highest unemployment rate peaked at 10%.
Just over a month ago, unemployment was just 3.5% – a record 50-year low. Morgan Stanley economist Ellen Zentner predicts that up to 17 million jobs could be lost by May, twice the amount of jobs lost during the Great Recession. Other economists predict that the economy could shrink by an unprecedented and whopping 30% this year.
Incredibly, the mammoth $6 trillion stimulus package being debated in Congress will not offset this surge in unemployment.
Expansion of unemployment benefits
With unemployment soaring, US lawmakers preparing the bailout have included provisions in the bill that would expand unemployment benefits:
- The Federal government will pay an extra $600 dollars a week on top of what the states provide,
- Benefits will be extended an extra 13 weeks beyond the six months that states offer,
- Gig workers, free lancers and other workers not on company payrolls will become eligible for unemployment benefits.
A separate piece of legislation drafted this week will provide states with up to $1 billion in aid to help them process claims. However, distribution of these funds could take weeks.
This is a similar concern of many newly laid off individuals: generally, it takes up to three weeks for applicants to receive their first payment. It is almost the end of the month and there are bills to pay next week.
Another serious issue is that unemployment agencies are understaffed and underfunded, which means they are overwhelmed and unable to process claims quickly. Indeed, the job market was in top shape just weeks ago and they could not predict nor prepare for such a tidal wave of unemployment claims.
The silver lining is that some economists expect the economy to recover by the summer if the virus is contained.
How it the markets reacting?
At writing, the Dow Jones is up 4.6% and the NASDAQ is up 3.6%.
The market’s optimism is based on several factors: the imminent bailout, Trump’s insistence that the economy be reopened as soon as possible and the [still very hypothetical and uncertain] prospects of the virus being under control within the next few weeks rather than the next few months.
However, investors should remain cautious as the virus is not yet under control or disappearing. Indeed, we may not have hit the bottom yet and a wave of bad coronavirus news would cause the markets to plunge further.
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Disclaimer: This is not financial advice. Do your own research before investing in any asset.