Chief economist update: COVID-19 eating into jobs

Wall Street and most other equity markets welcomed reports that the White House and the US Senate have finally reached a deal to unleash a stimulus package worth around US$2 trillion.

"Highlights include: $250B in direct payments to Americans; $367B in small business loans that can be forgiven if employees are retained; a $500B loan and loan guarantee program for industries, cities and states that with help from Fed can produce ~$4T in total liquidity; $150B for state and local stimulus funds; $130B for hospitals; and expanded unemployment benefits," according to Factset.

The news generated optimism in the markets but the overriding question is will this new-found hope repeat the short burst of confidence generated with every cent of stimulus announced by the US Federal Reserve - from an inter-meeting 50 bps cut in the fed funds rate on March 3, followed by 100bps reduction on March 15 (that effectively took the target rate back to zero) to a US$700 billion QE and ultimately expanded into an open-ended one.

With both fiscal and monetary policy working towards a common a goal -- restoring consumer, business and investor confidence - perhaps, this time, the optimism will last. Perhaps ... perhaps ... perhaps.

They better work given the deterioration in US economic activity. IHS/Markit's flash US composite PMI dropped to a fresh low of 40.5 in March (from 49.6 in the previous month) as manufacturing declined to its lowest reading (49.2) in more than a decade and services plunged to a new series low reading of 39.1.

The natural offshoot from a general slowdown in economic activity is, of course, unemployment.

Latest available data show that unemployment insurance claims - a leading indicator of unemployment - jumped by 70K to 281K in the week ended March 14. Still peanuts when you consider that the current US unemployment rate remains at a half a century low of 3.5%.

However, the US Economic Policy Institute's (EPI) latest estimates provide a guide of things to come.

EPI estimates 3.4 million workers filed for unemployment in the week ended March 21, that it says "dwarf every other week in history, as can be seen by comparing the projection against the trend in initial claims back to 1967".

"For scale, consider that 3.4 million Americans moving from employment to unemployment would raise the number of the unemployed from 5.7 million to 9.1 million. This alone would raise the unemployment rate by more than half, by 2 percentage points from 3.5% to 5.5%, moving back to 2015 levels in just one week." (EPI)

We're doomed!

Well, it all depends on whether the US Treasury and the Fed's largesse - needless to say, a cure for the coronavirus is discovered soon - are able to revive confidence, making the spike in unemployment claims a short-term phenomenon rather than a rising trend towards joblessness.

Read our full COVID-19 news coverage and analysis here.

Link to something 2k3ydcmF