The Gigantic Economic Hole

Imagine you are asked to fill a 12-foot deep hole. Now imagine that the hole is only 11.5 feet deep. Feel better? Of course 11.5 is better than 12, but the task ahead is immense. That massive hole is the U.S. economy (and the labor market) and right now, although it may be slightly shallower than first feared, it is still gigantic.

Just a few days after the May jobs report was better than expected (yes, the rate was understated, but 2.5 million jobs were added, which is an unambiguous good sign), the National Bureau of Economic Research declared that the economy officially entered a recession in February. How long the downturn lasts remains the big question.

There is evidence that after a cataclysmic downturn in March and April, the most beaten down sectors like air travel, train traffic and even visits to the dentist, may have bottomed. But the hole is still deep.

Last week, Federal Reserve officials chimed in with recent surveys (National Association for Business Economics, CBO, World Bank, OECD), predicting that the U.S. economy will shrink by 5.5 – 7.5 percent this year. That would be the sharpest annual decline since GDP fell 11.6 percent in 1946, when the nation was demobilizing after World War II. The unemployment rate will drop, but it will likely remain at 9-10 percent by the end of the year. As analysts from Capital Economics noted, “things aren’t quite as bad as we feared, but they are still potentially worse than at any time since the Great Depression of the 1930s.”

It’s going to take time to dig out of this gigantic hole, and we’re probably not going to fill it until the middle of 2022, according to Fed Chair Jay Powell. In his press conference last week, he reiterated that millions of Americans will become permanently unemployed from this crisis, as the companies they used to work for go out of business or their old jobs are eliminated. And while the pandemic impacts all Americans, it does not do so equally. Powell underscored, “The rise in joblessness has been especially severe for lower wage workers, women, African Americans and Hispanics.”

A new paper from the National Bureau of Economic Research finds that the inequality is also apparent with small business failures. Over the past three months, 3.3 million small firms shut their doors, that’s more than all of the 17-month Great Recession. But, the closings disproportionately hit minority and immigrant-owned firms, and “may portend longer-term ramifications for job losses and economic inequality”. African American businesses were the hardest hit.

Powell will no doubt reiterate his concerns about the economy, the labor market and the vast economic inequality that exists, when he testifies before Congress on Tuesday and Wednesday. As some members may press him on what more the Fed can do, he is just as likely to underscore that it is Congress that must act, and must do so before too much more time elapses, because millions of Americans have fallen into the gigantic hole and need help to survive as the rest of us try to fill it up.