Fathom’s Chart of the Day 20.03.2020: U.S. labor market faces unprecedented shock

Reports of the increase in jobless claims in certain states is consistent with the US unemployment rate increasing by around 2 percentage points in a single week — a figure that is more than double the largest ever monthly increase. That scale of increase is consistent with reported figures coming out of Ireland. According to Okun’s Law, that sort of jump would normally be associated with GDP being 4% below potential. However, investors would be wise to not extrapolate and think that this recession will be orders of magnitude worse than the in 2008 and 2009. This downturn is unusual in how easy it is to see ahead of time. As a result, businesses are likely to move forward with lay-offs much more quickly than normal, suggesting that increases in unemployment will be heavily concentrated at the beginning. With financial support and effective control of the virus, both of which are hugely uncertain, many of these lay-offs could prove to be temporary. Another reason for cautious optimism is that since the recession is so widely anticipated, policymakers should, in theory, be able to respond to it better. Indeed, fresh measures on both fronts and their associated price tags seem to be getting bigger by the day. Whether they will be enough to prevent widespread bankruptcies that could feed on themselves and lead to a U or L-shaped recovery, it is still too early to tell.

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