The Layoffs Are Just Beginning

The Layoffs Are Just Beginning BY  for Daily Reckoning

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UNEMPLOYMENT skyrocketed in March and April, during the worst stage of the pandemic and the lockdowns that followed.

The unemployment rate approached 15% in April and total initial claims for unemployment benefits exceeded 59 million between March and August.

This was the worst episode of unemployment since The Great Depression in the early 1930s.

Things have improved since spring. Unemployment fell to about 11% by July and even further in the August unemployment figures released last Friday.

Does this mean the worst is over and the economy is recovering quickly? Not exactly.

No More Payroll Protection Plan

Unemployment would have been much worse in April and May but for the Payroll Protection Plan enacted by Congress.

This Plan appropriated almost $1 trillion in easy-to-get loans for small-and-medium sized businesses. The loans would be forgiven if the proceeds were used to maintain payrolls for two-and-one-half months or to pay rent.

This program acted as a kind of bridge loan from May to July to keep employees on the payroll. It worked. But now, those funds have run out and the lockdowns continue in many parts of the economy.

Businesses that were expecting a reopening and a V-shaped recovery have found that the reopenings have been delayed by new lockdowns and that the recovery is real but weak.

We’re starting to see a second wave of layoffs as the Payroll Protection Plan money runs out and the economy doesn’t recover as hoped.

Meanwhile, states and cities are also planning huge layoffs in the coming weeks as tax revenues dry up and the costs of riots and looting begin to add up.

Putting all of this together reveals that unemployment may actually rise, starting now, after declining from May through August.

Digging Out of a Deep Hole

The reality is, the economy’s in very bad shape. The idea that we’re going to bounce back out of this with all this pent up demand is nonsense. The data is already indicating we’re in a recovery, yes. But if you fall into a 50-foot hole and climb 10 feet up, you’re still 40 feet in the hole.

We’re not going to see 2019 levels of output until 2023 at the earliest. We’re not going to see 2019 low levels of unemployment until probably 2025. We’re not getting back there for three or four or maybe five years. So we’re looking at a long, slow recovery.

And that’s if things don’t get worse from here. But they could, especially if we get a deadly second wave of the virus.

We’ve climbed 10 feet out of the hole. Unfortunately, we could find ourselves right back at the bottom before too long.

Of course, we can’t talk about the economy without mentioning the Fed…

The Powerless Fed

In a highly publicized speech on August 27, 2020 at the Federal Reserve Jackson Hole Conference, Fed Chair Jay Powell declared a new form of monetary policy for the Fed.

For the past 20 years, the Fed has pursued a policy of targeting 2% inflation. They have generally failed miserably at this; inflation has only hit 2% briefly since 2007 and has typically been closer to 1.5% than the 2% target.

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