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Economy

US joblessness set to spike as Covid-19 takes toll on businesses

WASHINGTON (AFP) – With streets in major cities barren, and shops and restaurants forced to close due to the coronavirus pandemic, economists warn of a record explosion of Americans filing for unemployment benefits.

The Labor Department on Thursday (March 26) will release its weekly data on first-time applications for jobless benefits covering the week ending March 21 – the first to show the epidemic’s impact on the US economy.

“Whatever the number, it will be horrific,” said Ian Shepherdson of Pantheon Macroeconomics.

The data have been mundane for the past two years amid a very strong US labor market, but the situation has changed for this lowly report on the frontlines of the virus fallout.

Last week’s report showed jobless claims surged to their highest level since September 2017, especially with a jump in applications from hotel and restaurant workers.

But that was just the tip of the iceberg.

“The consensus for today’s first post-apocalypse jobless claims number (1.5 million), looks much too low,” Shepherdson said, adding that he is expecting a staggering 3.5 million.

White House economic adviser Larry Kudlow acknowledged the report would show a jump, but said the market is expecting it.

“It’s going to be a very large increase,” he said on Fox Business Network.

But economists cautioned that forecasting data in unprecedented times is dicey at best.

The models “are based on prior experience and we have no prior experience of an economy that has largely been shut down,” said Rubeela Farooqi of High Frequency Economics.

“These are extraordinary times that will result in extraordinary outcomes.”

Reports from states and even data on Google searches show that unemployment offices have been overwhelmed in recent days and may have to estimate their totals.

Shepherdson noted that New York alone reported receiving 1.7 million calls last week, “though it’s not clear if all of these calls led to a formal claim.”

Economists are projecting the pandemic’s shutdown could lead to a staggering 14 per cent contraction of the US economy, and the Conference Board on Wednesday said unemployment could rise to as high as 15 per cent later in the year – far beyond the 10 per cent peak hit in October 2009 during the global financial crisis.

Congress is pushing through a massive $2 trillion rescue package to dampen the blow to the economy, which includes a huge expansion in unemployment insurance, boosting the weekly payment by US$600 and extending the benefits to workers who would not normally qualify.

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Economy

Coronavirus raises spectre of depression for US economy as business activity halts

NEW YORK (BLOOMBERG) – The United States is entering a recession. The ultimate fear is that it could turn into a protracted malaise that has some flavour of a depression.

That’s far from the base case, with many analysts and investors taking heart from signs of revival in the original epicentre of the coronavirus – China – and predicting a second-half upturn in the US after the contagion hopefully subsides.

But as business activity halts and layoffs surge, some prominent economy watchers – including former White House chief economists Glenn Hubbard and Kevin Hassett and former Federal Reserve vice-chairman Alan Blinder – have drawn comparisons to the Great Depression, though they’ve stopped well short of forecasting another one.

Former International Monetary Fund chief economist Maury Obstfeld said the world hasn’t seen a synchronised interruption in economic output in decades. The best example the University of California, Berkeley, professor can think of: “Well, maybe the Great Depression.”

The US undoubtedly will suffer a huge economic contraction as businesses close and Americans stay home. By some estimates, the economy is headed towards its worst quarter in records since 1947. JPMorgan Chase & Co expects gross domestic product to shrink at an annualised rate of 14 per cent in the April-June period while Bank of America Corp and Oxford Economics both see a 12 per cent drop. Goldman Sachs Group sees a 24 per cent plunge.

In a Bloomberg interview on Sunday (March 22), Federal Reserve Bank of St Louis President James Bullard predicted the unemployment rate may hit 30 per cent in the second quarter because of shutdowns to combat the coronavirus, with an unprecedented 50 per cent drop in GDP.

While that’s an enormous wallop, it’s only one quarter at an annualised rate. In the Great Depression of 1929-33, the entire economy shrivelled by roughly a quarter as unemployment neared 25 per cent.

Recessions, which refer to periods of significant, broad-based declines in economic activity, vary in length. Depressions, of which there has been only one since 1900, require the downturn to last for a long time, perhaps years.

Whether the coming contraction proves to be prolonged depends a lot on how long it takes to check the contagion.

“Unless this virus miraculously disappears from the population over the course of the next few months, it is a reasonable scenario that we might be in this lockdown setting for quite a while, measured in quarters,” said Harvard University professor James Stock, who is a member of the National Bureau of Economic Research panel that dates the timings of recessions.

If everybody stays home for six months, “it is going to be like the Great Depression”, Mr Hassett, who’s returning to the White House to advise on economic matters, told CNN last Thursday.

POLICY KEY

The downturn’s depth and duration will depend on the economic policy response. It was policy mistakes – particularly by the Fed – that turned the contraction nearly a century ago into a depression.

“I am fearful of that if we don’t do the right policy,” said Mr Hubbard, now at Columbia Business School.

A big concern: The sudden stop leads to widespread firings and bankruptcies that scar the economy for years, as in the Great Depression.

Goldman Sachs sees jobless claims surging to a record 2.25 million in the week ended March 21, while Bank of America projects three million and Citigroup four million. That compares with 281,000 in the prior week and would be more than triple the record 695,000 during one week in 1982.

Finance professor Greg Brown, at the University of North Carolina’s Kenan-Flagler Business School, said unemployment will rise as high as 9 per cent in two months, from February’s 50-year low of 3.5 per cent.

Mr Andrew Hollenhorst, chief US economist at Citigroup Inc noted that with such job loss, “spending is not going to be as easy to restart because you just can’t see the same level of spending if you have people that have lost that income”.

In addition, if companies can’t make planning and investment commitments now, “that can have impacts on spending today but also on potential innovation in the future”, said Prof Tara Sinclair, an economist at job website Indeed and professor at George Washington University.

Unlike nearly a century ago, the Fed has acted fast, cutting interest rates effectively to zero, restarting quantitative easing and resurrecting emergency financing facilities it used during the financial crisis.

President Donald Trump, who has been criticised by some for a sluggish response, has also now recognised the enormity of the coming economic hit.

He said last Saturday that negotiators in Congress and his administration are “very close” to agreement on a plan that an adviser said will aim to boost the US economy by about US$2 trillion (S$2.9 trillion). Majority Leader Mitch McConnell was aiming for a final vote on the measure on Monday.

“The economic hit could be sharp and deep,” said Harvard University professor Jeffrey Frankel. But assuming that infections peak in 2020, “there is no reason why economic activity should stay depressed for a period of years, which I take to be the definition of a depression”.

Some analysts trying to project the economy’s path cite the 1918 influenza pandemic that claimed an estimated 50 million lives worldwide.

In a recent presentation to a virtual Brookings Institution conference, economist Robert Barro said that countries back then typically suffered a 6 per cent reduction in GDP, about in line with that of the last recession but far smaller than in the Great Depression.

He described his findings as an upper-bound estimate of the economic impact from the coronavirus. Global health systems are better equipped to handle contagion now, but the world is more interconnected, he said.

Mr Blinder, now a Princeton University professor, said “we think of a depression as a recession that is very, very deep and very, very long… That’s the kind of thing that could happen” should infections peak only temporarily then return in the autumn.

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Business

Asian Markets Rise but Alarm Persists: Live Updates

The S&P 500 rose 6 percent, rebounding from a 12 percent collapse on Monday, which was its steepest drop since 1987.

Still, even if the financial system functions well, a daunting economic challenge continues to face the American economy, as the spread of the coronavirus forces federal, state and local officials to take simultaneous actions that will cut consumer spending. Such spending accounts for roughly 70 percent of American gross domestic product.

Even as stocks gained, the trading on Tuesday reflected some of these concerns. The best performing parts of the market were traditionally defensive areas, such as the utilities and consumer staples, where investors typically hide out during trying economic times. Oil prices also fell.

Mnuchin warns that unemployment could approach 20 percent without government help.

Treasury Secretary Steven Mnuchin warned Republican senators on Tuesday that the unemployment rate in the United States could approach 20 percent without the intervention of robust economic stimulus measures, according to people familiar with the discussion.

The comments came while Mr. Mnuchin was making the White House’s pitch to lawmakers to back a $1 trillion fiscal stimulus package that would include $250 billion of checks being sent to Americans suffering from the fallout of the coronavirus epidemic.

Mr. Mnuchin said that the jobless rate could go up by 5, 10 or 15 percentage points if there is no intervention, according to two people familiar with his comments. The jobless rate currently sits at 3.5 percent.

Monica Crowley, a spokeswoman for Mr. Mnuchin, said that the Treasury secretary’s comments were not a projection and that because Congress was taking additional action, he did not believe the unemployment rate would reach 20 percent.

“During the meeting with Senate Republicans today, Secretary Mnuchin used several mathematical examples for illustrative purposes, but he never implied this would be the case,” Ms. Crowley said in a statement.

Since World War II, the United States has never seen unemployment rise above 11 percent, the level it nearly reached in the recession of the early 1980s. It reached 10 percent, briefly, during the 2008 financial crisis.

The White House is seeking ways to use smartphone location data in its virus response.

The Trump administration has spoken with large technology companies about how their access to geolocation data from smartphones can aid in the response to the coronavirus pandemic.

At a recent meeting, a group of tech companies discussed the use of anonymous, aggregated geolocation data to respond to the spread of the virus with the White House and other administration officials, according to two people with knowledge of the matter. They also discussed how that would intersect with user privacy, the people said.

The Centers for Disease Control asked during the meeting about the prospect of using the data to track demand for hospitals around the country, which are expected to be deluged by patients, one of the people said. The conversations were first reported by The Washington Post.

Facebook has also discussed with the U.S. government the maps it produces to track disasters using satellite and census data, said a company spokesman, Andy Stone. It is also working to provide nonprofit groups — which can work with local, state and federal authorities — with a second set of mapping tools that use smartphone location data that Facebook users can choose to share.

The possible use of geolocation data raises questions about user privacy, especially as policymakers are increasingly asking about the power of major tech companies like Amazon, Facebook and Google.

But analysis of aggregated data would be different from aggressive measures to track individual patients using their phones. In Israel, for example, the government has moved to use cellphone data to retrace the steps of virus patients.

Reporting and research were contributed by David McCabe, Cecilia Kang, Alan Rappeport, Nicholas Fandos, Jim Tankersley, Carlos Tejada and Daniel Victor.

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