What will high unemployment in the US mean for the world’s largest economy?

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What will high unemployment in the US mean for the world’s largest economy?

Unemployment in the US defied expectations in May and declined to 13.3% – down from 14.7% the previous month. This equates to 2.5 million jobs being regained. However, despite this good news, the US is still suffering from unemployment rates that have not been seen since the Great Depression.

The decline in unemployment will be welcome news to Donald Trump who, five months off from an election, needs the US economy to grow. While he has been fortunate to see the economy improve since he took office, the coronavirus outbreak has put obvious and immediate brakes on that growth to cause 20 million job losses in April 2020 alone.

So what were the immediate effects of the decrease in the US unemployment rate?

The impact of the shock good news took rapid effect on the markets that saw sharp rises in both the US and Europe. The uptick in numbers was evidently what investors were waiting to hear. Recently, markets were sluggish as hopes of a V shaped recovery were starting to fade. However, there have been other economic figures that already point to growth too. For example, retail sales in May rebounded by a huge 17.7%.

But, while the unemployment rate in the US did not increase in May, it’s important to remember it is still at unprecedented highs. Plus, what makes these highs particularly painful to the economy is the unemployment rate was at just 3.5% in February – only three months ago.

So what does high unemployment in the US mean for the world’s largest economy?

Since the pandemic took hold, any labor market gains from the previous ten years have been completely eradicated. And while that in itself is a worrying fact, even if the markets seem to be showing otherwise, the pandemic is still rife in the world – and the US itself. The longer it continues, the less temporary job losses are, and the more permanent they become.

This has more long-lasting effects on an economy as it makes the possibility of a bounce-back so much harder. For example, it goes without saying that high, permanent unemployed levels are a considerable drag on any economy – even the world’s largest. And, arguably, we are likely to see yet more permanent unemployment too. For, while the immediate shock of the pandemic caused wide-scale job losses, past recessions have seen their peak unemployment rates being hit several months into a recessionary cycle. The US is only three months into its current recession. It is highly possible therefore that the unemployment rates could rise over the next few months.

And this is all in the face of the fact that there is still no vaccine, nor hope of one for another few months yet at least. Plus, while some of the US states have successfully reopened themselves for business without rising infection rates, others are struggling to contain outbreaks. The chance of a second peak is a very near and present danger.

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What else could happen in the US due to high unemployment?

There are other implications of the high unemployment rate in the US caused by the pandemic other than a slow recovery. Due to the lockdown measures imposed in the US, the industries hit were largely the services and hospitality sectors, as well as education. This has had a massive impact on what types of people have become unemployed. In particular, it has affected black and Hispanic groups more acutely than any others. This is due to black and Hispanic workers being more likely to be in low paid jobs in certain industries – for example hospitality – which were the first to be affected by the repercussions of shutdowns. Worse still, those hardest hit by an economic contraction usually only benefit from a recovery once it has become well established.

These are groups of people who already feel marginalized and forgotten by the US system. Which, given the close proximity of the next US general election, could have serious ramifications for Donald Trump. This has only been exacerbated by the events surrounding George Floyd in Minneapolis in May.

What other issues will trouble the US in the future?

There are other problems that will burden the US too, in addition to political instability, racial tensions and high unemployment. Even with the glimmer of good hope that the lower than expected unemployment figures gave, there is still the fact that the US has thrown a lot of money behind softening the blow of the Coronavirus pandemic. It is believed that a large proportion of the $1.6tn in federal aid put aside to help has actually already been spent, with another large package being debated in Congress. While it is currently facing opposition from Republicans, the Democrats are hoping to pass a package twice the size of the first.

In short, the amount of spending that the Fed has undertaken and the size of the relief package passed by Congress already, coupled with high unemployment, should sadly point to a long and deep recessionary cycle. While the causes for the contraction in the US economy and high unemployment are very different from any recession previously seen, the impacts will still be keenly felt by many and for years to come too.

The OECD recently projected that the US’s GDP would contract by 7.3% in 2020 if it only contends with one wave of the pandemic. If it has two, then that could go down to 8.5%. In terms of unemployment, the organization has forecasted the United States will see unemployment only dip to 10% by the end of 2021. Despite the hard and fast route the US took into recession, the long term outlook for many of its population therefore looks bleak.

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