Is an Economic Depression Coming? Fed: US Unemployment Rate 40% Possible

Trump US Coronavirus job losses risk what is an economic depression in 2020
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Another Forecast is an Economic Depression Warning

Many people ask, “What is an economic depression?”

In the simplest of terms: A protracted, very deep, very painful downturn.

Now some people may argue about this requisite, or that requisite, but in fact, there is no one standard definition what is an economic depression. The truth is, we just all kind of know one when we see one.

That raises an interesting question: If we do indeed fall into something more than just a bad recession (a depression), say, something on the 1 to 10 recession scale where 1969 was about a 1 and 2007-09 was a 10 (so we’re talking numbers over the top here), does the Trump administration acknowledge that we have fallen into what is an economic depression or do they continue to say that everything is “more or less fine,” “the fundamentals are strong,” that it “might be a good time to buy stocks,” etc.

I’m willing to bet you may have the same hunch as I have.

I digress. Back to the study.

So it finally made mainstream news today, even though the study was conducted last week. It is worth pointing out that at first the numbers were so mind numbingly bad, that in all fairness, many outlets surely didn’t want to pick it up and run the story for fear of being labeled “alarmists,” “haters,” and “Fake News!”

But this is not a media outlet running numbers and putting them out there as a headline, eye-grabbing, click-clicking, shocking headline. It’s the Federal Reserve out of St. Louis, who among the Fed branches, is arguably the branch that does the most of this kind of research, and does it well:

Fed Study: US Unemployment Rate Forecast

Calculating Second-Quarter Unemployment Rate

These two numbers were obtained by applying different methodologies and classifications to two different datasets. This means that while there may be significant overlap, each measure will also be capturing some aspects that the other ignores.

For this reason, we simply took the average of those two numbers as a point estimate for the total number of workers who will be laid off during the second quarter. This resulted in 47.05 million people being laid off during this period.

Summing to the initial number of unemployed in February, this resulted in a total number of unemployed persons of 52.81 million. Given the assumption of a constant labor force, this resulted in an unemployment rate of 32.1%.

Civilian labor force in February 2020 = 164.5 million (BLS via FRED)

Unemployment rate in February 2020 = 3.5% (BLS via FRED)

Unemployed persons in February 2020 = 5.76 million (#1 * #2)

Workers in occupations with high risk of layoff = 66.8 million (Gascon blog post)

Workers in high contact-intensive occupations = 27.3 million (Famiglietti/Leibovici/Santacreu blog post)

Estimated layoffs in second quarter 2020 = 47.05 million (Average of #4 and #5)

Unemployed persons in second quarter 2020 = 52.81 million (#3 + #6)

Unemployment rate in second quarter 2020 = 32.1% (#7 / #1)

Summary of Calculations

It is worth emphasizing that this is a point estimate that makes several important assumptions. One way to think about how to bound this estimate is to take the Famiglietti-Leibovici-Santacreu number minus 10 million (workers in education and health care, who are less likely to be laid off) as an optimistic estimate for the number of layoffs during the second quarter and the Gascon number as a more pessimistic estimate. This results in unemployment rates between 10.5% and 40.6%.

https://www.stlouisfed.org/on-the-economy/2020/march/back-envelope-estimates-next-quarters-unemployment-rate

Well, today, CNBC has the study a front page story:

Coronavirus job losses could total 47 million, unemployment rate may hit 32%, Fed estimates

Economists at the Fed’s St. Louis district project total employment reductions of 47 million, which would translate to a 32.1% unemployment rate, according to a recent analysis of how bad things could get.

The projections are even worse than St. Louis Fed President James Bullard’s much-publicized estimate of 30%. They reflect the high nature of at-risk jobs that ultimately could be lost to a government-induced economic freeze aimed at halting the coronavirus spread. 

Click here to read the rest of this article on www.cnbc.com

There are a few caveats, as CNBC and the study itself point out.

The research finds the most likely rate of how bad things could get to be is 32.1% U3 Unemployment. THAT’S REALLY BAD. The highest the unemployment rate officially got during THE Great Depression was about 25%.

And as we have talked about economic depression warning elsewhere about what is an economic depression, to be a depression, it needs to be not just sufficiently deep with spectacularly high unemployment, but also at least longer than the average recession. Average recessions last about 11 months in the post WWII era.

It is possible, and some would even aspirationally say more likely than not, that we bounce back in the third quarter, which would argue against calling the outcome here, however deep, a depression.

But again, if the virus is not contained, if deaths are still mounting up, and let’s not forget, if the unemployment rate in the US is already well into double digits, SHIT JUST STARTS TO BREAK DOWN.

People miss mortgages. And car payments, etc. Lenders go under. Banks could even fail. Companies that used to hire lots and lots of people can go bankrupt. Homelessness may skyrocket as it did during the Great Recession, or worse. Shit just starts to break at some point. And then, it may be too late to lock in the potential to just bounce right back by Fall.

And then, if the unemployment is high, and people are really suffering, and things aren’t turning around by the end of the year. Well. In pretty stark and simple terms, you have it. You have what is an economic depression – because you, I, and everyone else who isn’t blindly committed to Donald J. Trump and/or the Republican Party, will see clearly what it is we are dealing with.

That’s when we will know for sure if what this thing is, is an economic depression coming, and not ‘just’ a really bad “V-shaped” recession.

thi sis an economic depression look

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