MNI POLICY: Fed Models See Year-End Unemployment at 8%-17%

--Grim Labor Market May Normalize Late Next Year

By Jean Yung

     WASHINGTON (MNI) - Fed economists forecast the unemployment rate being

elevated for the rest of the year and not returning to pre-pandemic levels until

at least the second half of 2021, even as states begin to lift stay-at-home

restrictions. 

     A San Francisco Fed working paper projects unemployment could remain as

high as 16.7% in December before falling to 5.9% by the end of 2021, based on

historical patterns of hiring coming out of a recession. More upbeat research

published by the Cleveland Fed Thursday sees the jobless rate ending the year

around 8%, reaching 5% by July 2021. 

     "It's a grim portrait that we're depicting," San Francisco Fed economist

Nicolas Petrosky-Nadeau said in an interview with MNI. "Given the initial

unemployment insurance claims at the end of March, the numbers we ultimately

ended up with unfortunately did not entirely surprise us." 

     Analysts surveyed by Bloomberg expect the Labor Department to report Friday

that 21 million jobs were lost last month, lifting the unemployment rate to 16%.

Even that staggering figure will underestimate losses as workers put job

searches on hold, effectively dropping out of the labor force for a period. 

     --9 MILLION HIRES 

     A return to pre-coronavirus levels of unemployment next year "would require

a pace of hiring activity that is much more rapid than recorded during any past

recovery, which seems unlikely given the severity of disruptions to employment

relationships, business ties to customers, and financial markets,"

Petrosky-Nadeau and co-author Robert Valletta wrote in their paper. 

     An unprecedented 9 million hires each month in the third quarter -- triple

the fastest rates following the Great Recession -- are required to reverse the

job losses seen so far this year, the economists find. 

     Consumers' reticence to resume their spending patterns may be a limiting

factor, Petrosky-Nadeau said. "Not knowing whether they'll generate typical

business activity will limit the hiring activity firms will undertake." 

     --LESS STARK SCENARIOS

     The Cleveland Fed paper, using historic data on the rate of workers flowing

into and out of the pool of unemployed, estimates the jobless rate jumped to 12%

in April and peaks at 16% in May. As governments begin reversing school and

business closures next month, the unemployment rate could fall "rather swiftly"

to 7.5% by December. 

     "In 2021, with a continued recovery of the economy, it reaches 5 percent in

July," according to authors Aysegul Sahin, Murat Tasci and Jin Yan. An

additional month of drastic virus mitigation efforts could add another 1

percentage point to the peak unemployment rate and push it to June.

     If the economy starts seeing bankruptcies and other permanent dislocations,

or the pandemic does not pass soon, "the effects on the labor market might be

notably different from what we find here," they said.

     The papers don't show unemployment returning to the half-century lows of

3.5% recorded before the pandemic, suggesting of the risk of a permanent loss of

worker skills and output Fed Chair Jerome Powell cited at the last rate

decision.  

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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