Forget Crashing Q2 GDP: Growing Unemployment Filings Are The Real Scare Factor

This is a day when national economic news and personal finance run into one another with a resounding and sickening crunch.

The first estimate of GDP (gross domestic product, or a measure of the value of all goods and services sold) for the year’s second quarter came out this morning. It was a record: a 9.5% drop from the first quarter. If that pace continued, we’d be seeing an annualized rate of 32.9%.

This wasn’t unexpected. From April through June, large swaths of economic activity, especially in consumer shopping (representing 68% of GDP), came to a halt. Heaven knows how many businesses were shut down. Essential services, like grocery stores, had limited goods available.

A total mess, but a measure of what has already happened. Ugly flood water under the bridge. Countless investment marketers say, time after time, past performance is no guarantee of future results. They may be better. Or worse.

And there’s more worrisome news in unemployment data. That is what the country and its government need to address.

A GOP plan to cut additional unemployment insurance (UI) payments from the $600 a week down to $200—which, with state payments, would provide an average targeted 45% of what people had made before—already threatens grave economic damage.

At last count (most recent data from the end of May), there were 5.4 unemployed people per open job. The issue has not been millions of individuals deciding to live the life of Riley on overly generous congressional early response to the Covid-19 effects on U.S. economics.

As some Yale economists noted in a recent study:

We find that that the workers who experienced larger increases in UI generosity did not experience larger declines in employment when the benefits expansion went into effect. Additionally, we find that workers facing larger expansions in UI benefits have returned to their previous jobs over time at similar rates as others. We find no evidence that more generous benefits disincentivized work either at the onset of the expansion or as firms looked to return to business over time.

There aren’t enough jobs right now to accommodate all the people who need to work and trying to prod people into gainful employment doesn’t change that fundamental.

Given the huge portion of GDP that is consumer spending, it’s a short trip across an open border from having a lot of employed adults to seeing an entire economy tank.

Beyond the clear moral danger of watching people drown when there is a life saver someone could toss to them are the practical implications that should be heeded by people of any political persuasion:

1.      Unemployment rises because of new closings driven by virus spikes.

2.      Cuts in additional UI payments don’t act as a stick to push people into work because there aren’t nearly enough jobs for them.

3.      Inadequate money means, at best, highly reduced spending.

4.      At worst, people get evicted, lack money for food, and become homeless, needing even more support.

5.      With significantly less spending, businesses in highest-hit areas come under additional pressure, with many going out of business.

6.      The number of jobs drops and number of unemployed increases.

7.      The economy falls even further as the mechanism becomes a self-reinforcing vicious circle.

As of July 11, before some big states had to start closing again, there were 30.2 million on some version of UI, or about 18.5% of the labor forceؙ.

Putting it differently, even as some were again talking about a V-shaped recovery and things going back to normal—right before the virus reasserted its ability to spread—close to a fifth of working people had no job.

What kept the second quarter from cratering even more than it did was the flood of aid to people who needed it. Even with this, people are in trouble. The ship of state is heading squarely into an iceberg and there is little time to steer it around.

About 26.5% of surveyed adults either missed their last rent or mortgage payment or have either slight or no confidence they can pay the next one, according to the Census Bureau. More than a third expect someone in their household to lose employment income over the next four weeks, while 51.1% had already seen a loss in employment income.

What happens from here outward will determine the course of the economy, possibly for a decade or even more, if the Great Recession is any predictor.