What Are We Learning About the Economic Decline?

Each week we learn about the new job losses caused by the COVID crisis. Through the first part of May, the number of people who had lost their jobs and had filed for unemployment insurance had accumulated to 36 million—22 percent of the labor force. Many others have faced cutbacks in hours worked. The job losses have hit lower-wage workers the hardest. A recent survey indicates that 40 percent of those earning $40,000 or less lost their jobs in March. This share likely has climbed since those numbers were released.

For comparison, the unemployment rate topped out at 10 percent during the 2008-2009 recession. The current job situation is approaching that of the 1930s when unemployment hovered around 25 percent. There is an important difference, though. The bulk of those out of work now are collecting unemployment insurance benefits. Indeed, these benefits were boosted $600 per week by the CARES Act of late March. However, unemployment benefits are complicating our assessment of the current situation because many workers have opted for unemployment status or have been reluctant to return to work because they gain more by being unemployed than by working.

The COVID crisis has led to a sharp drop in both aggregate demand and aggregate supply. The downturn in demand is illustrated by the plunge in retail sales by 25 percent over March and April. Especially hard hit have been restaurants and bars, which saw sales collapse more than 75 percent over those two months. And this does not include many services, such as hair care, many of which came to an even more abrupt halt. Amid the uncertainty, households have hunkered down. They have postponed purchases of big-ticket items, such as cars and trucks, and boosted savings. Indeed, the saving rate jumped to 13 percent in March, from 8 percent the month before, and is poised to rise further in April. Similarly, most businesses have been postponing investments.

Lockdowns and other restrictions also are curbing aggregate supply. Manufacturing output contracted nearly 20 percent over March and April. The drop was especially sharp in motor vehicles. Of note, food production declined 9 percent over those two months, in part reflecting shutdowns of meat processing plants because of the COVID crisis.

The behavior of prices at the consumer and producer levels can give us some idea of the interplay of demand and supply. Consumer prices fell 1-1/4 percent over March and April and producer prices 1-1/2 percent. Of course, the crash in the price of oil in April (see April 21 post, Today’s Crude Oil Glut) contributed to these declines. But declines occurred in several other categories, such as apparel and motor vehicle insurance (both down about 7 percent). In contrast, there was a notable increase in the price of food at home (3 percent), especially processed meat and eggs, as people shifted away from restaurants. At the producer level, processed food prices were down over these two months. The difference in food prices between the producer and consumer levels likely reflects bottlenecks in the supply chain in redirecting food produced for restaurants to grocery stores.

At this point, the evidence does not suggest that the various federal relief efforts (see April 4 post, Is There a “V” in the Corona Virus Shock?) and the Fed’s massive injection of liquidity (see May 5 post, Are We Drowning in Fed Liquidity?) are proving to be inflationary. Absent these programs, though, prices likely would have been weaker.