While Friday’s optimistic jobs news showed the U.S. added 2.5 million jobs in May rather than the loss of 9 million that most experts were expecting, the economy is not yet out of the woods. Here’s what could derail the U.S. recovery.
- New coronavirus cases
87% of panelists in the June National Association of Business Economists Outlook Survey said that a second wave of Covid-19 infections was the biggest risk to the economy in 2020.
Another wave of the virus could force businesses to reclose and put even more stress on an already-fragile economy; the U.S. won’t “inevitably” see a second wave, Dr. Anthony Fauci said last week, though he acknowledged that new infections will rise in the fall and winter.
- Government layoffs
The May jobs report also noted that while retail, hospitality, and construction jobs have begun to bounce back, government workers are still being laid off with more than half a million state and local government jobs eliminated in the same period.
With state budgets facing severe shortfalls across the board because of the coronavirus, more trouble could be ahead for the largest employers in the nation.
- Stimulus uncertainty
New estimates from the Congressional Budget Office show that extending the CARES Act’s extra $600 unemployment benefits until 2021 would reduce incentives to work for those who take home more from unemployment than they would otherwise earn, and that has the potential to depress both output and employment.
Lawmakers are still divided over how to address the raft of expiring benefits (which also include a moratorium on certain evictions), with Democrats pushing for more immediate rescue spending while Republicans have advocated for waiting to see how existing stimulus spending shakes out in the economy.
These risks come as the stock market stages a remarkable rally— right now, the S&P 500 is up over 40% from its coronavirus crisis-level low on March 23, 2020. Markets have a long history of looking beyond periods of social or political unrest, even when it seems impossible that stocks could be so divorced from world events.
“Investors are continuing to ignore the three P’s—pandemic, protests and politics—and are instead focused on what increasingly is being interpreted as a quicker and better than expected recovery in the economy,” David Donabedian, chief investment officer at CIBC Private Wealth Management, told the Wall Street Journal last week.
The U.S. economy added 2.5 million jobs in May as the unemployment rate dipped to 13.3% from 14.7% and more than 20 million jobs lost in April. Despite the unexpectedly positive news, however, unemployment levels remain at record highs. A data “misclassification error,” acknowledged by the Bureau of Labor Statistics in the footnotes of May’s report, means that the true unemployment rate for the month was likely three percentage points higher than reported—about 16.3%.
WHAT TO WATCH FOR
As lawmakers struggle to reach an agreement over extending the CARES Act’s emergency benefits, May’s jobs report has the potential to derail the next round of federal rescue legislation.
There is now concern among lawmakers that Friday’s positive numbers—touted by President Trump as a “stupendous” victory for the economy and his administration—will erode enthusiasm for another big relief package. Lawmakers will undertake tough negotiations in the coming weeks.