St. Louis Fed chief predicts U.S. unemployment to spike from 3.5% to 30% in second quarter

March 30 - April 5, 2020

By Wesley Brown 


U.S. record string of 128 straight months of GDP growth expected to end in March


St. Louis Fed President and CEO James Bullard and other top U.S. economist are predicting that the COVID-19 pandemic could jump as high as 30% in the second quarter, leading to an unprecedented 50% drop in gross domestic product and an end to 130 consecutive months of expansion.


In an interview with Bloomberg News on Sunday (March 22), the contrarian Fed economist who oversees the expanse Eighth District that includes Arkansas and portions of six other states said the Trump administration and nation’s central bank needs to respond with a stimulus package strong enough to replace at least $2.5 trillion in lost income. 


As one of 12 Fed regional presidents, Bullard recently rotated off the influential Federal Open Market Committee (FOMC) that cut interest rates to zero percent and increased agency holdings of Treasury securities and mortgage-backed debt by a total of $700 billion. He said the Fed is still ready to do more to make sure financial markets remain viable during this unparalleled period of volatility.


“Everything is on the table” for the Fed as far as additional lending programs, Bullard said in the Bloomberg News telephone interview from St. Louis. “There is more that we can do if necessary” with existing emergency authority. “There is probably much more in the months ahead depending on where Congress wants to go.”


While Bullard was commenting on the stimulus package to ensure the U.S. economy fully recovers, the $1.8 trillion Coronavirus Aid, Relief, and Economic Security Act or the CARES Act, hit a snag in the Senate on a proposed $500 billion discretionary fund to held by the U.S. Treasury. Democrats and some Republicans senators fear the fund will be used to bailout the airline industry and other selected sectors.


In a note on St. Fed’s website concerning COVID-19, Bullard said the spreading virus is having a profound effect on people and economies in the U.S. and across the globe. The “third” and final reading of the nation’s economic might and output in the fourth quarter of 2019 will be released on March 26, according to the U.S Bureau of Economic Research, housed in the U.S. Department of Commerce.


In February, the BEA reported that real gross domestic product (GDP) increased 2.1% in the fourth quarter of 2019, based on the group’s second reading that includes less-than-complete economic data. Even before Bullard’s Sunday forecast surprise based on the COVID-19, a panel of Federal Reserve economists had already predicted that the U.S. economy would cool to a baseline of 2% growth through 2020 and 1.8% in 2021 in beyond.


“These are challenging times, and the Federal Reserve System is united in a common goal: to serve the American people. The (FOMC) — of which I am a participant — has authorized the Federal Reserve to take action by lowering the targeted range for the federal funds rate, enhancing liquidity in financial markets and facilitating increased lending by financial institutions during this disruptive period,” said Bullard.


“We are driven by our public service mission, our responsibility to promote the stability of the financial system, and by our congressional mandate to foster maximum sustainable employment and price stability,” continued the Eighth District Fed chief. “At the St. Louis Fed and at our branches in Little Rock, Ark., Louisville, Ky., and Memphis, Tenn., we are carrying out our mission while actively monitoring the developments of the spread of COVID-19 and its ongoing impact on our nation, our District and our workforce.”


If U.S. GDP growth dips into negative territory in March, as expected, it will end the longest period of economic growth in America history, beating the previous record that lasted from March 1991 through March 2001. The current expansion began after the Great Recession following the last stimulus package under former President Barack Obama in July 2009 and has continued into the last quarter of 2019, BEA data shows.


Arkansas’ healthy job market expected to see coronavirus fallout in coming weeks, months


Notwithstanding an expected ten-fold spike in U.S. unemployment that fell to a near record low of 3.5% in February, Bullard did not provide a unemployment forecast for the Eighth District, where Arkansas and most of the region is seeing jobless rate at or below the U.S. average. 


According to the U.S. Labor Department’s Bureau of Labor Statistics, the revised jobless rates in the Eighth District ranged from a low of 3.1% in Indian to the nation’s second-highest jobless rate of 5.5% in Mississippi. In between, Arkansas, Illinois and Missouri all matched the national average at 3.5%, while Kentucky stalled at 4.3%.


In Arkansas’s most recent job report for January, the state’s brimming civilian workforce stood at a healthy 1,366,290 workers as more than 2000 workers were added to payrolls in the first month of 2020. However, although the state’s February and March report will not be released by the BLS until March 27 and April 17, respectively, there are already signs in the state’s job market that unemployment rolls are spiking.


For example, Gov. Asa Hutchinson has already charged Arkansas Department of Commerce Secretary Mike Preston to expedite unemployment benefits to assist Arkansans whose employment status may be impacted by the COVID-19 outbreak.


Hutchinson has also directed Preston to waive current work-search requirements for 30 days, allowing the unemployed to receive benefits without seeking other employment. This exception applies only to those employed by businesses that are temporarily closed with plans to reopen.


In a third action first announced on March 17, the governor also directed state Commerce officials to allow the unemployed to apply for benefits online or by telephone rather than in person in a further effort to minimize the risk of spreading COVID-19. 


“These important changes will allow Arkansans impacted by COVID-19 to file unemployment insurance claims, register for work, and seek job-placement assistance in a timely manner while also protecting ADWS employees and mitigating the spread of the virus,” Hutchinson said his daily COVID-19 online media briefing.


Besides Bullard’s dire job market and GDP forecast, the Ball State’s Center for Business and Economic Research (CBER) in Muncie, Ind., also noted in recent research report that “extreme social distancing” will create a recession as mass layoffs cause unemployment to exceed 10.5% nationally 45 days. Within 90 days, unemployment may rise to 14.6% nationally, the Indiana forecasting group said.


“These are likely very conservative estimates, yet it argues that job losses in March, April, May, and June may be the four largest in U.S. history, topping the 1.9 million jobs lost in the weeks following V-J Day in September 1945,” said CBER director Michael Hicks. “This level of job losses does not consider the effect of school closures on labor supply by households. This study does not assess the impact of supply chain disruptions on manufacturing, nor does it include the extreme shock to household wealth caused by stock market declines.”


CBER’s analysis also said the effect of a 45-day social distancing will reduce GDP significantly, O.5% nationally and cause 10.6 million layoffs nationally. After 90 days of social distancing, the forecasting group predicts 21 million U.S. works will lose their jobs and GDP will fall 0.9 nationally.


“Moreover, this estimate extends only 90 days and does not include much broader impacts of longer social distancing,” he said. “We urgently need state policies to speed resources to displaced workers, and we need policies such as workshare and relief from job search, job tenure, and earnings requirements.”


Hicks also pointed out that state and federal policies that encourage extensions to borrowing terms should be broadly encouraged. 


“This should extend to both small businesses and households,” he said. “Federal policies that supplement income for all residents are required. Universal basic income payments, with a fixed duration, would provide economic stabilization while minimizing labor market supply effects. 


Industry officials ask Trump administration to exempt construction trade from COVID-19 slowdown


In other areas of the job market, construction industry leaders and union officials on Monday (March 23) called on the federal government to exempt construction from regional, state and local work shutdowns.


“Government officials at all levels should treat the construction industry and the work it performs as vital and essential to the critical industries that must remain in operation,” the Associated General Contractors of America (AGCA) Chief Executive Stephen Sandherr and North America’s Building Trades Unions President Sean McGarvey said in a joint statement.


“Construction workers provide an invaluable economic service, maintaining and improving the nation’s infrastructure, including critically important energy and communication systems, roads and bridges, and social infrastructure, including police, fire and health care facilities,” the group said.  “Construction workers’ unique skills are essential now and in the coming weeks to construct, maintain, and repair critical infrastructure, and to build temporary health facilities and retrofit and expand existing ones.”


Earlier on March 20, AGCA officials said the coronavirus pandemic has caused more than one out of four contractors to halt or delay work on current projects, based on a nationwide industry survey. By March xxx, the construction trade group and many others were still awaiting word on the Senate’s omnibus trillion-dollar stimulus package that includes $1,200 to most Americans.


“The Senate proposal offers a good start to helping offset the sudden drop-off in work many contractors are experiencing,” said Sandherr. “But without real investments in new infrastructure, compensation for contractors’ lost work and up-front funding for paid sick and family medical leave, it does too little to help the industry and its nearly eight million employees.”