As the duration of unemployment increases, it becomes more likely that the loss of job will be permanent, rather than just a temporary vacation.
Despite the recent positive economic reports, the US economy is in a precarious position.
The economy currently depends on the consumer's ability to spend. However, we know that current consumer spending numbers and habits are inflated. Retail sales returned to pre-pandemic levels in the summer, but this was mainly due to increased unemployment benefits. For the first time, personal income remained high despite a high unemployment rate and a decline in compensation.
Preview of Friday's job report: The US September job report will show the economy is entering a weaker phase
Don't let the numbers fool you. If Americans stop working or receive more government aid, the consumer – and the economy – will finally face the realities of the recession.
When the pandemic started, the thought was that unemployment would be “temporary” and many who were laid off or on leave would shortly be returning to work. That's not what happened. Temporary layoffs result in permanent job losses, according to figures in the August employment report.
This could be attributed to a few factors. The Corporate Paycheck Protection Program, which provided assistance to retain additional workers, has expired. For some industries, such as the aviation industry, government funding was contingent on layoffs being halted by the end of the third quarter – September. 30th
Because of this, we are now seeing layoffs and this is a trend that could continue well into the fourth quarter.
Another factor is that companies that only wanted to close temporarily have now decided to close permanently.
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According to the Yelp Economic Average report for Q2 2020, 79% of closed businesses said they were closing temporarily, while 21% announced permanent closings. In the following months, the number of permanently closed stores grew steadily, while the opposite was the case for temporary closings. By July, the number of permanently closed stores rose to more than 50% of the total number of announced closings.
Big companies – including Ford
– Announce that vacation days will now become layoffs as the economic recession lingers. This is a structural shift in the way we classify unemployment, which is growing despite the fact that unemployment figures exceeded expectations in August.
Read: Disney plans to lay off 28,000 workers, Exec says the impact of the California pandemic has worsened
In reality, the number of marginally tied workers has increased. “These people do not work and want a job but have not actively looked for one in the past four weeks and are therefore not considered unemployed. This could be because they are hesitant to return to the workforce, or they may not have coverage for childcare or home teaching.
The bottom line is that with no additional incentives, there is an impending “income cliff” that will deal a significant blow to the economy in the fourth quarter. This will be the first time in 2020 when real disposable income falls to pre-pandemic levels and consumers are really feeling the effects of the current recession.
Knowing that the health of the U.S. economy depends on consumer purchasing power, that approaching cliff will reverberate across the economy by the beginning of 2021.
Also read: Private sector employment growth in September is the strongest in three months: ADP
Danielle Marceau is a Senior Economist at Prevedere.