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Spending, jobs could gain steam as economy reopens

The economy got two pieces of good news yesterday on the job front: ADP private job losses were much less than anticipated, and weekly jobless claims released by the Department of Labor (DOL) came in at expectations.

“In the week ending May 30, the advance figure for seasonally adjusted initial claims [for unemployment insurance] was 1,877,000, a decrease of 249,000 from the previous week’s revised level,” said the DOL release.

One weak spot was continuing claims that brought unemployment up 0.5 percent to 14.8 percent.

Economist are hoping that May represents the high water mark for joblessness, but are unsure if traditional methods of measuring unemployment are relevant now.

“There is growing disagreement among economists about whether May will represent the worst of the crisis for the job market,” said Glassdoor senior economist Daniel Zhao, according to the Hill.

“While UI [unemployment insurance] claims have acted as a useful real-time indicator thus far, we may soon enter a phase where UI claims understate the health of the labor market as claims remain elevated but hiring picks up,” he added.

At issue is how quickly hiring will pick up to replace job losses and whether another round of COVID will necessitate another round of lockdowns.

Some Wall Street analysts are optimistic that the economy can recover quickly, called a V-shaped recovery.

“We will see a V-shaped recovery for two reasons – the historic steepness of the decline in activity, and the unprecedented policy response,” wrote Michael Wilson, Chief U.S. Equity Strategist at Morgan Stanley.

Thus far, the federal government has injected $3.6 trillion in direct aid to help mitigate the effects of the COVID lockdown. Congress and the president are suggesting that more money is on the way– how much and in what form remains to be decided.

By comparison, the Obama stimulus package in 2009 was $831 billion or just 23 percent of the current COVID package.

In addition to the fiscal stimulus described above, the government is planning on purchasing around $3.5 trillion in government securities by the end of 2020 to keep the banking system awash in money and interest rates low, also known as monetary stimulus.

Economists hope that the spending package and monetary stimulus is enough to create rapid job growth as the economy opens up.

One hopeful sign is the saving rate.

Americans have stockpiled cash at historic rates as extra stimulus checks have come in, in part because few shopping opportunities existed during the lockdown. Also, Americans have been uncertain about future wages, one of the key determinants of spending decisions. When people are unsure, they save.

“The personal savings rate hit a historic 33 percent in April, the U.S. Bureau of Economic Analysis said Friday,” reported CNBC. “This rate — how much people save as a percentage of their disposable income — is by far the highest since the department started tracking in the 1960s. April’s mark is up from 12.7 percent in March.”  

The question is how quickly will Americans start spending that money?

“The paradox is that if everyone across the broad economy is hunkering down, that only makes the recession worse,” said Marc Odo, portfolio manager at Swan Global Investments. “The paradox of thrift is a negative feedback loop. The more people save, the less they spend; the less they spend, the worse the recession gets; the worse the recession gets the more they save.”

The faster people resume their old jobs– or get better ones–the faster old spending patterns will return.

And the faster the economy will recover.

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