As the global economy is nearing a standstill due to the COVID-19 respiratory disease pandemic, the US government is considering providing $1,000 to all American citizens as part of a massive relief plan. However, observers believe this may not prevent a sharp increase in the unemployment rate.
Strong support packages from the Government
On March 18th, the US Senate finally approved a $100 billion relief package, allowing American workers to take paid leave and receive free testing for the SARS-CoV-2 virus. Unemployment benefits were also expanded under this relief package.
In another move to mitigate the impact of COVID-19 on American households, President Donald Trump directed the Department of Housing and Urban Development (HUD) to suspend all evictions and foreclosures for 60 days on all federally backed mortgages.
HUD Secretary Ben Carson stated in a release that this action would help American families face COVID-19 challenges without fear of losing their homes, while also reassuring the market.
However, it remains unclear whether US Treasury Secretary Steven Mnuchin and the Trump administration can finalize the $1.3 trillion emergency spending plan for Congress to pass. If implemented, the plan will provide immediate cash assistance to the American people.
The rescue package will include approximately $300 billion injected into the economy by allowing businesses and individuals to defer up to $1 million in tax payments. This measure has already been approved by the US Treasury.
However, the remaining $1 trillion still requires congressional approval. It is expected that these funds will be disbursed in two phases in April and May. Americans may receive up to $1,000 through this relief package, but the actual amount will vary based on income levels and household size. The total cost of these operations is estimated at around $500 billion, according to documents from the US Treasury.
Additionally, the plan will provide $300 billion in loans to small businesses so they can cover employee wages for up to six weeks.
The risk of a sharp increase in unemployment rates
On March 18th, US Treasury Secretary Steven Mnuchin warned Congress that the country’s unemployment rate could rise to 20%, far exceeding the current 3.5%. However, President Trump responded that this figure represents a worst-case scenario and the country is not close to that scenario.
Nevertheless, economists warn that the US unemployment rate could reach 20% if the government does not implement large spending packages promptly.
Gregory Daco, Chief US Economist at Oxford Economics, stated that the US economy is facing a sudden “seizing up.” This could potentially be the worst contraction phase in US economic history.
The economist noted that even a 5% unemployment rate in the US could result in the loss of about 5 million jobs. By comparison, about 8 million jobs were lost during the Great Recession following the global financial crisis in 2008, when unemployment peaked at 10% in October 2009.
According to Adam Posen, former member of the Monetary Policy Committee at the Bank of England, without quick fiscal stimulus measures, a 20% unemployment rate in the US is not out of the question.
Posen agreed that Secretary Mnuchin’s “dire” warning was appropriate.
Economist Diane Swonk of Grant Thornton, a consulting firm, also shared similar views. She initially estimated that US unemployment could jump to 6.4%, resulting in the loss of about 5 million jobs. However, she cautioned that the actual figure could be much higher.
Economists have been continuously revising their economic forecasts. Some are now predicting alarming declines, with estimates suggesting the US economy could contract by up to -12% in the second quarter of 2020 (April-June). Moreover, this figure could potentially increase further due to the complex dynamics of the current pandemic that many forecast models are struggling to keep pace with.
