The unemployment rate—it goes up to double digits, high teens, by some forecasts you've seen 20% and more than that. But when people go back to work in the third quarter or the fourth quarter, then the unemployment rate comes down. Where's it going to settle down to, how quickly is it going to be? Firms are still in place, they have survived, they have the wherewithal to call back workers. They continue with the previous business model. How many of those were able to do that? I think the unemployment rate is going to be a big measure of that. If we face an unemployment rate of 9% at the end of this year, well, it takes time to get people back, but I think the unemployment rate at the end of 2021 is going to be a very important marker. If it comes down to something like 5% or less than that, then we're in the vicinity of where we were in 2019—you know, higher than 3.5%. ... And I do think that the baseline outcome where the unemployment rate goes down to the 5% or 6% range at the end of 2021 involves a lot of things going right. And I'm optimistic that we can do that, but it takes commitment and it takes patience, too. Patience is usually in short supply.
—Chicago Fed President Charles Evans, May 5, 2020
Later today, we will get the April employment report. The news is expected to be truly horrible, with an anticipated 22 million decline in nonfarm payrolls and a jump in the unemployment rate to 16.0%, from just 3.5% in February. This would be the highest (and fastest) increase in the unemployment rate since the 25% reached in the Great Depression. It will reveal that all of the jobs gained during the last economic expansion of over 10 years will have been wiped out in just six short weeks. For financial market participants, much of this weakness has already been priced in; and unless the figures come out to be much worse than anticipated—though the range of forecasts is exceptionally wide, at 11.6% to 22%—then the market's reaction is likely to be relatively muted. What hasn't been priced in and what is clearly a great unknown is just how fast jobs will return following the end of the virus.
In this Economics Weekly, we look at the past relationship of GDP growth with changes in the unemployment rate, what the current consensus forecasts are for GDP growth over the coming year and a half, what other factors are likely to be at play, and what this should mean for the unemployment rate.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.