The figures are ugly and unprecedented. In the last 3 weeks, initial claims for unemployment were 6.61, 6.87 and 3.31 million respectively. This adds up to 16.78 million people that have become unemployed in the last 3 weeks. Although the overall unemployment rate ticked up 0.9% since last month, this is just the tip of the iceberg in terms of an unprecedented employment crisis in the US. The charts of weekly initial unemployment claims over time that the media shows, convey the exceptional nature of the pandemic.

Source St. Louis Fed

To get an understanding of how this may play out in terms of overall unemployment in the coming months, which workers and industries will be affected most and how the economy will adapt and change to this crisis will require some context.

The Size of the Problem

As of March, according to the Bureau of Labor Statistics (BLS) there were 162.9 million people either working or looking for work in the US. This is the size of the US labor work force. It constitutes about half of the 320 million people in the US overall. The rest being retirees, children, adults who have permanently disengaged from the workforce and the institutionalized population.

With this figure at hand, adding the 5.7 million people who were already looking for work before the crisis to the 16.78 million figure would imply that the real unemployment rate right now is somewhere around 13-14%. This is a very rough and back of the envelope estimate. These figures are often revised upwards and downwards but taking into account that unemployment claims offices are still jammed up, we could continue to see the high numbers for at least a few weeks. The figures I have been hearing from economists are settling around a 15% figure for their projected unemployment. I think it could go even higher.

So how bad could it actually get? The Brookings Institution did a survey where they looked at what they considered the industries at the most immediate risk due to the lock down: retail, transport, arts & entertainment, accommodation, and restaurants & bars. Together these industries employed 37 million people, or about 23% of the workforce. Of that workforce, one in four works in restaurants and bars.

We ca not assume that all of them have been or will be laid off but we can assume a large proportion of these workers will be out of work for some time. Who wants to crowd into a restaurant, concert venue or floating Petri dish known as a cruise, when there is no vaccine for coronavirus and we don’t have enough people that have infected for herd immunity?

Even the plan by Major League Baseball to try and bring all the teams to Arizona and keep them in hotels to play each other is wrought with pitfalls. Even with no fans in the stadiums, there needs to be a support network of hotel staff, trainers, coaches, broadcast crew etc. that all could possibly become contaminated and spread the virus in the baseball community. The risks may be too great to have a baseball season anytime soon.

In addition, large group gatherings risk putting us right back in a general quarantine. If we were to open back up fully now, the virus could rapidly re-emerge and spread quickly among the population again, overwhelming hospitals and their staff. Due to this, we may be looking at a Great Depression scenario for certain sectors of the economy. Below is a breakdown of what the Brookings Institution sees as the most vulnerable industries and how many workers are in each in the thousands.

Source: Brookings

Some of these sectors will not be able to open up for the foreseeable future, think amusement, gambling and recreation. Some have an argument as being critical like personal and laundry services and motor vehicle and parts services may see a dramatic scale back but not total shut down as things start to slowly ramp back up.

These industries will also have ripple effects to other parts of the economy as well. Independent contractors, wholesalers and manufacturers are tied into these industries and could see their sales slow down significantly, which would cause these areas to lay people off.

Again, if we were to use a crude, back of the envelope calculation to say that these vulnerable sectors may see 60% to 80% of their workers laid off, this would put unemployment between 14% and 18% just from their contribution alone. Add residual effects to other sectores and we could start to look at unemployment reaching above 20%.

Pain Points

These types of jobs are not distributed evenly over the US either. Many restaurant and bar workers are concentrated in places where there are a lot of restaurants and bars. This would mean places where there is a large population of people with enough disposable income to support a large bar and restaurant scene. These tend to be the larger and richer cities in the US, with familiar names at the top of the list.

Source: Brookings

Although the absolute numbers are large, the even greater pain may be felt where vulnerable workers make up a higher proportion of the population. In these places we will likely see a large ripple effect that spreads to real estate, construction, finance and other industries.

Source: Brookings

Here we can see that in places like New York and LA, although the total number of workers in vulnerable industries is high, the proportion is more around 15% to 20% of total workers. The areas where as much as 42% of workers are in these sectors include places like Las Vegas and the Orlando area. This is where I think the ripple effects of closures and unemployment will be the strongest and last the longest. We could soon start to see home prices affected in these areas in a mini replay of the housing crisis.

Once again the poorest are going to take the brunt of the hit during this downturn. The average salary for a worker in one of these vulnerable industries is $32,700 annually versus $57,700 for other workers. If we see another bout of long term unemployment similar to the crisis, we would likely see people have to rely more on family units to make ends meet: moving back in with parents. Multigenerational households, and scrounging for sporadic entrepreneurial or seasonal work.

All is Not Lost

On the flip side of this, we have seen an amazing and rapid move towards working at home for those who have the ability to telecommute. Gallup recently did a random samples poll to see how many workers were telecommuting during this crisis and found that 62% of workers were telecommuting as of last week.

Source: Gallup

If these numbers are to be believed, that means that over 100 million people have the ability to work through this crisis. Given that workers that have this ability tend to be higher earners, this means they could well punch above their weight in terms of earning power and economic impact. What is 62% of workers may represent even more than 62% of output.

Predictions in terms of second quarter annualized GDP have been between -20% and -30%. To be sure this is a massive figure but we have to take into account that this is a sudden shock and will not be the case every quarter going forward.

The US economy’s GDP is about $20.49 trillion annually and even if we were to operate at 75% capacity for a year, that would still make our dollar GDP larger than that of China running on full steam in good times.

Source: IMF

Don’t Underestimate the Capacity to Adapt

Our tendency to be scared and to be negative is evolutionary. When early humans were roaming Africa, it was better to be worried and scared of what was shaking in the trees or beyond in that bush to be ready to run or fight. Our fear and worry has kept us safe from potential dangers for millions of years. In modern times however, we tend to focus too much on the negative and discount the upside.

Those vulnerable workers will not just sit at home and wait for their old industry to come back. They will adapt their living situation, their habits and their careers. The gig economy may start to move even more online, with more how to do and self help gigs, more teaching English over Zoom and more online classes of other subjects.

Our highest earners will need to pull the economy along for a while so that the less fortunate have time to regroup and adapt. They already have a massive head start by being able to almost completely work from home.

Efficiency gains will also start to become apparent to managers. Work from home will likely start to become much more accepted as managers notice they don’t see the productivity cliff they expected. Workers tend to be happier and more self motivated when working from home. Realizing this, CFO’s are already planning to shift as much as 20% of workers to permanently or mostly work at home. This will help them save on office space expenses.

Significant work from home will also change residential real estate habits. I’m willing to bet that deep suburban and rural real estate could start to pick up as people would be willing to bear a two hour commute if it was once a week and offered significant cost savings in terms of real estate. Were cheap flights to come back, you could even see the re-emergence of the super commuter in a different form, for example the person that has cheap real estate in Florida but flies up to New York every two weeks to be in the office.

Given the supply chain shock, we could start to see workers slowly shift towards businesses that re-onshore critical parts of their supply chain. This could spur a new manufacturing renaissance in the US as well as increase the reach and breadth of logistics and transportation as more and more people have goods delivered to their homes instead of going to retail stores.

Conclusion

Don’t get bummed out by the big numbers and tough times we see every night on the news. For every tough story, know that there are 2-3 inspiring stories of perseverance that you likely won’t hear. They are under the radar and don’t grab the headlines but they will be the bigger story in the long run as the majority of people pivot and adapt to the new reality. Adaptability is always underrated and under appreciated.

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