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St. Louis Fed chief says unemployment could hit 30 percent in second quarter

Monday, Mar 23, 2020

* Hoo boy

Federal Reserve Bank of St. Louis President James Bullard predicted the U.S. unemployment rate may hit 30% in the second quarter because of shutdowns to combat the coronavirus, with an unprecedented 50% drop in gross domestic product.

Bullard called for a powerful fiscal response to replace the $2.5 trillion in lost income that quarter to ensure a strong eventual U.S. recovery, adding the Fed would be poised to do more to ensure markets function during a period of high volatility.

“Everything is on the table” for the Fed as far as additional lending programs, Bullard said in a telephone interview Sunday from St. Louis. “There is more that we can do if necessary” with existing emergency authority. “There is probably much more in the months ahead depending on where Congress wants to go.”

Unemployment peaked at 24.9 percent during the Great Depression.

* Also from the St. Louis Fed

During a severe viral outbreak, state governments are likely to be squeezed financially from separate directions: increased Medicaid payments, new costs associated with virus containment, and falling state tax revenue. Projecting the budget impact of declining taxes is a straightforward exercise. In 2018, state governments collected about $1 trillion in total taxes.13 The $480 billion in general sales taxes and gross receipt taxes collected by state governments is of particular importance.

Reduced purchases of some goods and services during a severe outbreak (e.g., meals out and hotel stays) would mean lower tax revenue. A 30 percent decline in this revenue source for six months would create a $72 billion budget shortfall. A $72 billion state fiscal support program from the federal government would cover this sales tax shortfall.

In addition to the federal-to-state fiscal support I describe here, there would likely be other reasons related to COVID-19 for the federal government to aid state and local governments, such as medical costs and virus containment. Financing these costs in the form of additional grants to states could be considered in a separate Congressional act.

Nearly all states face balanced budget requirements for ongoing expenses. Failure to support states fiscally would put these governments in the difficult position of either raising taxes or cutting back on expenditures. Burdening citizens with additional taxes during a virus outbreak would be ill-advised. And, generally speaking, if state government expenditures made sense from a cost-benefit perspective before a viral outbreak, that cost-benefit calculation would likely hold during the outbreak. Thus, it might also be ill-­advised to cut back on that spending just to satisfy a balanced budget requirement.

That was almost a week ago, so it could be worse now.

- Posted by Rich Miller        

9 Comments »
  1. - Lester Holt’s Mustache - Monday, Mar 23, 20 @ 9:46 am:

    That number might go even higher if states start shutting down daycares like JB did. A lot of essential workers in healthcare, retail (grocery stores, gas stations, etc) and other sectors aren’t going to be able to go to work if they don’t have access to daycare for their children. Maybe laid-off restaurant workers can start up home daycares, balancing it out? Although that might not work either, since DHS is required to inspect any new daycares that open - idk if they’ve waived that rule or not. Or maybe essential businesses will have to rely on hiring the newly unemployed who happen to be childless, to replace parents who now have no access to daycare?


  2. - SSL - Monday, Mar 23, 20 @ 10:16 am:

    This is going to be a fiscal castrophe for the globe. It won’t be a simple matter of a few months time and then back to normal. There will likely be many small businesses that simply do not return or recover. When you are struggling to keep the business going, as many are, disruption at this level is more than enough to say game over. Retail and restaurants will be particularly hard hit. How many do those industries employ?

    And even if this first wave were to last only through May/June, unless a vaccine is developed quickly, this thing may start up all over again in September.

    Keeping people healthy and alive is rightfully job one, but what’s left afterward is going to look and feel very different.


  3. - truthteller - Monday, Mar 23, 20 @ 10:23 am:

    the domino effect and no way to stop it. Many jobs will take years to recover and many businesses will simply not come back


  4. - striketoo - Monday, Mar 23, 20 @ 10:26 am:

    Target aid to people not companies. Nonessential companies can shut down and then restart (or not) after the epidemic wanes. What is needed now is for individuals to have resources for food, shelter and healthcare. That’s pretty much it.


  5. - Pick a Name - Monday, Mar 23, 20 @ 11:11 am:

    Especially true if the Senate Dems and Pelosi hold things hostage


  6. - Oswego Willy - Monday, Mar 23, 20 @ 11:14 am:

    === Senate Dems and Pelosi===

    Divided chambers will call for reconciliation of a bill for it to pass.

    218/60…. those are the numbers.

    We need something now, we need action, we need something that will pass… but will be sufficient to meet the needs.


  7. - Ducky LaMoore - Monday, Mar 23, 20 @ 11:15 am:

    @Pick a Name

    Okay, so it would be good if the US Treasury got half-trillion of our dollars and got to dole it out to whoever they want (billionaires) with no obligation to report who it goes to and for what purpose? Good to know.


  8. - OpentoDiscussion - Monday, Mar 23, 20 @ 1:00 pm:

    I keep reading about $1,000 checks being sent to people making under $75K/$150K.

    Seems to me that the focus should be on the unemployment funds rather that sending out money willy nilly.


  9. - bailbond - Monday, Mar 23, 20 @ 5:48 pm:

    For what it’s worth, the “50% drop in GDP” is due to how the feds report, which is on an annualized basis. Huge drop in 2nd quarter gets annualized as if it will also happen in the 3rd and 4th quarters.


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