Companies and consumers have scrapped travel plans, and factories have endured broken supply chains from the coronavirus outbreak. If employers were to respond by slashing jobs, it would significantly escalate the economic damage.
For that reason, a range of job market barometers will provide some of the most vital signals about the economy in the coming weeks and months. So far, they have yet to show much impact.
Widespread layoffs can transform slowdowns in just one or two sectors — the travel industry, say, or manufacturing — into a full-blown downturn for the overall economy. When workers lose jobs and pay, they typically cut spending. Their friends and relatives who are still employed grow anxious about their own jobs and wary of spending freely, a cycle that can trigger further job cuts.
Layoffs “tend to build on each other,” said Tara Sinclair, an economist at the jobs website Indeed. “That spiral is really what we’re worried about happening.”
So long as monthly job gains remain above 100,000 or so, the unemployment rate should stay low and the economy will avoid a downturn, Mark Zandi, chief economist at Moody’s Analytics, said. If the monthly pace were to sink below that level for a sustained period, the unemployment rate would likely rise.
“Once the unemployment rate notches higher, that’s when a recession becomes a real threat,” Zandi said.
One rule of thumb, developed by Claudia Sahm, a former Federal Reserve economist, is that a recession becomes likely once the three-month average of the unemployment rate rises one-half point from its lowest level in the past year. That means that if the jobless rate were to exceed 4 percent over several months, a downturn could result.
The timeliest gauge of layoffs is the government’s weekly report on applications for unemployment benefits. Only people who are laid off are eligible for the aid.
The latest data, issued Thursday, was reassuring: It showed that the number of people seeking unemployment benefits dropped 3,000 to 216,000 in the week that ended Feb. 29. That is roughly the same as the average over the past month and is a very low level historically.
“If this is devolving into a recession, there will have to be layoffs,” Zandi said.
The job market appears resilient for now according to several gauges. Sinclair said that Indeed’s data shows that companies have yet to cut their job postings, evidence that they are still willing to hire.
And on Wednesday, payroll processor ADP said companies added a healthy 183,000 jobs in February. That figure was likely boosted, though, by unseasonably warm weather that spurred hiring in construction and a category that mostly includes restaurants and hotels.
Job gains were particularly strong in larger companies with 500 or more employees, ADP said. Those larger employers are more likely to be multinationals with exposure to the supply chain disruptions in China. That could force them to stop hiring or even cut jobs in the coming months. But Zandi said that those larger companies have enough resources to avoid layoffs, at least for a while, even if their revenue should suffer.
One factor is that companies have no way to know how long the coronavirus outbreak will last or how much economic damage it will cost. So it’s difficult to know whether they should or need to reduce their payroll. With the jobless rate so low, many companies have also struggled to find workers to hire and will be reluctant to let many of them go.
“That provides a bit of a firewall from what is happening in the rest of the economy,” Zandi said, referring to cutbacks in travel and tourism.
Should coronavirus worries start to depress consumer and business confidence, a broader pullback in spending and hiring could then weaken the economy.
So far, that evidence is mixed. A consumer confidence survey by survey research company Morning Consult has already shown clear declines. But a separate survey of small businesses by the National Federation for Independent Business found that about one-fifth of small companies in February planned to add jobs, unchanged from the previous month.
The Federal Reserve, which announced an emergency half-point cut in its benchmark interest rate Tuesday to offset any damage from the disease, is monitoring a range of data as well as its business contacts. Chairman Jerome Powell said Tuesday that the Fed is “hearing concerns from people, for example in the travel business, the hotel business and things like that.”
Still, “the effects are at a very early stage,” he said. “It will probably grow.”
A survey of the Fed’s business contacts released Wednesday, known as the Beige Book, found that half the bank’s 12 districts were reporting consequences from the coronavirus. The Philadelphia Federal Reserve reported fewer tourist groups from China and said many of the city’s Asian restaurants and shops had reported declining foot traffic because of unfounded fears over the virus.
Sahm, now the director of macroeconomic policy at the Washington Center for Equitable Growth, said that Fed economists are likely scrutinizing data on factory output that the Fed gathers for its monthly report on industrial production. They are also monitoring daily spending patterns from a measure using credit and debit card data the Fed has developed, she said.
Carl Tannenbaum, chief economist at Northern Trust, said the scope of the outbreak remained the most important trend he would monitor. For now, its impact on the United States has been limited. But if it spreads more widely, it could lead to cancellations of major events, including sports and tournaments, as has already happened in Japan and Europe.
“Can you imagine what that would do to Opening Day in baseball?” Tannenbaum asked. “If replicated in the United States, it would raise the risk of recession substantially.”