What Does the Shocking Unemployment Report Really Mean?

No one is sure whether this is a dead-cat bounce or the beginning of a glorious summer of economic recovery.

An illustration of a v-shaped graph.
The Atlantic

Most people who considered themselves students of the economy knew exactly what to expect yesterday morning.

The Bureau of Labor Statistics would release the May unemployment report, and it would be another bloodbath. Economists predicted that more 7 million jobs would be lost. I confidently forecasted that unemployment would soon scream past 20 percent, potentially eclipsing the all-time record set during the Great Depression.

Then, at 8:30 a.m., the report went online. And I was reminded that predicting the future in a pandemic is a surefire way to look like an idiot.

The unemployment rate fell in May, from 14.7 percent to the still-unacceptable level of 13.3 percent. The economy added 2.5 million jobs in a single month, as the leisure and hospitality and construction sectors undid some of their devastation from April. If you want to fully internalize the absurdity of the current economic situation, consider that the economy added the most jobs in history in the same month that economists predicted it would lose the most jobs in history. These expert forecasts weren’t off by a hair, or an arm’s length, or any remotely anthropomorphic margin. They were off by more than the civilian labor force of New York State.

A shock of this magnitude demands an explanation. But I felt incapable of providing one, since my predictions for the month had been so busted. So I called Justin Wolfers, an economist at the University of Michigan, to find out how he was digesting the news.

“There are two things going on at the same time,” he told me. “There is a suppression, and there is a recession.”

Suppression is the shutdown of businesses by governments and other institutions, such as universities and sports leagues. (Consumers have suppressed their behavior, too; Americans stopped going to restaurants before restaurants were officially closed.) Suppression happens quickly: One day you can go to the nail salon; the next day you can’t. But it can also be undone quickly: One day you can’t swim in the pool; the next day is an Ozark bacchanalia.

Recession is something quite different. It’s local stores going out of business, major retailers filing for bankruptcy, people losing jobs that don’t come back, and major industries—say, aircraft manufacturing—pinched for years. A mayor or governor can’t automatically fix any of that by announcing that everyone can go swim in the pool now. In short, the recession is all the lasting damage that goes beyond the short-term suppression of economic activity.

The suppression-depression frame brings the bewildering jobs report into sharper focus. “In April we lost 20 million jobs, and in May, 2.5 million of those jobs were suddenly recalled,” Wolfers said. “That tells you that at least one-eighth of the economic crisis is the mechanical unwinding of the suppression.”

Which is great news. But that’s just one month. And the distinction between suppression and recession will be at the heart of every conversation about the U.S. economy for the rest of the year. Take, for example, the popular debate about whether the road back to normal will be shaped like a V—a sharp decline followed by a sharp recovery—or a swoosh—a sharp decline followed by a slow recovery. “If we get a V-shaped recovery, that tells you that the down was almost all suppression and that you really can turn economies on and off just like that,” Wolfers said. “But recessions in recent economic history are swoosh-shaped.”

What nobody—not Wolfers, not other economists, and certainly not I—knows is whether this is a dead-cat bounce or the beginning of a glorious summer of economic recovery.

And that’s why Friday’s good news could prove dangerous. When the pandemic posed a fresh existential threat to the country, Washington broke its habit of indolence by passing a multitrillion-dollar economic-relief bill. This month’s reversal may encourage the government to dither. In fact, Republicans are already backing away from further stimulus, despite continuing economic conditions whose level can only be described as abysmal. And President Trump touted yesterday’s labor report as a tremendous achievement, even though the unemployment rate remains 30 percent higher than at the peak of the Great Recession.

I hesitate to guilt people about feeling any semblance of optimism. But in the fog of the pandemic, when uncertainty abounds and inconceivable death and joblessness become ordinary within weeks, the confidence that things are improving on their own can lead to a dangerous complacency. To maintain our focus and keep our sanity, I offer three simple rules: Live like an optimist. Legislate like a pessimist. And don’t publish your economic predictions during a pandemic.