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Unemployment Unexpectedly Drops, But Full Recovery Not Imminent

(CBSNewYork) -- Unemployment took a surprising turn in May. The official rate, as reported by the Bureau of Labor Statistics Friday morning, dropped to 13.3 percent, down from its 14.7 percent peak in April. (The actual unemployment rate is likely somewhat higher.) While tens of millions of jobs have been lost during the coronavirus shutdown, some are starting to come back.

Last month's turnaround offers plenty of cause for hope. Unemployment is widely believed to have peaked. First-time applications for unemployment have trended downward from a late-March summit of 6.9 million to 1.9 million last week. (Pandemic Unemployment Assistance, which is aimed at self-employed and part-time workers, have padded weekly totals since the end of May, but the downward trend is the same.)

>>READ: Why The Real Unemployment Rate Is Actually Even Worse

With the country reopening, people have started returning to work. Temporarily laid-off workers declined by 2.7 million after increasing by 16.2 million in April. (Permanent job losses still rose by 295,000.) Some of the hardest hit industries showed the biggest growth. Leisure and hospitality added 1.2 million jobs, and food services and bars added another 1.4 million. Optimism for the future is grounded in some amount of logic. The economy was healthy going into going into March, and many of the underlying fundamentals haven't changed.

The problem with such optimism is that the world is a very different place now than it was three months ago. So much more is unknown or even unknowable in the short-term. The job market's recovery depends on many factors, and conditions remain fluid. We're only beginning to understand how coronavirus has changed the economy, never mind how nationwide protests of George Floyd's killing and of systemic racial inequality might change the economy going forward. Things can get better, but they can also get worse.

"Employers had temporarily laid off their workers and were picking up the phone and calling them to come back to work," says Pete Kyle, the Charles E. Smith Chair Professor of Finance at the University of Maryland's Robert H. Smith School of Business. "And this would be associated with the fact that many businesses have been more or less completely closed during the coronavirus quarantine. But we're gradually opening up now, and so these businesses are probably bringing some of the workers back."

Four percent unemployment is a long way off, but a drop in unemployment is a step in the right direction.

A majority of the unemployed in April and again in May believed their layoff is only temporary. And the logistics of hiring, not to mention the tightness of the labor market, further support why those workers would be rehired if their services are needed. "If the firm that they used to work for still stays in business, many people will be returning to the jobs they used to have," says Kyle. "It's very expensive for an employer to hire somebody who's a stranger. And for a person to find employment with a boss that they don't know, there's a very complicated, long interviewing process that can drag on for some period of time."

But if employee-employer relationships already exist, rehiring is much easier and faster. According to Kyle, "it's quite likely that workers will just go back to their old jobs."

The caveat, of course, is that the job has to still exist. Many industries will continue to struggle, even as the unemployment rate declines. Restaurants showed big gains in May, but circumstances are not in their favor. "In the restaurant industry, things might recover rather gradually," notes Kyle. "Social distancing in the restaurants that [will] reduce the number of waiters and cooks and so forth that you need. But also, some of our restaurant entrepreneurs, the businesses themselves will have gone under. And so those jobs won't be there."

>>READ: Is Reopening A Restaurant Worth It?

Another industry that may not see a robust recovery is the car industry. "The fact of the matter is there are a lot of automobiles that are sitting around that haven't been driven very much recently," Kyle points out. "And so people don't really need to replace them as much as they would normally need to replace them. And so that is going to mean that the total number of automobiles that need to be produced is going to be quite low."

How fast the jobs return will depend in large part on consumer spending. "Consumer spending tends to drive macroeconomic growth," says Kyle. "But in this particular situation, it's probably even more affected by consumer spending than usual. And consumer spending is largely a function of how much income people have."

The people who have kept their jobs through the quarantine may have excess funds sitting in bank accounts. Many of those who collected unemployment received more than they would have working. Without dining, travel and entertainment options, not to mention childcare and doctor visits, there were simply fewer places to spend the money. As the economy opens up, spending options become available. That spending will create -- or revive -- more jobs. The more they spend, the faster unemployment will drop.

The opposite is also true. The less people spend, the slower unemployment will drop. The extra unemployment benefits will end in July, and an additional stimulus payment is unlikely. Further still, an unemployment rate of 13.3 percent is still historically high, even if it is trending downward. Consumer spending will depend on consumer confidence, which is a moving target. Those with money may have been hoarding money not for lack of options but for fear of the future.

For now, unemployment seems to have peaked. But what happens next will depend on coronavirus. "The big question outstanding is what happens to coronavirus cases going forward," says Kyle. "And there are two issues that I see related to that. One is how fast can a vaccine be developed and distributed broadly. Because once the vaccine gets developed and distributed broadly, I suspect that will create enough herd immunity, because enough people will get vaccinated, that the coronavirus will kind of go away."

The other issue is that different parts of the country are seeing coronavirus cases trend in different directions. "In New York City, and in Boston, and even in DC, the trend of numbers of new cases is going down," says Kyle. "But in other parts of the country, the number of new cases is going up. And it might be the case that other parts of the country are opening up a bit fast, relative to the coronavirus situation on the ground."

This remains an economic crisis caused by a public health crisis. And the public health crisis has not been solved.

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