Monday, March 23, 2020

How bad is it? Bad, really bad.

Note: The peak shown would be something under 800,000 if adjusted for the
size of today's payroll workforce. [Click on image to enlarge and clarify.]
Yesterday, we posted a critique of the focus of the Regents last week for not spending 100% of their time on anything but the potential fiscal crisis facing the university. The focus should have been on the really bad scenarios that might occur, even if we hope for something better. Only Regent Makarechian seemed to get it. Maybe he should be in charge from now on.

So how bad is it out there? We have only preliminary economic data. One index is new claims for unemployment insurance, a proxy for layoffs. In the week ended March 14, new claims for unemployment shot up nationwide by 70,000 seasonally adjusted and about 50,000 without seasonal adjustment. California, which has particularly strict shutdown rules in place, accounted for 23.2% of those incremental new claims (without seasonal adjustment). The week of March 14 was just the beginning of the crisis, which should be more fully reflected last week.

An estimate just for California for last week indicates the total new claims for unemployment insurance for the state will be 564,000 (not seasonally adjusted): 

(I was able to find a second source for one of the daily figures in the tweet above. I got in touch with the reporter who wrote the tweet who insists the numbers came from Gov. Newsom.) 

Applying the 23.2% figure of the prior week suggests that the nationwide total for last week would be on the order of 2.4 million new claims for unemployment insurance for just one week. That magnitude is off the chart for this series. Note that unemployment insurance claims can't normally be filed by "gig" workers, so any new unemployment of that group would not be included. By way of contrast, 2.4 million would far exceed any weekly increase in the wake of the 2008 financial crisis, as the chart above shows. Indeed, if the number turned out to be half of that magnitude, it would exceed weekly amount that occurred in the wake of the 2008 crisis.

(We won't have the official numbers until Thursday or Friday of this week.)

It shouldn't be necessary to point to the danger of an economic contraction of anywhere near the magnitude indicated above to suggest the potential challenges posed to the state budget and the university budget. The main bright spot is that there appears to be some dramatic action by the Federal Reserve taking place and (maybe at this writing) by Congress. Still, it is not clear that the sharp contraction will - once the crisis ends - be followed by a mirror image expansion and that things will just go back to where they would have been. Once you have displaced loads of workers and closed numerous businesses, it's not so easy to just go back to the way things were.

Bottom line: We should be planning for the worst, even if hoping for the best.

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