Expect 'very high double digit' unemployment rate at least through end of 2020: Economist

Another 3.169 million Americans filed for unemployment benefits in the week ending May 2. Barclays Chief U.S. Economist Michael Gapen joins Yahoo Finance's On The Move to assess the U.S. economy and break down latest jobless claims.

Video Transcript

- This of the jobless claims numbers and look ahead to that report. We're joined by Michael Gapen. He is chief US economist at Barclay's, joining us from Westchester County. Michael, it's good to see you.

Heidi's taking us through what is still very grim numbers on the jobs front. How should we think about the employment picture? Because of course, the employment picture is just a part of the economy, and we've got a lot of ripple effects that are yet to come in terms of things, like consumer spending.

MICHAEL GAPEN: Well, I think that in terms of how the economy is doing right now, the weekly initial jobless claims number is probably the best number one piece of information that we can look at. It's only lagged by a week. It's almost contemporaneous with what's happening in the economy today, so it's very difficult to look at the broad macro data, which typically lags by 30 to 45 days. It's often just confirming what we already know from the other high frequency data, but the claims data is different.

So I think there's really two key things about tomorrow. Tomorrow, we'll just reset where we are. We know the number is going to be unprecedented. We have the unemployment rate actually rising to around 18.5%. There's going to be a lot of noise in this data, because sampling sizes are likely to be quite low. And therefore, there is just going to be difficulty ascertaining exactly what the unemployment situation is.

It'll take several revisions for that to come clear, but it'll reset kind of how bad things are in the labor market. The big question is, where do we go from here? Are we able to quickly re-employ many of these unemployed workers beginning in June or even at the end of May? Or are we going to be sitting with a very high double digit unemployment rate still by the end of the year?

ADAM SHAPIRO: So that is the question we're all going to ask tomorrow, Michael, and we had Robert Kaplan on, the President of the Federal Reserve Bank of Dallas, just yesterday and the other day. Richie said, the fed's expecting an unemployment rate at the end of the year around 10%, if we're lucky. But with what you just said, Barclay's expecting about 18%, and as the country opens, if you're going to limit the capacity at restaurants and all kinds of places to just 25%, how do we get to even 10%? It seems to me as if it's going to take much longer than six months to get this number down from your 18%.

MICHAEL GAPEN: Right, so I think that I think that Governor Kaplan's number is similar-- I'm sorry, President Kaplan's numbers is similar to ours. We have at around 11%, 10.5% to 11% at the end of the year. That's under the positive scenario, where kind of everything goes right on the testing and tracing and suppressing subsequent outbreaks front.

To your point, we're reopening many economies, but we're doing so quite slowly. So initially, it's likely to mean that the rehiring is going to be slow and sluggish. And it may take a good three years or more for the unemployment rate to fully retrace, so I think we're getting a surge. There's no question about that, and we are likely to see 20 million jobs lost in the report tomorrow. But they're only likely to get rehired slowly.

The risk is we have-- it's a repeat of '08, '09 in the sense that we have a large portion of the unemployed who kind of transition towards longer term unemployment. And that's a problem, because it hurts future income prospects. It means skill sets deteriorate. Workers could lose attachment to the workforce, and it could slow potential growth. So it's imperative that federal resources get to where they're needed quickly, retain as many workers on payrolls as possible, and get the employment situation improved. I agree with you that that's a very tall ask in the months ahead.

- Michael, I'm also curious. If it's going to take three years, two to three years to fully retrace, what is that path going to look like? I would imagine as an economist myself that it's going to be unusually choppy as well. We have reports today, for example, that the Trump administration is withdrawing the CDC guidelines for the states. At least for now or is revising them in some way, perhaps allowing more states to reopen. Because we might then get some relapses and get some resurgences in virus, I mean, what is that path going to look like?

MICHAEL GAPEN: I think you're right. It's highly uncertain and could be very choppy. I think what seems to be clear-- I'm not an epidemiologist or a medical professional. But from my reading of that field's literature and research, we're not testing anywhere near where we need to, to have a high degree of confidence that we can suppress subsequent outbreaks. The positivity rate nationally is still a little bit above 10%.

On average, there are many states that have higher positivity rates and below average testing rates. Many of those states are the ones that are indeed reopening, so there's a non-trivial risk. And again, we don't know. The virus will determine this. There is a non-trivial risk that we will have outbreaks that either cause people to informally social distance to a greater extent. There's more caution about reengaging in normal behavior or maybe some localities.

Maybe it's states or high density counties, not necessarily entire states. But it could be some states. Some higher density areas have to re-mitigate and put down lockdown measures. It will likely be choppy. You're right.

We could get a resurgence in the Fall, or we could get kind of oscillating and rolling outbreaks that we have to deal with for some time. Forecasting that, of course, is virtually impossible. I think it's right to expect that some of the lost jobs come back fairly quickly, but chipping away at that remainder will likely take a long period of time and effectiveness of testing and tracing will be key in that. We're not where we need to be right now, but we certainly hope we can be there by the time the Fall rolls around.

- Michael, I just want to ask. You know, we see a bunch of these jobs that are restaurant workers or part time workers. Some of these restaurants and smaller businesses won't come back. That's just the reality of it, right? So do we then see a retooling of the economy as far as job skills go? If we don't have those jobs and those businesses coming back, do those people then just need to find new areas of work? Or do new restaurants, new businesses fill the void? And if so, will they have enough customers who aren't afraid to go back out?

MICHAEL GAPEN: Right. I think it's a little of both. I would couch this at least in the specific industries that you mentioned. It could be similar to the after effects of '08, '09, where we concluded ex-post that we over-invested in finance and housing. We had to reallocate labor and capital away from those industries to other parts of the economy. That was viewed as one reason why the recovery was slow.

The COVID situation, we think, is certainly accelerating structural change in a number of sectors. Retail would be the classic example of that. You mentioned just another firm is declaring bankruptcy today in that sector, so it may be the case that we conclude after the fact given the situation at least for a multi-year period until we know whether we have a vaccine or not.

We need to reallocate resources away from restaurants, leisure, and hospitality, and other services oriented sectors affected by the virus. So yes, some new business may come in to fill the gap. But it may also be that we need to rebalance resources, and the US economy is normally very good at that. We're pretty dynamic in adjusting over time. The problem here is, how do you rebalance labor and capital in an environment where you're still social distancing?

- Still a lot of uncertainties. Michael Gapen, thank you so much for your perspective. Michael is the Chief US Economist at Barclays. Appreciate it.