20 min read


8 JUN 2020

US Economic Update: Employment Losses, Policy Responses, Debt & Rates, Inflation Prospects

By Blu Putnam, Chief Economist & Erik Norland, Senior Economist

The research views expressed herein are those of the author and do not necessarily represent the views of CME Group or its affiliates. All examples in this presentation are hypothetical interpretations of situations and are used for explanation purposes only. This report and the information herein should not be considered investment advice or the results of actual market experience.

The speed of the decline in employment due to the pandemic-induced shutdown in the US has been unprecedented.  The policy responses have been immediate and massive from the Federal Government and the Federal Reserve (Fed). The combination of employment losses and policy responses raises many questions about the pace of the recovery, interest rates and debt, consumer price patterns, etc. To examine these issues, we have organized this report on the US economy into five sections. First, we want to simply review the damage to the economy in terms of the impact on employment. Second, we will discuss the fiscal and monetary policy responses. Then, we will discuss some of the implications for labor productivity and the pace of recovery; interaction of massive debt and interest rates; and finally, some scenarios for short and long-term inflation based on the fusion of fiscal and monetary policy, known as Modern Monetary Theory or MMT.

Employment Situation

The unemployment data tells the story of the economic damage in the United States better than any other data, and the numbers are overwhelming. The weekly release of new applications for state unemployment insurance are now widely watched, as they represent the most current information available. From March 15 through May 16, 2020, in just nine weeks, over 40,767,000 people filed claims for unemployment insurance. To put this number in perspective, the US civilian labor force was estimated to be 156,481,000 in April, the latest monthly jobs report at that time. Thus, 26.05% of the labor force were laid off in nine weeks.  Since then, we know that some people have been able to go back to work. We follow the weekly continuing unemployment claims for this information. Continuing claims actually fell from 24,912,000 for the week ending May 9, 2020, to 21,052,000 the next week. This was a good sign that the economy was re-opening with 3,860,000 leaving the unemployment insurance programs, even though over 2,000,000 new claims were being filed the same week.

Fiscal and Monetary Policy Responses

Fiscal and monetary policy responses have been massive and immediate. It is interesting to put the policy responses in context by comparing them to the Great Recession of 2008-2009 and the Great Depression of the 1930s.

Back in 1929-1933, the Fed stood by and watched banks fail by the thousands. This was especially unfortunate, since the Fed had been created after the financial panic of 1907 specifically to serve as the lender of last resort for the financial system to prevent future panics from turning into depressions. The Fed failed its first test spectacularly in the 1930s.

A key feature distinguishing 2008 from 1929 in the US was the response of the Fed. Once the extent of the financial panic was clear in September 2008 after the poorly managed bankruptcy of Lehman Brothers and the messy bailout of the insurance giant AIG, the Fed understood that decisive action was needed as the “lender of last resort” to preserve the stability of the US financial system. Within just a few months, the Fed had purchased about $1 trillion of distressed securities, lifting that burden from the books of the banking system, as well as reducing short-term rates to near zero and providing special support to several sectors of the financial system with emergency lending programs. 

This time around in 2020, the Fed has pulled out the playbook from 2008 and added several more trillions of financial system support for good measure. The lesson from the 1930s was not to stand-by and watch helplessly. The lesson from 2008 was to act quickly, decisively, and with maximum force.

Fiscal policy responses were very different between 1929 and 2020 as well. The depression was well underway before the Presidential election of November 1932. Both candidates affirmed a commitment to fiscal discipline in the face of the crisis. Franklin D. Roosevelt won the election handily, and he was not long in office before he realized that massive stimulus and public works programs were needed to reduce unemployment.  FDR quickly forgot about any desire for balanced budgets. With the Fed on the sidelines in the 1930s, the fiscal stimulus was critical in rebuilding the economy. We do note though that in 1936-37, there was a return to fiscal austerity which led to a setback in 1937 for the economy, and it was largely the war spending in the 1940s that conclusively ended the Great Depression.

At the end of 2008 as the financial panic was in plain view, the US Congress enacted a trillion-dollar spending program, which helped get the economy back on its feet in 2009. After 2009 though, there was a sort of mini-austerity that took place largely as a result of political gridlock. A spending sequestration went into effect in 2011, and the 2001 and 2003 tax cuts were allowed to expire at the end of 2012 along with a 2009 payroll tax cut. Slower spending growth and higher taxes helped to shrink the US budget deficit from 10% of GDP in 2009 to just 2.2% of GDP in 2016.  In doing so, it placed more of the burden of supporting growth on the Fed, which kept rates below 1% until the middle of 2017. In addition to the restraints on Federal spending, state and local governments also slashed spending in the wake of the 2008 financial crisis, and they did not begin to contribute to employment gains until 2013.

The spending restraint was lifted by Congress in 2017, and tax cuts were enacted in December 2017. The combination of higher spending and tax cuts grew the Federal deficit from 2.2% of GDP in 2017 to 5% of GDP on the eve of the pandemic. In 2020, a divided and highly partisan gridlock in the US Congress was broken by the need to act decisively. Well over $2 trillion of spending has been approved and signed into law. The budget deficits are broadly expected to soar to $4 trillion a year by the end of 2021, bringing them to around 20% of GDP and perhaps higher if Congress appropriates additional funds.

The budget deficits are set to soar to $4 trillion a year by the end of 2021, bringing them to around 20% of GDP.

-   Blu Putnam, Chief Economist, CME Group


Webinar: US Policy Responses to Economic Distress

Blu Putnam and Erik Norland share insights into how the US government might respond to severe economic stress caused by the Covid-19 pandemic.


Labor Productivity & Pace of the Recovery

Recessions are interesting to study in terms of how labor productivity responds to both the economic contraction as well as to the subsequent recovery and expansion periods.  The unemployment that accompanies a recession is associated with increased labor productivity from those still employed.  Basically, the decline in jobs as layoffs take their toll is generally a greater percentage loss than the associated decline in real GDP.  Those keeping their jobs simply have to pick up some of the slack from the cost-cutting layoffs forced by the recession.  This means that labor productivity, as measured, rises in recessions. What interests us is what happens to the labor force and labor productivity during the recovery and rebuilding phases.  Labor productivity is the ratio of two big numbers, real GDP and employment, and both the numerator and the denominator are on the move. 

During a major contraction, the labor force actually declines because some laid-off workers get discouraged and stop looking for employment. If one does not answer the Bureau of Labor Statistics (BLS) survey question in the affirmative that one is looking for work, then the BLS drops that person out of the labor force data, meaning that person is not considered unemployed. That is, the labor force participation rate drops.

Another issue for employment is that the dynamics of corporate strategies can make a huge difference in the pace of job growth. When the economy is growing, especially in a long expansion cycle, corporate strategies tend to evolve relatively slowly with little impact on job growth. Not so after experiencing a stressful period.

Stressful periods, such as the pandemic economic shutdown of 2020 that severely disrupted routines, may force individuals and companies to rethink even the most basic life habits and business processes. Companies that had to go into overdrive in the pandemic shutdown, such as online shopping, delivery services, and virtual internet meeting providers as well as companies damaged by the shutdown, such as the food service industry, airlines, and hotels, all have learned valuable lessons. We will briefly mention just a few to illustrate our point and to invite one’s imagination to extend our examples.

  • Work from home. Where it was possible to work from home (WFH), many companies have seen increases in productivity. Meetings are shorter. There is more focus on tasks at hand. The success of WFH is likely to lead to more flexible time schedules where possible, a reduced need for office space, a reduction in business travel compared to past practices, among other changes.  As these lessons are implemented by companies, there will be efficiency gains.
  • Supply chain complexity. The pandemic shutdown disrupted supply chains around the world, many of which were already suffering from the US-China tariff tensions.  Companies may choose to diversify their supply chains, seek shorter routes, locate input parts and assembly plants a little closer to the where the products will be sold, etc. The dependability of supply and transportation logistics will be more carefully balanced against seeking the location with the lowest cost of production.
  • Just-in-time inventory. Keeping inventories as slim as possible did not work as anticipated in the pandemic shutdown. Balancing inventory planning with a heightened expectation of potential swings in demand will get considerable attention in the post-pandemic era.
  • Leaner-decision structures. The speed of economic upheaval from the pandemic shutdown was unprecedented. Many companies had to streamline decision structures so they could react faster than they ever knew they could. Less bureaucratic decision-making offers a chance for improved adaptability.
  • Intense problem-solving focus. In many cases, quick solutions to unexpected challenges have led to an intense focus on solving specific types of problems. Developing a new vaccine or improving health treatment protocols are headliners in this space. As some companies emerge from the stressful period, they will see heightened innovation and creativity.

These are just a few examples, yet as we look around even in the early stages of the economic rebuilding, there are many cases where strategic corporate changes are being made that are based on the lessons of the pandemic shutdown and are being rapidly deployed. There is some good news and not so good news embedded in this reality of potentially heightened innovation during the recovery period.

The good news is that we may see a period of several years or more with strong gains in labor productivity as corporations apply the lessons learned from the pandemic shutdown.  Some corporations may downsize to match reduced demand to their output, and at the same time enact various efficiencies, including less business travel, more flexible work hours, streamlined executive decision processes, etc.  All of these things hopefully add up to more earnings growth, yet they also suggest that the process of putting people back to work may take longer than many expect. A further implication is that the recovery in real GDP back to the pre-pandemic peak may arrive more quickly than a return to pre-pandemic employment levels.  Of course, it does not have to turn out as this hypothetical scenario suggests since other things are never equal.  Government fiscal spending, especially on infrastructure projects, could result in much faster employment gains and a more rapid return to peak employment.

Debt and Interest Rates

With massive fiscal stimulus coming from the US and all corners of the globe, it looks as though bond markets could be bracing for a flood of additional sovereign debt issuance.  What is surprising is that bond investors are greeting the possibility of unprecedented peacetime deficits with long-term yields that are at or near record lows in most bond markets.  There are various explanations for this:

  • Central banks could buy a large portion of the debt as they expand their balance sheets in renewed quantitative easing.
  • Inflation expectations remain extremely low amid pressure in the oil market, soaring unemployment, and a negative demand shock.  Indeed, many fear significant deflation over the next 12 months or so due to the intensity of the decline in global demand.
  • There is little expectation that central banks will be able to lift short-term interest rates in the near term.

Nevertheless, even extremely long-term interest rates remain low and yield curves remain remarkably flat by historical standards. Could such large budget deficits eventually lead long-term bond yields higher?

Thanks to the Bank for International Settlements (BIS), investors have access to historical series of credit to the non-financial sector stretching back to at least the year 2000 for most countries – and for some countries the data goes back much further. For Australia, Canada, and South Korea, the credit numbers go back to the late 1980s and early 1990s.  Japanese data begins in 1980. The US data series go back to the early 1950s.

Taken in combination with widely available data on short-term and long-term interest rates in these countries/currency areas, what the BIS data reveals is an interesting debt paradox. In almost every other market that we can think of, all else equal, increased supply means lower prices. If that were true in the debt market, then an increased supply of debt would mean a lower price for bonds and therefore higher yields, since bond yields move inversely with price.

Curiously, for debt markets, the relationship appears to work in reverse.  Historically, an increased supply of debt appears, on balance, to increase bond prices, thereby lowering the average level of both short-term interest rates and long-term bond yields. Take Japan as a case in point. It achieved extremely high debt levels sooner than any other country. It also got to near zero short-term interest rates a decade sooner than anyone else (in late 1998 rather than late 2008). In Japan, there appears to be a strong inverse relationship between the total level of debt (government + households + non-financial corporations) and the level of both short-term interest rates and longer maturity yields. Similar relationships hold in the US and every other developed-market currency area.

We also examined the correlation across time for 12 different currencies between their total debt levels on the one hand and their short-term rates and long-term bond yields on the other. In each of the 12 currency areas, the higher the overall level of debt, the lower the average level of short-term interest rates. Interestingly, in 11 of the 12 currency areas, the correlation was more strongly negative for long-term rates than for short-term rates.

One might have expected the opposite to be true. If debt levels are excessively high, central banks can set policy rates to low levels to help governments, households, and corporations manage their debt burden. So, what keeps long-term interest rates low in the face of vastly increased debt supply?

While the short-term rate part of this puzzle is clear, central banks have more difficulty controlling longer-term rates. Some central banks, including the Bank of Japan, have explicitly engaged in yield curve targeting/control: setting ceilings on the level of yields for different maturities to engineer a positively sloped yield curve and buying as many bonds as needed to prevent further, unwanted steepening. Others, like the Fed and the Bank of England, have opted to sporadically buy long-term debt maturities with the idea of keeping longer-term interest rates lower than they would otherwise be, but without setting explicit targets.

Nevertheless, despite central-bank buying and the near certainty of additional quantitative easing across the US, Europe, and Japan, not all of the additional public debt coming to the market is likely to be purchased by central banks. It may be that bond investors willingly absorb the additional debt supply at high prices/low yields simply because they perceive that high debt levels will oblige their respective central banks to keep policy rates low for a long time. Moreover, since few market participants fear the imminent or even long-term return of serious inflation, there is little incentive to insist on higher yields in return for taking on additional duration risk. Indeed, the concern over the next 12 months or so is outright deflation.  If inflation is to develop, it will take many take years, if not a decade or more.

Modern Monetary Theory and Consumer Price Patterns

The economic crisis stemming from the global pandemic of 2020 quickly exposed the limits of traditional monetary policy acting in isolation from fiscal policy. Lowering short-term interest rates to near zero would clearly not be enough to limit the economic damage from a cascading collapse of the economic network, akin to a disequilibrium phase transition in physicsi.  Central bank purchases of government bonds (i.e. quantitative easing or QE) were unlikely to help much either, given that this approach had failed to generate additional economic growth or inflation when tried in an aggressive fashion by the central banks in US and Europe during the economic expansion of 2010-2019ii. Arguably the Bank of Japan’s (BoJ’s) even more extreme version of QE, which took its balance sheet to over 100% of GDP and, unlike Europe or the US, also included buying large quantities of corporate debt and even equities via exchange traded funds, provided a very slight boost to Japanese inflation through the transmission mechanism of depreciating the yen in 2013 and 2014. Once the yen depreciation was capped and then reversed, the BoJ’s aggressive QE had no further impact on growth or inflation.

As we have observed and duly noted, many countries around the world, especially the US, Europe, and Japan, embraced the idea that massive fiscal stimulus would be required to deal with the cascading collapse of the economic network.

Many central banks responded to the fiscal stimulus by committing to expand their asset purchases in new directions, including corporate and local government debt.iii Voilà, the active collaboration of fiscal and monetary policy was a reality and the age of Modern Monetary Theory or MMT had begun, not by choice, but by necessity.

MMT has gained relevance in terms of tackling unemployment because it frees fiscal policy to run massive budget deficits as a percentage of GDP, and MMT frees the central bank to buy all kinds of debt in very large quantities, without regard to how large the balance sheet gets in terms of its ratio to GDP.

MMT also effectively recognizes asymmetries in policy effectiveness. That is, when economies are far from equilibrium, monetary policy may not be very useful in arresting the economic decline associated with a phase transition like the cascading network collapse caused by the pandemic. A catch phrase for this monetary policy asymmetry, often associated with John Maynard Keynes: “In times of high unemployment, monetary policy is like pushing on a string”.iv The solution in the 1930s in the US was to lean on fiscal policy and launch a wide variety of massive public works and other spending programs, known as the New Deal.

This time around in 2020 in the US, Europe, and Japan, there is a willingness by governments and central banks to intertwine fiscal and monetary policy to fight the huge abrupt increase in unemployment caused by the pandemic. Governments are trying to provide support for wage earners, and loans and grants to corporations. Central banks are not only expanding their loans to banks and buying more government bonds, they are going beyond their traditional limits and are now lending to corporations and local government authorities. These programs are largely aimed at getting individuals and businesses through the worst of the pandemic and to put a floor under the economy. New programs to address the pace at which the economy can rebuild are still being discussed, many will be controversial, but more spending is on the horizon.

The most likely public policy program, for example in the US, to accelerate the pace of economic rebuilding would be massive spending on infrastructure improvements, from roads to airports to schools, and hospitals, etc. Such spending programs would involve even larger budget deficits and more asset purchases from the central bank, but the key to their being proposed and implemented would be that they would get the economy moving at a much more rapid pace. That is, the return on investment criteria approach of MMT would be front and center to the debate over these spending plans, rather than worrying too much about how they would be financed.

When traditional economists, meaning most of the profession, analyze MMT, they worry about the breakdown of the independence of central banks and the possibility of a return to serious inflation pressure. With the central bank being joined at the hip with expansionary fiscal policy under MMT, were an inflationary spiral to develop, the central bank would not be able to “take the punch bowl away,” using the typical metaphor.v This criticism takes as a given that the politicians in charge of fiscal policy will become addicted to spending and not worry about budget deficits, so they cannot be depended upon to rein in spending.

As economics Nobel Prize winner, Robert Shiller, observed though, MMT may well work up to a point.vi When the starting point for the rapid rise in government debt finance aided and abetted by the central bank is a low inflation environment, then it may take years or decades for the inflation to occur.  Down the road, if inflation occurs when demand for goods and services far exceeds the available supply, such as often happens with war time military spending, then MMT has the potential to lead to inflation even in peace time, eventually. 

Indeed, by most measures, inflation has been extremely low in Europe and Japan for a long time.  In the Eurozone, core inflation has not once exceeded the European Central Bank’s (ECB) 2% limit since December 2002. In Japan, expanding the Bank of Japan’s (BoJ) balance sheet from 40% to over 100% of GDP and buying corporate bonds and equities in the process did succeed in moving Japan from -1% inflation to barely positive inflation, averaging 0.4% or so for the past five years. Even in the US, where the Fed enjoyed more success than either the ECB or BoJ in steering its economy clear of deflation, the Fed’s preferred measure of price increases, the core PCE deflator, has exceeded a 2% year-over-year growth rate on only a few occasions since 2008. That is, central banks have tried hard to create some inflationary pressure in goods and services, and neither low rates nor government bond asset purchases achieved the stated objectives. So, the frustration of central bankers was manifesting itself in calls for less fiscal austerity and more government spending, even before the pandemic crisis hit. 

From our perspective, the challenge is figuring out when the inflation might occur, and what to do about it when it arrives. When the starting point for MMT is in the middle of a massive economic dislocation with huge rises in unemployment, the immediate problem is going to be lack of demand, and the risk is outright deflation, not inflation pressure.  A necessary yet not sufficient requirement for the inflation pressure to re-emerge is that the economy would have to get back on track and reduce unemployment back to the low and non-inflationary levels of 2019.  And then, even more aggressive new spending financed by debt bought by the central bank, would be needed to push the economy into an inflationary spiral.  This whole process of “getting out of deflation” and “moving into spiraling inflation” could take a decade or more.  When it comes, though, MMT has no exit plan – except depending on the fiscal authorities to curtail their spending.

Bottom Line

  • Fiscal and monetary responses to the pandemic-induced economic shutdown have been as unprecedented as the massive declines in employment.
  • Unlike the 1930s when the Fed failed to act, in the 2020s the Federal Reserve has acted with huge purchases of a wide variety of securities to secure the stability of the financial system.
  • Also, fiscal policy has been expanded just as quickly and massively in the 2020s. In the 1930s it took over four years before government spending was enacted to put people back to work.  And in 2008 at the onset of the Great Recession, there was a big fiscal program, but as the recovery commenced, political gridlock set in, constraining spending, reducing budget deficits, and putting a heavy burden on the central bank to keep rates low.
  • Lessons learned by corporations from the shutdown period may lead to major adjustments in corporate strategy in the post-pandemic period that may make it possible to create long-lasting increases in labor productivity. The not-so-silver lining here is that faster labor productivity growth may mean that real GDP regains its previous pre-pandemic level far more rapidly than employment.
  • Massive budget deficits around the world are leading to huge increases in sovereign debt supply, and one might have thought that could put upward pressure on bond yields.  Instead, our research indicated in the major industrial countries that higher debt loads are associated with lower bond yields. With demand diminished, there are worries of deflation not inflation, and central banks are already buying large quantities of the debt being issued.
  • The fusion of monetary and fiscal policy that has occurred as part of the policy response to the pandemic shutdown amounts to a backdoor entry into an age of Modern Monetary Theory, or MMT, where governments spend and central banks buy the debt.  MMT could cause inflation down the road, but when starting from a point of deep economic contraction, serious inflation could take a decade to develop.  Even then, inflation might be modest, depending on how fiscal and monetary policies are adjusted once economies are growing steadily again.

Webinar: US Policy Responses to Economic Distress

Blu Putnam and Erik Norland share insights into how the US government might respond to severe economic stress caused by the Covid-19 pandemic.


iSee CME Group research report: “Policy Analysis through the Lens of Phase Transitions”, by Blu Putnam, March 2020, https://www.cmegroup.com/education/featured-reports/policy-analysis-through-the-lens-of-phase-transitions.html.

iiSee chapters 14 and 15 on evaluating quantitative easing in Economics Gone Astray, by Bluford H. Putnam, Erik Norland, and K.T. Arasu, World Scientific Professional (2019).

iiiFederal Reserve Press Release, March 23, 2020.  Federal Reserve announces extensive new measures to support the economy. The opening sentence said it all: “The Federal Reserve is committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time.”  Many analysts dubbed this “open-ended QE or infinite QE”. Also see: Federal Reserve Press Release, April 9, 2020. Federal Reserve takes additional actions to provide up to $2.3 trillion in loans to support the economy.

ivFrom Investopedia (https://www.investopedia.com/terms/p/push_on_a_string.asp) “While the phrase pushing on a string has been attributed to British economist John Maynard Keynes, there is no evidence he used it. However, this exact metaphor was used in a House Committee on Banking and Currency in 1935, when Federal Reserve Governor Marriner Eccles told Congress that there was very little, if anything, that the Fed might do to stimulate the economy and end the Great Depression.  Governor Eccles: “Under present circumstances there is very little, if anything, that can be done.”  Congressman T. Alan Goldsborough: “You mean you cannot push a string.”  Governor Eccles: “That is a good way to put it, one cannot push a string. We are in the depths of a depression and…, beyond creating an easy money situation through reduction of discount rates and through the creation of excess reserves, there is very little, if anything that the reserve organization can do toward bringing about recovery.”

vWilliam McChesney Martin, Jr. (October 19, 1955). "Address before the New York Group of the Investment Bankers Association of America”. The job of the Federal Reserve, he famously said, is "to take away the punch bowl just as the party gets going," that is, raise interest rates just when the economy reaches peak activity and inflation pressures are likely to emerge. [paraphrased from Wikipedia:  https://en.wikipedia.org/wiki/William_McChesney_Martin].  William McChesney Martin was chairman of the Federal Reserve Board from March 1951 through January 1970, serving under five US Presidents.

viiRobert J. Shiller.  March 29, 2019. “Modern Monetary Theory Makes Sense, Up to a Point” The New York Times.

About the Authors

Bluford “Blu” Putnam has served as Managing Director and Chief Economist of CME Group since May 2011. With more than 35 years of experience in the financial services industry and concentrations in central banking, investment research, and portfolio management, Blu serves as CME Group’s spokesperson on global economic conditions.

View more reports from Blu Putnam, Managing Director and Chief Economist of CME Group.

Erik Norland is Executive Director and Senior Economist of CME Group. He is responsible for generating economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact on CME Group and the company’s business strategy, and upon those who trade in its various markets. He is also one of CME Group’s spokespeople on global economic, financial and geopolitical conditions.

View more reports from Erik Norland, Executive Director and Senior Economist of CME Group.

All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author(s) and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.