Market Events

Unemployment Rate May Surprise Investors on the Upside

July 01 2020
Key Insights

  • Unemployment data is bad, but we believe that expectations—which are based on economic models relying on historical data from past recoveries—are too low.
  • While some job losses will be permanent, 80% of the current unemployment is flagged as temporary in industries that will resume operation as economies reopen.
  • Should the pace of economic recovery exceed expectations, unemployment numbers may surprise on the upside and benefit a broadly diversified portfolio. 


There’s no doubt that the current unemployment data is bad, but I would argue that expectations are too low.

We saw with May unemployment, a huge positive surprise. And markets reacted positively.

Economists were forecasting 20% unemployment, and we got 13.3%. That is a huge difference. I think part of the issue is that a lot of economic models are based off historical data. So they rely on the path of past recoveries. But clearly here we’re in a more temporary situation than we were in previous unemployment spikes.

Look, 80% of the unemployment at the moment is flagged as temporary. Clearly there will be permanent job losses. But 80% is a very large number because historically the percentage of unemployment that’s flagged as temporary is around 15%, and the highest it gets is around 20%.

So this is a different situation. It’s not like an industrial recession where factories shut down, and it takes years to get back to the same level of activity. Or take the crisis of ‘08/’09, it’s not the same because these are not jobs like financial sector jobs that were just permanently different and permanently lost in a lot of cases.

Here we’re talking about restaurants, airlines, service industry temporarily closing and then reopening. And we know that there’s a bookend here especially once we get a vaccine.

It’s clear that the reopening is going to be slow. But if you think about this way, suppose that the expectation is that we’ll reopen at 20% capacity for the next six months.

And that sooner than later, we actually reopen up at 50% capacity, it’s still not flipping a light switch. But it’s better than expectations. I think we will see some of that in the unemployment data for months to come that it might surprise on the upside if economists don’t readjust their models and continue to rely on somewhat historical calibrations.

There’s also an incentive at the moment for people to be on unemployment, $600 a week, which is meaningful and is not going to be around forever. And there’s even talk of a return-to-work bonus.

This is a situation that could actually surprise on the upside. Now, stocks have rallied quite a bit. So I’m not arguing that stocks are cheap at the moment. But if there ever was a moment to argue for broad diversification in a portfolio, this would be one. 

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of June 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal.

T. Rowe Price Investment Services, Inc., Distributor.

© 2020 T. Rowe Price. All rights reserved. T. Rowe Price, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

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