“It will hold back the economic recovery if they continue to lay people off and if they continue to cut essential services,” Mr. Powell said during congressional testimony in June. “In fact, that’s kind of what happened post the global financial crisis.”
Charles Evans, president of the Federal Reserve Bank of Chicago, echoed that sentiment in a CBS interview on Sunday, saying, “As you look at the economic outlook, there are some negative scenarios, and the ones that are most pessimistic involve not supporting state and local governments.” Absent that help, Mr. Evans said, “there will be employment reductions.”
While it is unclear how persistent job cuts will be — some jobs may still come back as economies reopen — state and local job losses this year have already dwarfed those in and after the entire Great Recession. Back then, state and local governments cut about 750,000 jobs over nearly five years.
Just since February, about 1.2 million local government jobs have been lost. Moody’s Analytics researchers estimate that 2.8 million more could be on the chopping block without more federal help. If that happens, state and local job cuts stand to shave about 2.6 percent from overall pre-crisis employment levels.
While some employers have begun rehiring, nearly 13 million people remain out of work across sectors, and the unemployment rate stood at 10.2 percent in July.
Jobless claims, which are calculated differently, remain elevated. The Labor Department said on Thursday that weekly initial jobless claims fell below one million for the first time since March, with 963,000 new workers filing for unemployment insurance. That is still higher than the peak level in the 2007-9 recession, and economists warn that the recovery is slowing as the virus lingers and businesses struggle to reopen fully.
With unemployment high and many businesses expected to close, states are bracing for more safety net costs on top of the public health expenses they are already incurring. They spend a large chunk of their budgets on Medicaid payments and services for low-income residents.