Question

We are supposed to select a current topic in the news that deals with Economics. I selected Unemployment.

We are supposed to talk about the Historical view of unemployment and also the rates for 2020.

How unemployment affects the:

Stock market (2-5 sentences)

Mortgage (2-5 sentences)

Savings (2-5 sentences)

Auto loan. (2-5 sentences)

Lastly, a brief summary of each bullet point put in one paragraph.

(IF THE OPTIONS FOR WHAT UNEMPLOYMENT AFFECTS DOES NOT MATCH, YOU CAN PICK WHATEVER IT WILL AFFECT ECONOMICALLY) Thank you :)

Answer 1

Unemployment rates have often increased during times of depression. For example during the Great Depression, unemployment rate reached a peak of 24.9% in 1933, while it subsided afterwards because of several measures taken by the government. While during the Great Recession the peak was 10.6% in 2010. This time around because of the pandemic the rate reached a peak of 14.7% in April 2020, which is much more than the Great Recession rate. Even though it has moderated to 11.1% in June 2020, as the economy shows greater cases of the virus, the unemployment rate may moderate only slightly with the pick up in activity.

In terms of Stock market, higher rates of unemployment show that people are out of jobs and that there could be lower profitability which means reduction in stock values as earnings will not be as per expectations. However as stock markets are based on how the future is going to play out, investors might see gradual improvement in terms of unemployment rates and thus will expect the earnings to improve in the future, which will drive up the stock prices of specific companies which are not affected or their business is expected to grow.

In terms of Mortgage, higher rates of unemployment essentially mean that people won't be able to repay their mortgages on time, this will lead to less payouts and less number of people seeking new mortgages as they don't know when the demand is going to pick up and when they will get back to work. Thus people seeking and repaying mortgages would slowdown.

Savings would increase as people don't have any idea when they will be able to get back to jobs. This will lead to less expenditure and spend on discretionary goods. Thus the marginal propensity to save will increase due to high levels of unemployment and individuals spending less.

People seeking new auto loans and repayment would reduce because people will avoid buying new cars as they don't have enough money to spend on luxury products because of less income generation in the economy. This leads to much lower demand in the economy because of higher rates of unemployment and loan defaults as they are laid off and don't have enough reserves left.

Thus, all in all as stock markets are based on future expectations, there is no direct impact because of higher rates of unemployment, but if they expect the rates to be higher, the losses mount up as stock prices decline and vice versa when the rates are expected to be lower. In terms of Mortgages, new issuance and prevailing repayment would decline as higher rates of unemployment imply that people don't have enough money left and steady cash flow. Savings increase and consumption declines, whereas Auto loans decline as people refrain from buying new cars.