Economic Preview: Just when it seemed safe to go back to restaurants a new coronavirus outbreak threatens U.S. jobs recovery

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The U.S. got some great news Thursday with the rehiring of 4.9 million people in June, but the two steps forward the economy took in May and June could be followed by one step back in July.

The problem? A resurgence in coronavirus cases, especially in states that allowed their economies to reopen early, is leading to renewed restrictions on businesses and consumers.

See: MarketWatch Economic Calendar

At the epicenter of the resurgence in the coronavirus epidemic is the restaurant industry.

The reopening of restaurants led to the return of some 3 million workers in May and June, accounting for 40% of the jobs the U.S. has regained since the onslaught of the coronavirus. That’s the good news.

Read: U.S. regains 4.8 million jobs, unemployment falls to 11.1%, but rehiring set to slow

The bad news? Many of the people rehired could be laid off a second time if more states place inside dining off limits again or pause plans to loosen restrictions.

California, Florida, Texas and other states have tightened restrictions after a fresh outbreak of COVID-19 cases while others such as New York and New Jersey have delayed plans to allow inside dining. In California, restaurants in 19 counties were told to cease indoor dining for at least three weeks.

Read: Consumer confidence jumps to 3-month high, but still well below precrisis levels

The slowdown in rehiring at bars and restaurants could put a big dent in U.S. employment growth in July if the fresh viral outbreaks are not brought under control soon, economists say.

Eating and drinking establishments accounted for the bulk of the 7.5 million jobs the economy recovered in the past two months.

Yet restaurants still employed about 3 million fewer people at the start of July than they did before the crisis — a whopping 50% reduction. And the recent outbreak of coronavirus cases means many of those jobs probably aren’t coming back soon.

See: Marketwatch’s Coronavirus Economic Recovery Tracker

Adding insult to injury, fear of catching the virus has discouraged customers from making reservations or even eating outside. Reservations at restaurants stalled toward the end of June, according to the reservation-making site OpenTable.

“Consumers were already starting to shy away again from restaurants even before the states announced the reopening pauses and reversals as the fear of virus spread began to change consumer behavior,” said chief economist Scott Anderson of Bank of the West.

Read: In latest dark twist of pandemic, companies appear to be cutting wages

The rash of new coronavirus cases is likely to result in smaller increases in employment in the next few months, most economists say. The U.S. regained 4.8 million jobs in June and 2.7 million in May, indicating about one-third of the jobs lost in the early stages of the pandemic have been restored. The U.S. hemorrhaged more than 22 million jobs in March and April.

Yet the momentum is rehiring is unlikely to come to complete halt, economists also say. New York and other Northeast states that were hit the hardest by the pandemic early on are still on track to open more of their economies. COVID-19 cases have not experienced a similar surge.

What’s more, states have taken a more targeted approach to slow the spread of the virus than they did at on the onset of the pandemic.

“They are tracing it down to people going to bars or traveling to vacation spots,” said Richard Moody, chief economist at Regions Financial. “States are trying to be more surgical this time around instead of resorting to blanket shutdowns. That suggests you are not going to see a total retrenchment in rehiring.”

Finally, hiring is likely to continue at manufacturers, construction companies, technology firms and other businesses in which large crowds are absent and social distancing is more easily practiced.

There are still plenty of reasons to worry, though, even if the spike in coronavirus cases tapers off. For one thing, many companies that have reopened appear to be laying off scores of workers given depressed demand for their goods and services.

The evidence can be found in the slow decline in initial jobless claims — applications for unemployment benefits. They fell slightly last week, but still haven’t dropped below 2 million a week since mid-March. If the economy was really mending rapidly, economists say, new claims should have dipped below 1 million a week by now.

Read:Jobless claims continue slow but steady descent in late June

What might also hurt the economy in July is a lack of clarify on whether Washington will extend emergency unemployment benefits and other crucial aid meant to prop up the economy. The closer it gets to the end of the month without a deal between Democrats and Republicans, the more likely consumer spending and business investment will taper off.

So buckle your seats up for another rocky ride.

“With states dialling back on re-openings the July jobs report could be far more sobering,” said James Knightley, chief international economist at ING.

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