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The U.S. Bureau of Labor Statistics reports that the national rate of unemployment fell to 7.9% in September 2020, down from the August 2020 rate of 8.4%. Total nonfarm payroll rose by only 661,000 in September, less than the 1.4 million in August. (USDL-20-1838, the employment situation for September 2020, 10-2-2020.)

The September 2020 national unemployment rate is 4.4% higher than in September 2019.The national rate of unemployment was 4.4% for March 2020, 14.7% for April 2020, 13.3% for May 2020, 11.1% for June 2020 and 10.2% for July 2020.

States seeking federal unemployment insurance loans continues to rise

The number of states seeking federal unemployment insurance (UI) loans to bolster trust funds reserves for the payment of UI claims continues to rise.

As of October 12, 2020, 21 jurisdictions have applied for, and are approved to receive federal UI loans. (Title XII Advance Activities Schedule, UI Department of Treasury website.)

As of October 12, 2020, 21 jurisdictions have outstanding federal UI loan balances for loans paid to them in 2020, for a total combined 2020 loan amount of $35,932,355,115. The Virgin Islands continues to carry a balance on the federal UI loan that it received in 2009. (U.S. Department of Labor UI trust fundloans.)

Federal unemployment insurance loan data as of October 12, 2020

The labor market continues to improve but UI claims remain at elevated levels

The drop in the unemployment rate to 7.9% in September 2020 continues a five-month streak of declines since peaking at 14.7% in April 2020. With the 661,000 jobs added to the US economy in September 2020, a total of 11.4 million jobs were added from May 2020 through September 2020, recouping 51% of the combined 22.2 million jobs lost in March and April 2020.

These labor market improvements reflect continued resumption of economic activity and continue to suggest greater strength than some forecasts had predicted during this stage of the recovery. For example, the unemployment rate is now below the Congressional Budget Office's July 2020 forecast of a 10.5% in the fourth quarter of 2020. The 7.9% September unemployment rate is also below the peak of 10% experienced during the global financial crisis that began in 2007.

The number of unemployed persons in September 2020 fell by 1.0 million to 12.6 million. The labor force participation rate decreased by a 0.3 percentage point in September 2020 to 61.4%, 2.0% below its February 2020 level.

Unemployment insurance claims, however, remain at elevated levels, with 0.8 million initial claims for the week ending September 19, 2020, possibly suggesting some sluggishness in labor markets.(EY QUEST Economic Update highlights key US and global economic trends - October 2, 2020.)

Ernst & Young LLP insights

Under current federal law, employers in states that begin borrowing in 2020 run the risk of a federal unemployment tax (FUTA) credit reduction for calendar year 2022 if loans are not repaid in full by November 10, 2022.

Federal UI loans taken in 2020 are interest free if repaid by the end of 2020; however, interest begins to accrue in 2021, and employers may be required to pay state interest assessments as a result.

The last time the nation saw a substantial increase in UI benefit payouts was during the great recession of 2007 and 2008. At that time, most states received federal loans to shore up their trust fund reserves, and at its peak in 2011, 21 states fell subject to the FUTA credit reduction.

Once the FUTA credit reduction is triggered, it can take years to go away. California, for instance, began borrowing in 2009 and its loan balance was not repaid until 2018, subjecting California employers to the FUTA credit reduction for seven years (2011 to 2017). The Virgin Islands has yet to repay its federal loan balance from this period and a FUTA credit reduction in 2020 is likely for Virgin Islands' employers.

Several states (e.g., Alabama, Idaho, Iowa, Louisiana, Maine, North Carolina, North Dakota, South Carolina and Tennessee) chose to use federal CARES Act funds to bolster state UI trust funds to help mitigate employer state UI tax increases for 2021.This is in addition to most states choosing to not charge regular COVID-19 UI benefits to employer UI accounts for experience rating purposes.

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EY Payroll News Flash