And there’s the scary scenario that, before it’s over, the coronavirus will plunge the world into another Great Depression that will change everything and take a generation from which to recover.
In truth, nobody knows what course the economy will take because nobody knows how the pandemic will play out. But I’ll go out on a limb and predict that neither of these scenarios will come to pass. No V-shaped recovery. No L-shaped lapse into permanent economic stagnation.
First, a warning: Many of the statistics and much of the vocabulary that we normally use to talk about the economy won’t be particularly useful for this one.
There have been estimates, for example, that the unemployment rate could hit 30 percent in April or that the economy’s output, as measured by GDP, could drop 30 percent from April through June, in both cases surpassing numbers during the Great Depression.
Those kinds of comparisons, however, are really not useful because the loss of jobs and output is likely to be temporary — more akin to a natural disaster. Given the trillions of dollars that the Fed and Congress are about to throw at the problem, and four to six weeks of lockdown of much of the population, it’s reasonable to expect that most people will return to the same jobs at the same companies at the same pay.
President Trump and some business leaders may be pushing things a bit in demanding that economic life get back to normal by Easter, but they are not wrong in warning that, at some point, the economic damage will grow exponentially — a word we are all coming to better understand — if the lockdown continues so long that companies fail and the link between workers and companies is broken.
Public health officials would do themselves and the country a favor by sketching out some guidelines for how companies will be gradually allowed to reopen — just so people and businesses can at least imagine life returning to normal and begin planning for that. Without it, there will be even greater public pressure to end the restrictions prematurely.
So far, the economic ride down has been sharp and steep, in loss of jobs, income, profits and paper wealth. And it’s pretty clear we still have farther to go as the death toll rises and more regions of the country are forced to lock down. Big companies have begun to announce mass layoffs and weekly claims for unemployment insurance will be counted in millions. And while the Fed’s pledge to do whatever it takes has already begun to stabilize credit markets, the experience from previous downturns is that stock prices will bottom out only once they have fallen 45 to 55 percent from their peak.
When the viral storm finally subsides, the initial ride back up is also likely to be steep, at least initially, as companies and workers get back to business and investors pile back into the market. But after that brief surge, progress will slow and the longer-term effects of the crisis become clear.
Yes, cooped-up consumers — at least those with jobs — will rush out to restock their shelves, treat themselves to restaurant meals and splurge on a new dress or pair of shoes. But even as all that pent-up demand is satisfied, the spending won’t be anywhere near where it was back in February.
For starters, the return to work will be gradual, starting in those regions where the virus was less deadly, with younger and healthy workers who are less vulnerable, and at companies that can operate in ways that allow workers and customers to keep their distance.
Given the very real prospect of another wave of the virus later in the year, wary consumers are going to put a priority not only on replenishing their depleted savings but also building a bigger financial cushion for what lies ahead. And what’s true for households is also true for businesses, which are apt not to proceed with planned investments. In normal times, these account for anywhere from 15 to 20 percent of economic output.
Then there are whole categories of spending that will take years to come back. Until a vaccine is available, some people will be reluctant to go anywhere there are large numbers of people packed into small places, whether that’s an airplane or train or theater or sports arena. I’m also guessing that grandma and grandpa aren’t going to be rushing out to book their next cruise, while trade groups may hold back on planning their next convention. All of this will dramatically slow the recovery for hotels, restaurants and the makers of aircraft and their suppliers.
To a minor degree, how much people spend depends on whether their wealth — the value of their house, their retirement fund and investment portfolio — has recently increased or decreased. All of those have now taken a hit.
The slow recovery in spending by domestic businesses and consumers will surely be matched by slow recovery of demand for American-made goods in hard-hit countries in Europe, Asia and South America. Big American corporations as a group depend on foreign sales for more than half of their profits. And sales will be further impacted by the recent run-up in the value of the dollar as global investors rushed to the relative safety of the U.S. financial markets. A stronger dollar makes American products more expensive for foreign buyers.
The prospect of a global recession has also caused a sharp decline in commodity prices that is likely to shutter wide swaths of the U.S. energy industry — coal mining, oil and gas exploration. Falling prices for wheat, corn and soybeans will also put a crimp in farm income. Those declines will be a drag on the national economy while keeping some regions mired in recession.
While most companies are likely to survive the coming recession, and be able to respond quickly to the pickup in business, some will not.
In the retail industry, the pandemic has accelerated the shift to online shopping that had already forced national retailers to close stores, turned shopping centers into offices and driven independent retailers out of business. The prospect of loan defaults by mall owners has already caused meltdown in the credit markets for commercial real estate. Meanwhile, Amazon shares have barely noticed the typhoon sweeping through the rest of the stock market.
A similar wave of defaults is coming in the energy industry where heavily indebted drillers and service companies cannot survive on $25-a-barrel oil and $1.60 for a thousand cubic feet of natural gas.
Such defaults are reminders of just how over-indebted many industries had become over the past decade as companies loaded up on cheap and plentiful debt, much of it used to pay dividends, buy back stock and buy up other companies at what now look to be highly inflated prices. Households also gorged on credit, taking on record amounts of student loans, car loans and credit card debt.
Now, the air is rushing out of that credit bubble and with it the “best-anyone-has-ever-seen” economy that Trump continues to brag about. The extraordinary actions taken by the Federal Reserve to keep credit flowing is not only a multitrillion-dollar rescue of the businesses and households that took out those loans. It is also a rescue of the banks, hedge funds and private equity funds that made untold riches creating that credit and were on the hook to suffer untold losses if their elaborate house of credit cards collapsed.
We can leave for another time, and another column, the details of how regulators stood by and allowed another credit bubble to inflate so soon after the last one burst. But now that the economy and the financial markets have begun to shed some of that debt — deleverage in the language of finance — the economic activity previously supported by that credit will disappear.
In the long run, that’s a good thing — the U.S. economy needs to be weaned off its addiction to cheap credit. But in the short run, it means that the economy won’t be roaring back to where it was.