Coronavirus and the US Economy: Not how deep the recession but how long

The right question to ask about the US economy is not how deep will be the GDP plunge but how long will the shutdown orders prevent recovery.

The depth of the GDP collapse in the second quarter, whether 5% or 25 % just to take two estimates, is less telling for the future than its longevity. Two quarters or three at -5% will be far more damaging than one at -25%.

This is not to say that the various shutdown orders in many states are incorrect. The public health and economic questions are in active and full-fledged debate in the media and US public life. States have taken very different approaches to the pandemic as the infection and fatality rates have varied substantially with geography, population density and international access.

It is however to state the most basic fact that until the restrictions begin to be rescinded there can be no recovery.  It is also to remind that the decision is a political one. The governors who are mostly responsible must take both the economic and health variables into account, the decision is not a zero-sum game for one side or the other.

There are, despite the daily reckoning of new cases and fatalities and the even the much harder to find number of cures, as Ian Drury would say, reasons to be cheerful.

The first is to remember that the predictions for a prolonged economic disaster or a new depression are that, projections, estimates based on assumptions. We should be very careful that we do not, in our desire for certainty, treat these educated guesses as fact or high probability.   

The second is that there is no reason to assume that the economic logic of the deeper the recession the swifter the recovery rule is untrue for pandemics.

And third, the motivation for employers, workers, managers and investors to reconstitute their lives and fortunes will prove again that individual effort is the strongest engine of economic growth.

Unemployment and initial claims

No previous recession produced jobless claims and unemployment on a scale or with the rapidity of the past month.  In the 2008 financial crash it took 11 months after claims turned higher for them to rise from 349,000 in April to 665,000 in March 2009.  Last month claims went from 282,000 in the week of the 14^th to 3.307 million, 6.867 million, 6.615 million and 5.245 million the next four weeks. The highest four week average in 2009 was 659,250, this week it was 5.509 million.

Initial Jobless Claims

The 22 million claims filed in the past four weeks are almost 60% of the total claims registered in the 79 weeks of the 2007-2009 recession, 37 million.

It is not only the size and speed of the dislocation that makes it so difficult to model but its nature.  Unlike business cycle recession or financial crashes where the overextended economy requires time to rejuvenate and recreate the jobs lost, most employers expect these positions to be recovered.  

Temporary layoffs

A number of states require employers to say whether a layoff is permanent or temporary and according to a Wall Street Journal article, California firms with at least 75 employees reported that just 7% of their March and April layoffs were considered permanent.  Companies in Colorado and Washington reported 23,400 layoffs this year and nearly 75% were considered temporary compared to less than 1% in 2009 and 2009.  

Employees will have the same hopeful opinion and this may limit the drawdown in consumption.   It may be that the physical limitation on shopping is responsible for a portion of the 8.7% drop in March retail sales. The figure would certainly be higher if most automobile dealerships in the country were not closed.    

Retail Sales

US-China trade

The US economy before the pandemic was operating at historically low levels of unemployment and jobless claims.  The US-China trade deal signed on January 15^th was expected to boost growth in the manufacturing and agriculture sectors and relieve the drag from two years of tariff warfare.  Before the virus struck the Atlanta Fed GDPNow estimate for first quarter growth had been 3.1%. China reported a 6.8% contractions in the first quarter. New

Whatever damage the pandemic has done to long-term US-China industrial relations both governments will want to get their economies moving as quickly as possible and that will only be possible if each side cooperates in fulfilling the agreement.  For the time being there should be no new disputes on the trade front.

Virus modeling

If we needed a further reminder about the fallibility of modeling new and unusual events the cautionary example is right in front of us. 

A number of the public health models for the spread of the Coronavirus and the likely fatality rates have been highly inaccurate.  The most frequently cited model for the spread of the virus from the University of Washington's Institute for Health Metrics and Evaluation has decreased its fatality rate by a factor of four over past month from 240,000 in the US to about 62,000 at last estimate.

The original figures were not merely academic exercises but were used by the authorities and politicians to formulate policy.  Estimates for the UK and the US from the Imperial College in London saw the same wholesale adjustments lower.

The purpose is not to denigrate the motives or skills of the medical and economic statisticians or the judgement of the people who relied on them but to note a singularly important fact. It is very difficult to model future events.  When you model a little know event, the main thing you may be modeling are your own assumptions

Dollar prospects

The chief impacts of the pandemic on the currency markets has been the safety-trade to the US dollar and assets. That premium has started to fade as equity markets have recovered and governments in Germany and the United States among others are discussing plans for a gradual reopening of their economies.  

If those revivals take place the dollar will continue to slip as the safety advantage is extracted.  It will be likely be several months before normal economic and interest rate comparisons return to currencies.  

Everyone wants to work

Perhaps the biggest factor in reviving the economy is also the one hardest to fit into an economic equation. 

The motivation for employers and employees to reconstitute their lives cannot be underestimated.   People want and need to work, they want their children to go to school.  Business owners will stretch every nerve and use every resource to save what they have built.   

The pent up demand from weeks of forced inactivity should generate a burst of spending that will encourage businesses and provide much needed cash even if the overall level of consumption will be slower to return to what it was before the virus.

Time is of the essence

All of factors tending to a positive outcome after the shutdown of large sections of the US economy decrease the longer the closures remain in place.

In another month or two businesses will begin to exhaust their credit lines.  The unemployed may not run out of benefits until the fall, most receive 26 weeks, but the longer they are out of work the less they will spend.  If the shutdown drags on into the summer more and more of the temporary layoffs will become permanent. The danger of a self-reinforcing cycle of lower consumer spending leading to jobs cuts and then to more spending reductions increases as time goes on..

There is a final reason for governments to be very uneasy about prolonging the country’s economic constriction. The longer it continues the greater the impact on the nation’s food supply.  

Be wary of disaster

The models predicting a large and dramatic collapse in US GDP in March, April and May are most likely correct. Beyond that state of the economy is at the mercy of the continuation and extent of the closures.  The worse a model’s GDP prediction the longer and more stringent will be its assumptions about the shutdowns.

The main and most powerful reason to expect a rapid resurgence of the US economy is the human one.  Owners, managers and employees want to return to their livelihoods.  

Now and for an indeterminate number of weeks into the spring and summer the expectation that the economy will return will remain the operating assumption of consumers and markets, employed and unemployed alike.

 If that begins to shift, if people start to expect a long and slow return to normality, then the economic recession cycle of falling consumption and employment, rather than the current viral one, could become the measure of the next year.