As much as 17% of the workforce is unemployed, or around 22 million workers. For perspective, the unemployment high during the great recession was 10%. Here is a nifty chart from Forbes:
So, are we faced with another long, slow recovery? Well, the fact that the figures are so huge and impact so rapid, it’s very difficult to say. We could use the Great Recession as an instrument for projections:
The first issue with the Great Recession was that monetary policy was too tight, which greatly impeded the recovery. The second issue was a human one: expectations and confidence. This part is far more nebulous than central bank policy.
For instance, let’s assume the decision is made to bring everything back to normal August 1st. In this hypothetical scenario, the magic wand will not only “open” the economy back up, it will keep every piece of labor and capital intact, ready to resume production and output and their former level. The question is, will the fact that the economy froze in and of itself, everything else held constant, be enough to impact future production and demand. The answer is of course, yes. Even if tomorrow the economy were opened up, all the people who were laid off rehired, and all the businesses who closed shop, reopened, there would still be a lagging confidence effect on output. This is what central bankers will try to isolate before they can even attempt to isolate the impact from sudden, massive layoffs.
Let’s say that we have established what the impact would be from “freezing” the economy for a period of time, with everything returning exactly to normal afterward. The next calculation should be: what would it take to revert everything back to January 1st, 2020. That is what we’re after right? We have 22 million workers who were fully employed just a few short months ago, and expanding businesses, and entrepreneurs ready to lift off. What exactly would it take to retroactively approximate these growth conditions post-Covid19?
Once the economy “reopens” there will certainly be a situation where capacity to produce is greater than what is currently being produced. We will be in an environment where tens of millions of displaced workers are ready and willing to work with no place to go. The firms which downsized and went out of business are not going to be prepared or able to rehire the displaced workers. This represents a significant shrinking of aggregate production. The better question to ask, is: will the economic conditions which led to our unprecedented expansion assume their former upward pressure? First its important to understand what those conditions were, circa pre-Covid. Let’s think through a few of those conditions which led to our economic growth:
- Low interest rates
- Raised inflation expectation
- Stock market growth driven by solid earnings growth
- Higher labor force participation rate(though this could be argued as a symptom rather than a driver of growth)
- Market expectation of consumer spending
It’s important to note that these domestic factors buoyed domestic growth amidst global factors, including geo-political tensions such as Iran and China. Any measurement of domestic growth factors must be weighed against the net global pressure(either negative or positive).
To what extent then will these domestic factors “reset” the economy back to January 2020? If investors believe the only thing which prevents return to status quo is the opening of the economy, then perhaps we will see a rapid growth period beginning with Q3, as Goldman Sachs suggest. If investors believe that structural changes have occurred along with a freezing of the economy, we are likely to see a longer period of recovery. In parallel, if people are confident enough to return consumer spending to normal levels, market entries may return to growth levels. But, if consumers who have been able to keep their jobs choose to save over spend, we will see a longer recovery period.
These tandem actors, investors and consumers, will dictate the recovery. An added dimension is that the U.S. is no longer a domestic consumer economy; we are a member of a global consumer economy. With certain countries experiencing a more severe impact from the virus than others, our recovery will depend on the recovery of the countries which we export to. Germany, for instance, is doing relatively well in terms of containing the virus, but Spain and Italy are not. These countries are relatively minor in terms of export impact, but what if Mexico becomes a battleground? Canada?
To forecast the recovery, where possible, must expand its purview to include our global trading partners, as well as our domestic economic condition. Auxillary companies along the supply chain, both domestic and globally, will determine the pace of recovery to the extent that they support primary business drivers. If those companies, whom rely on mega-corps like Apple and Google, cannot repurpose their capital to other productive work, or at least diversify their capital to support other companies, they may find themselves a casualty of the economic freeze.
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