By Rob StrandRestrictions on movement due to the COVID-19 pandemic have led to a collapse in consumer spending and a steep drop in output, as many workers cannot get to their jobs. Surely March will be noted as the start of a national contraction, ending the longest span of economic growth since the last World War.
Stabilization programs from Congress and the Federal Reserve created temporary lifeboats for many businesses and households. These efforts may have halted the decline but turning the economy around will depend on consumer and business behavior, government finances, and a global recovery.
Economists struggle with the question of what recovery will look like when the economy reopens—whether it will be a quick “V-shaped” bounce back or a more protracted “U-shaped” recovery. It is clear, however, that the timing of reopening will greatly affect the shape it takes. If large parts of the economy less impacted by the virus reopen, the recovery could commence more quickly. On the other hand, an extended shutdown would significantly slow recovery.
If the pandemic abates to the point that “social distancing” can end, the trillions of stimulus dollars from the government may support a sharp rebound in the economy. Consumer fundamentals were strong heading into the downturn, and households may significantly increase spending to satisfy pent-up demand. Moreover, reopenings for many firms that have recently closed should create a surge in activity.
After the initial surge, a synchronous recovery will be needed to build momentum for growth. Household spending will have to become exuberant and businesses will have to rehire laid off workers and start investing again. The six to twelve months following the initial upturn will be critical.
Some factors for each of the economic sectors could slow recovery after the early upturn, leading to a more U-shaped recovery.
- Consumer spending. The government currently supports millions of workers, but consumer spending must remain strong or else firms will not keep workers once those payments end. Even so, high unemployment appears likely, given that many firms will fail in this economic downturn. This plus general anxiety and uncertainty may restrain consumer demand below pre-pandemic levels for some time.
- Businesses investment. Capital investment was not robust before tax cuts were implemented and the pandemic struck. Thus, business capital spending may not be strong in the uncertain environment ahead. Regional economic surveys already show sharp deterioration in planned investment spending.
- Government spending. Federal government spending will surely decline when stimulus actions run their courses and recovery kicks in. State and local governments will need to tighten their belts because their budgets have been decimated.
- International trade. Revival of the U.S. trade sector is important, but it is difficult to guess when pre-pandemic growth will return to Europe and Asia. The IMF foresees a deeper recession in Europe than in the U.S. this year and very modest growth in China. The IMF is particularly concerned about recovery in emerging markets, where governments and central banks do not have the means to mitigate lost income.
Recovery will depend largely on the degree of success in containing the pandemic. If vaccines and treatment medicines are developed, then the pandemic can be contained and “social distancing” phased out, spurring economic resurgence. However, an extended shutdown would exacerbate problems greatly, reduce business survival rates, deepen the recession and significantly slow recovery. The IMF recently noted lingering infection or recurrence as the biggest risk.
Rob Strand is senior economist at ABA.