Not all recessions are created equally. Neither are the recoveries — and the biggest financial fear is that the current economic slump will last long after the coronavirus is contained.
Economists often say recessions take on shapes. A “W”-shaped recession is a double-dipping downturn, with the financial system bouncing back but falling again. A “U” form means lower-for-longer, while a “V” means a sharp decline but an equally strong snapback.
That “V” was the ultimate hope when the coronavirus first started spreading in the U.S. Stay-at-home orders were soon issued to keep as many people at home as possible. As retail stores, offices, gyms and bars closed, the economy naturally came to a sudden stop. But there was a silver lining: The economy would surely pick back up where it left off, once those shelters in place were lifted.
Then the forecasts started rolling in. And the data looked bleak. Economists at the Federal Reserve Bank of St. Louis said unemployment could top 32 percent. Goldman Sachs expects an unprecedented 24 percent contraction on an annual basis, while Euler Hermes sees a 30 percent plunge.
The International Monetary Fund (IMF) said Tuesday the global economy will suffer the worst economic crisis since the Great Depression. Meanwhile, the Congressional Budget Office (CBO) said it expects unemployment will remain elevated until 2021. All of this suggests that the return to normalcy could happen later — rather than sooner.
“What I’m seeing here is a depression-like shock without a depression,” says Joe Brusuelas, chief economist at RSM. “We’re not going to flip a switch and the economy is going to open back up at once. It will take some time to ascertain where the longer-lasting damage is.”
Natural disaster or financial crisis? Current recession has flavors of both
That’s going to be a tricky game of search-and-rescue, simply because the U.S. recession has checked “all of the above” on the list of typical causes.
History suggests that downturns come from different angles. Shocks can be exogenous or endogenous, Brusuelas says — exogenous being an unforeseen external problem and endogenous being economy-restricting policies. But this downturn has flavors of them all. Factories have been cut off from their global supply chains, and consumers have just stopped spending amid nationwide shutdowns.
“It’s hard to even classify what we’re dealing with,” Brusuelas says. “We had supply, demand and financial shocks all at once, cascaded through the real economy. It was like a few years in two weeks.”
Some experts have compared the standstill nature of the current downturn to the Great Depression. But others say it’s more comparable to an “event-driven” recession, or a slowdown that follows some sort of natural disaster or war. Researchers at the New York Fed tracked unemployment claims in Louisiana after Hurricane Katrina, finding that U.S. job losses right now are following a similar pattern, only on a national scale.
“We have no event post-war where the numbers are comparable to this, the only other instance is the Great Depression,” says Samantha Azzarello, global market strategist at J.P. Morgan Asset Management. “But it’s like apples to oranges. It’s much more comparable to a natural disaster.”
Economy getting back on track may depend on vaccine
There’s a caveat: Event-driven recessions seem to be paired with quicker snapbacks. “I wouldn’t say one is any better than the other,” Azzarello says, “but with event-driven, you recover. People know what the deal is.” It’s easy to tell when an event-driven recession is over, she says, because the event is over.
But when the shelters-in-place are eventually lifted, the idea that life will quickly return to normal implies that individuals will want to venture back out into the world immediately. Some Americans may still be scared that they could catch the virus.
Brusuelas himself is one of those individuals. “I’m not going to a movie theater, I’m not getting on a bus, I’m not getting on a subway. I’m going to be very skeptical about who I get in the car with,” he says. “You start thinking through the simple building blocks of the complexity of the economy. Social contracts have been shattered from the inside out. There’s going to be a new relationship between individuals and society.”
Looking back, data suggests that the slowdown in spending began long before consumers were mandated by state governments to stay home in droves. OpenTable data tracking the number of seated diners in the U.S., for instance, shows that dining-in dropped off in March and started plunging in double-digit territory by March 9. The U.S. coronavirus count was just around 700 people infected then, and it was before any state had declared a shelter-in-place, with California becoming the first on March 15.
Economists say developing a vaccine will be the equivalent of tossing the economy a life preserver, and the data seems to agree. A Seton Hall University survey found that 72 percent of Americans aren’t going to attend a sporting event before a vaccine is developed.
But even that will take time. It took 20 months for scientists to develop a vaccine in response to the SARS outbreak of 2003, a pathogen genetically similar to COVID-19, according to a Healthline analysis. There’s also a risk that, once a vaccine is developed, individuals might not take it. CDC data shows that more than half of all Americans didn’t get a flu vaccine during the 2018-2019 season.
“The economy cannot get permanently back on track if there’s the possibility of a person carrying this virus,” says William Poole, former president of the St. Louis Fed. “Going to a movie theater or a restaurant or a sports stadium could spread the disease all over again.”
Trump administration officials have introduced a three-phase plan to reopen the economy, with the president deciding to leave the exact timing up to the states. But epidemiologists say reopening the economy too soon could lead to a second wave of infections — something that happened in Hong Kong, Singapore and Taiwan.
The longer the shutdowns persist, the graver the stakes for everyday Americans. Shortages could take place, leading to higher prices and surging inflation down the road.
“What’s happening now seems to be the only feasible approach to stopping the spread,” Poole says. “But we have to produce goods that are necessary for everyday life, although it’s going to be a massive problem because people can catch the virus having tested clean yesterday.”
Beyond vaccine, shutdowns could cause long-term job market harm
About 22 million Americans over the past five weeks have applied for unemployment insurance. That likely means the unemployment rate is around 18 percent, after holding at 50-year lows just a month ago.
Once unemployment is elevated, history also suggests that it will take a while for it to return to previous levels. Joblessness during the Great Recession peaked at 10 percent and took nearly seven years to return to its pre-recession low. Payrolls in the U.S. shrunk by 701,000, according to the March jobs report. That’s the first time payrolls have shrunk since 2010, and it’s the worst monthly performance since March 2009.
Bringing jobs and workers back en masse as soon as the shelter-in-place orders are lifted isn’t going to be easy. While it’s possible some of the unemployed still have ties to their former employers, that won’t matter if many firms don’t make it out of the shutdowns alive.
One in four small businesses report having already temporarily shut down, according to Department of Commerce data released April 3. Meanwhile, 43 percent believe they have less than six months until a permanent shutdown is unavoidable.
“The idea that we’re just going to see a quick snap back, those kinds of claims ring hollow,” Brusuelas says. “In the near-term, there’s going to be less restaurants, less drinking establishments, and broad consolidation within the airlines and hotel lodging industries. The depth of the downturn will be worse than the duration.”
Watch for these longer-term indicators
1. Watch consumer spending data
If you’re wanting to track how the coronavirus is impacting the economy, it’s important to keep a watchful eye on data. Experts say it’s wise to first watch how much — or how little — consumers are spending, given that it’s the broader engine of economic growth.
Retail sales in March plunged 8.7 percent, the worst on record, the Department of Commerce reported Wednesday. The worst is most likely yet to come, given that the shutdowns have lasted well into April. But if you start to see a sustained rebound, that could point to a light at the end of the tunnel.
“Given that the consumer is the heart and soul of the economy, individuals have to watch the data on themselves,” Azzarello says.
2. Take a look at job market figures
The job market is the backbone of consumer spending. If unemployment remains elevated, it means individuals might cut back on spending. And if employers are shrinking the number of positions on their payroll, it indicates that the worst of the coronavirus crisis isn’t over yet.
The Department of Labor releases its monthly jobs report (typically) on the first Friday of the month. Pay attention to the unemployment rate and how many jobs employers in the U.S. added or erased from their payrolls.
The Labor Department also releases data every Thursday on how many individuals are filing and using unemployment benefits. Since it’s released more frequently, it can be a faster way of tracking the virus impact in real-time.
The number of Americans filing initial claims has posted back-to-back historic surges over the past four weeks. Eventually, it will be more worthwhile to track continuing claims filings. That could indicate whether those unemployed initially through virus shutdowns are still not able to find work.
3. Track gross domestic product (GDP)
Tracking gross domestic product (GDP), which shows how much the economy expanded or contracted over a three-month period, is another way of watching how the activity is fairing on a broader scale.
But that won’t be released right away. An advance estimate for the first quarter is out April 29, according to the Department of Commerce. The Atlanta Fed’s GDPNow tracker shows the economy contracting by 0.3 percent (as of April 16).
Second-quarter figures won’t be available until July 30. Most experts say it’s this stretch that could show the worst of the virus-related shutdowns.
4. Keep an eye on what the Fed is doing (as well as Congress)
Containing the fallout is often left up to monetary and fiscal policymakers. Lawmakers in Congress have already expanded paid sick leave and unemployment benefits and are delivering direct payments of $1,200 (or more) to soften the financial blow. Meanwhile, the Federal Reserve slashed interest rates to zero and enacted 11 emergency lending programs geared toward ensuring the recovery gets off to a solid start.
Fed Chairman Jerome Powell has already emphasized that the Fed would continue to intervene as necessary, meaning more programs could be announced if the outlook worsens.
If you’re wanting to track whether the coronavirus could lead to longer-term damage, it’s important to keep an eye on what’s happening across Washington, Azzarello says.
“We need a bridge to get us over the abyss,” she says. “This is a bridge for us to do that.”
5. Watch virus and vaccine updates
But since the root of the problem is mainly the coronavirus itself, it will be wise to watch the level of new infections, vaccine developments and news about whether any treatment methods are gaining traction, such as medicines or preventative therapies.
Experts say stock market isn’t the broader economy
Economic data is released with a lag. That means you might be tempted to watch the stock market for more immediate clues on how healthy the U.S. economy is, since it changes in real-time. But don’t do it, Azzarello says.
Markets have been whipsawing investors, with U.S. stocks experiencing their worst quarter since the financial crisis in the first three months of 2020. Since then, the S&P 500 has recovered sharply.
Major stock indices have finished in positive territory, even when catastrophic economic data is released. Stocks on April 9, for example, posted their biggest weekly gains since 1974 on the day that the Labor Department showed more than six million Americans had filed for unemployment benefits.
“What that’s showing and proving to me is that they’re not efficient. They’re swinging too much, and they don’t know what to price in,” Azzarello says. “We have to hunker down with the data that is slower-moving and less sexy, but it’s the data that really matters.”
There will be an end to the current U.S. recession at some point. But a changed economy is inevitable, Brusuelas says.
The pandemic is causing a new wrinkle: Firms are evaluating whether they should invest more in their cyber footprint, rather than office space, Brusuelas says. Remote workers are best suited to weather these changes, but that isn’t everyone — meaning the U.S. economy could be more unequal on the other side of the coronavirus.
“In the middle of a battle, we don’t notice how the war is going,” Brusuelas says. “Anytime you have a recession, depression, war or pandemic, the status quo is shocked. You’re not going to devolve back. Pandemic economics are going to forever alter the American social economy.”