Economic Update with Dr. Michael Walden - 10 Questions - March 2020

One of those voices I like to listen to in turbulent times is Michael Walden, Ph.D., who has brought insight into the economic issues that our individual and corporate clients face. We did an interview on March 24, 2020, in the midst of change. He brings and has always brought a cool minded, thoughtful perspective during calm and chaos. Here are my questions in bold and his answers to bring sense to the volatility.

Dr. Walden is a William Neal Reynolds Distinguished Professor and Extension Economist at North Carolina State University and a member of the Graduate Economics faculty with The Poole College of Management. 

1. On February 26, 2020, in your column You Decide: Could A Virus Take Down the Economy, you made many important insights and you ended with this note: 

Companies and industries in the U.S. having strong ties to China or other countries with major infections could be in for a rocky road ahead, but hopefully the challenges will last only weeks or months, and not years. But if U.S. consumers continue to spend, then the economy will continue to expand; that is, there will be no recession. However, continued drops in the stock market could – at the least – cause economic growth to be lower than expected.  

We are likely now in a recession - which means an economy-wide reduction in spending and jobs - as the virus has directly affected our country, and as the short-term remedy has been to deliberately reduce economic activity.

2. Would you add anything to this concluding paragraph at this time, almost exactly a month after it was published?

People are mostly either at home on some kind of sabbatical, been laid off in certain service industries or are adjusting to remote work. This came quickly. Does this trend continue after and I assume we will get a handle on this virus and if the age of social distancing dissipates in the next several months?

I think our experience with “tele” in many areas - delivery, working, integrating with doctors, and teaching - will continue at some level after the virus is gone. We will then have more direct experience with the relative benefits of this technique of interacting.

3. At least in North Carolina I have seen a big uptick in unemployment claims, but those claims seem to be coming from primarily service industry jobs and small businesses at the moment. Does this spike last and what are the signs that would make it creep into our technology and financial sectors?

This will be the first “service sector-induced” recession. But virtually no sector is immune for an economy wide recession, so tech and finance will also be impacted. The optimistic scenario is the virus is contained relatively quickly and the recession lasts - at most - two quarters.

4. What should the balance between the amount of time our economy is in its current, emergency mode vs. the potential health impact? What are the factors the President, governors and congress weigh in this risky environment? These must be very difficult calls. 

At yesterday’s federal coronavirus press conference, the President referred to this dilemma. The policy reaction to the virus (closures, lockdowns, etc.) is clearly leading to the economic trauma. How do we weight the benefits in controlling the virus from shutting down the economy to the costs of that shutdown? One approach is to identify major “hotspots” of the virus in the nation and use more draconian measures there, while allowing other parts of the country to have fewer restrictions. I think this decision will be driven by an analysis of the data from the outbreak over the next couple of weeks

5. In your June 2019 talk to my group in Raleigh, NC you pointed out that the unemployment rate was at a near 50-year low and until at least February 2020 things looked very strong there. What could impact local, regional and national unemployment? What should we pay attention to now? 

Unemployment will certainly rise everywhere in the next several months. The question is how high. At this point, an unemployment rate in NC of between 8% and 10% at the peak of the virus is certainly possible.

6. No cranes have come down or as I can see construction stopped in at least our Triangle area. Is there any concern among economists that investment dries up or does this shock look more like pent up demand right now? 

The key in ensuring that business picks up when the virus is contained is providing federal help to businesses to keep them solvent - and to prevent bankruptcy - during the virus period. This is why the massive (up to $2 trillion) federal aid package being considered in Congress is so vital. Fingers crossed, a package will be passed this week.

7. You also mentioned in June of last year that recession fears have receded. Those seem to be coming back. I hear a lot of words like recession and depression right now. What is a rationale vs. emotional way of looking at the data coming in for better, less emotional insights? 

As I indicated earlier, we are likely now in a recession. This recession has been totally induced by the virus. Economic fundamentals prior to the virus were excellent.

Technically, a recession is defined as a contraction in aggregate economic activity for two consecutive quarters. A depression is simply a deeper and longer recession. The “call” of a recession or depression is made by an independent, non-government think tank called the National Bureau of Economic Research - a group that has been in existence for a century. Although there are not firm rules, a depression would be likely called if the economy contracted by more than 10% for longer than two quarters.

8. How do you see the economy moving forward after this shock is over or it starts abating? 

If an aid package is forthcoming from the federal government, I see a relatively strong economic comeback once the virus has passed. 

9. Maybe what is the worst case and best case for economics and employment in the coming months from any models they are running? Big macro questions in my mind include how can the Fed really promise unlimited liquidity no matter what and also how much more is the US at risk given our current debt of $23.3T vs if we had no such debt?

Best case scenario I have seen is a contraction of 3% over two quarters. Worst case is 25%. The range suggests much uncertainty about the virus.

The Federal Reserve has the ability to create money. If an aid package is passed, funds will be raised for the programs by the federal government selling investments (Treasury securities) to the Federal Reserve, who pays for the investments with money it has created. Yes, this adds to the national debt, but in my view, effectively saving a large part of the economy now is worth the added debt.

10. You said in your column to “Plan for the best, but have a back-up for the worst” is advice I often hear and follow. You decide if these words are pertinent today. I think they are pertinent. Is there anything you might add for now or for later as we heed your advice?

We have not had a pandemic in our country of the magnitude of the coronavirus since the “Spanish flu” a century ago, which killed 600,000 Americans and between 50 million and 100 million people worldwide. Now that we know we are exposed, we need to do more planning for future possible pandemics. Businesses should also review their supply chains, especially if they are dependent on foreign countries like Asia. I will also be interested in seeing if there is a reaction by some people of living in highly dense cities. There may be a surge of living in small towns and rural areas.

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ABOUT Michael Walden, Ph.D.:

Michael L. Walden is a William Neal Reynolds Distinguished Professor and Extension Economist at North Carolina State University and a member of the Graduate Economics faculty with The Poole College of Management. 

His Ph.D. degree is from Cornell University and he has been at N.C. State since 1978. He has also been a Visiting Professor at Duke University. He has served on several local and state level commissions. He currently teaches ARE 201 Introduction to Agricultural and Resource Economics.

Dr. Walden has teaching, research, and extension responsibilities at NCSU in the areas of consumer economics, economic outlook, and public policy. He has published eleven books and over 300 articles and reports, including the books North Carolina in the Connected Age in 2010 and North Carolina Beyond the Connected Age: The Tar Heel State in 2050 in 2017, both published by the UNC Press.

ABOUT John M. O'Connor:

In his 29th year of career strategy coaching, outplacement and best practices in career services, John M. O'Connor has written 44+ Feature Articles and been cited in 300+ Expert Panel Quote publications for Forbes on career and workplace issues. He became the first private practice Reach Branding Certified Specialist in North Carolina and is the first Certified Federal Job Search Trainer (CFJST). With a unique fiction writing pedigree, he obtained a Master of Fine Arts in Creative Writing from Bowling Green State University. He has written multiple LinkedIn articles and contributed to career transition stories for Yahoo! Hotjobs, Monster.com, CNN-Money, The Ladders, AOL.com, and in many newspaper publications locally and nationally. 

His diversified experience includes serving as a college professor and as a United States Army officer. John is a keynote speaker and corporate trainer offering consultations, outplacement and talent issues, best workplace issues and human resource services.