The Economy: Where Are We at Now

While we are all mired in the day to day details of the Corona virus pandemic, I thought I would try to add some perspective to where we are at and where we might be at the end of the year. 

The shape of our world has changed so much in the last two months that it’s hard to envisage what the months after the Corona virus will look like. Right now we are clearly in the “darkest before the dawn” period. Our nation is under extreme stress in its physical health, medical infrastructure, and the economic well-being of both its people and businesses. We haven’t yet seen the devastation that will emerge in the coming months when businesses do not reopen and individuals hit the end of unemployment without a job. The poor and elderly population are suffering the most.  Our doctors, nurses and essential businesses have stepped in with their lives to get us through and we are all indebted to them for their bravery and service.

More than 30,000 people in the U.S. have lost their lives in the pandemic and there are over 600,000 cases with a majority of them active. The global economy has just gone through a quiet implosion, and more than 22 million people have applied for unemployment as of mid-April, roughly 12% of the labor force.  That level is higher than 2008.  The unemployment number could reach as high as 20% of the workforce, the highest level since the Great Depression. While the stock market has taken a severe drop, it also has had some unsustainable climbs back. But the trend for the next couple of months will clearly be down. When the stock market turns around in a couple of months, let’s hope that will be a bellwether for the future. 

The economic data is going to look a lot worse before it gets better again. Guessing just how poor the U.S. and global growth will be is unknown and there will be some countries that will struggle for years to come.  Clearly, we have already slipped into recession but whether we are heading into a more serious depression in terms of the damage to jobs and growth, is a matter of speculation.

Former Federal Reserve Chairman Ben Bernanke has stated that the U.S. economy could contract by as much as 30% in the second quarter, but rejects the notion that we are heading into a longer-lasting depression. 

The case for optimism might defy logic right now, but eventually the fight against the virus will be won through the use of antibodies and vaccines, and the U.S. economy will have a slow year-long fight to recovery. Many businesses and whole industries will be changed forever. 

There are reasons to be hopeful, not least the fact that global policymakers have been using legislative, fiscal and monetary tools at their disposal to mitigate personal and business risks. Interest rates are near zero globally and dipping even further into negative territory in major economies like Europe and Japan.

Congress and the Federal Reserve are taking unprecedented action to bolter our economy with unprecedented capital literally being given away to ease the economic pain and resuscitate our lives. The CARES Act provides an enormous $2 trillion amount in loans and grants: $350 billion to small businesses, $500 billion to large businesses, $630 billion to individuals and almost $500 billion to public health institutions.  Many other niche groups are getting a billion here and a billion there. Very little of that capital has actually ended up in anyone’s hands, so there is no turn around that has even started.

The global economy is certainly not crashing into everlasting disaster and at some stage it will hit the floor and bounce back. The only uncertainty is when, by how much and what does recovery look like. 

The chances of a V-shaped recovery similar to the rally after the 2008 global financial crash are looking a lot less obvious, considering the pervasive impact on economic confidence and continuing doubts about how soon the pandemic’s peak passes and global lockdown measures begin to ease up. Recovery is more likely to be a broader U shape or even an uncertain W shape, if growth progresses in fits and starts. 

Recovery is likely to come in phases, with consumers likely to be bringing up the rear for quite a while given the sharp blows to individuals’ confidence, income and employment. Government spending and business investment are likely to be the initial growth drivers until consumer confidence finds its feet again.

Timing will be critical. China and South Korea are already inching to recovery after their lockdown. Later this year as global demand picks up, so should the appetite for exports of raw materials, consumer and capital goods. Major trading nations including the U.S., China, Germany and Japan should all see faster recoveries as world trade begin to pick up steam again.

Later in 2020 or early 2021, once the pandemic is well past its peak and the CARES Act capital has coursed its way through companies and individuals, consumers will start spending again. A consumer-led recovery could begin heading into 2021, considering the massive injections of monetary and fiscal stimulus in the past few months.

Talk of increased inflation and stock market bubbles are bound to surface again. That’s the nature of economic cycles. Global growth will come back over the next few years. Let’s all hope that Washington, our Governors and Mayors continue to use their powers to lessen the pain of those individuals most effected, find solutions for the new set of problems that will descend on certain sectors of our population and segments of our businesses and to support the drivers of our economy to provide the health and economic well-being of us all.

Alan Donenfeld, [email protected]