The New York Stock Exchange stands on abandoned streets in Lower Manhattan on May 18. | Photo by Spencer Platt/Getty Images
Magical thinking on the economy won’t make things the way they were before.
It would be nice to think that everything will be back to normal by June. It may also be close to delusional.
As states around the country begin to reopen their economies with the coronavirus crisis still far from under control, we’re about to undertake a very big experiment about whether you can turn the economy on and off, basically, like a light switch. That getting back to business will be easy is a risky bet to make, and so far, signs point to it being pretty unlikely.
“We have to balance optimism with realism, and those are two factors that don’t necessarily point in the same direction,” said Mark Hamrick, senior economic analyst at Bankrate.
There’s no way to predict exactly what the future of the United States economy will be, precisely what the recovery will look like or when it will arrive. Even if businesses reopen, many people won’t risk getting themselves or a loved one sick to crowd into restaurants and bars. Still, a sort of magical thinking has settled into place: This was just a glitch, some people argue, and a swift economic recovery is just around the corner if we simply will it.
But much of the evidence points to a longer and harder recovery than optimists project — instead of a “V-shaped” recovery (a quick dip down and then pop back up), at the very least, more of a Nike swoosh. Millions of Americans have lost their jobs, and even when workplaces open back up, some of those job losses will be permanent. The same goes for some businesses that have shuttered. And if the federal government waits too long to take further action to support the economy, the recovery will be longer and slower.
“It’s not going to be a snap-back V-shaped recovery, at least for Main Street,” said Alicia Sasser Modestino, an associate professor of public policy and economics at Northeastern University.
The best-case scenario feels very nice to imagine and is also pretty unlikely
On Monday, the stock market popped, thanks in large part to positive data from a biotech company called Moderna, which showed that eight participants in a Covid-19 vaccine study it was running had developed antibodies against the virus. Now, the stock market isn’t the economy — and the market lately has been a lot more positive than the economy — but the jump is emblematic of the overall hope that scientists will find some sort of solution for the coronavirus pandemic and, poof, everything will be right again.
“If we beat this thing, it’s going to be unbelievable,” trader and CNBC host Jim Cramer told me earlier this year.
“If for some reason somehow one of these companies discovers a vaccine that cures and eradicates the virus, which is a small possibility, we’d be in a V-shaped recovery faster than you could turn around, and the market would go to the moon almost instantaneously,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab.
Some sort of instant solution is perhaps possible, but it’s unlikely in the near-term. Scientists still haven’t identified a super-effective treatment for for Covid-19, and many experts caution that a 12- to 18-month timeline on a vaccine is optimistic. It’s still unclear how long immunity lasts after someone’s had the virus, and beyond treatments and vaccines, America is still getting its act together on testing.
“The truth is, nobody knows when or if we’re going to have treatments or a vaccine for the virus, and if we wind up with modest treatments and no vaccine, this recovery is going to be pretty gradual,” Frederick said.
Some big-money investors are starting to sound the alarm that the rosy stock market is pointing to a bright economic future that is divorced from reality. Last week, billionaire investor Stan Druckenmiller warned that despite the Federal Reserve’s measures to boost markets, “the risk-reward for equity is maybe as bad as I’ve seen in my career.” David Tepper, the manager of hedge fund Appaloosa Management, said this is the “second-most overvalued stock market” he’s ever seen. Even Warren Buffett, who in 2008 encouraged investors to “buy American,” at Berkshire Hathaway’s annual meeting recently, struck a more pessimistic tone. “You can bet on America, but you kind of have to be careful about how you bet,” he said.
Life isn’t back to normal, so how can the economy be back to normal?
Many states across the country have begun to gradually reopen their economies, but things aren’t back to where they once were. Many establishments have occupancy limits, so restaurants, for example, can only be at partial capacity, or retailers are open, but they’re only doing curbside pickup. Moreover, plenty of people are still very scared of contracting the novel coronavirus, and they’re just not eager to crowd into movie theaters, gyms, or bars.
According to a recent survey from Bankrate, 55 percent of Americans think it’s too soon to reopen the country’s economy, and 43 percent say that they plan to shop in public less than before. Most Americans say it will be at least a month before they feel comfortable going back out, and 13 percent say they wouldn’t feel comfortable until there’s a vaccine or the virus has been contained. There’s a partisan divide to it — Democrats are more hesitant about the economy reopening than Republicans — and there are some people who say they’ll get back to participating in the economy like before.
According to Bankrate’s survey, about one-third of Americans say they’d be comfortable visiting a local business within a month of restrictions being lifted. “But even if it’s one-third, you have to think about how that affects the margin,” Hamrick said. “You don’t have to have 100 percent for it to be negative.”
Sweden, for example, has decided largely to go about business as usual. But its economy is expected to contract at a similar rate to the rest of Europe because many people are still opting to stay home.
As Vox’s Matt Yglesias recently wrote, put simply, reopening the economy won’t save the economy. Even before the shutdowns, restaurant bookings fell off a cliff. The airline industry has taken an enormous hit, and people can still travel. Same goes for hotels. Per Yglesias:
The problem is a question of fear. Americans fear spreading or contracting infection, so much so that they’ve overwhelmingly participated in social distancing measures. They tell pollsters by wide margins that they fear lifting those restrictions too soon much more so than too late. They’re willing to stay put even if it harms the economy.
They also fear economic hardship. That’s led prudent people, even those left relatively unharmed by the downturn so far, to delay nonessential purchases, like new cars, appliances, clothes, and other goods.
Consumers are uncertain about what’s to come, and so many are inclined to save.
Some of what was lost just won’t come back
Over the past two months, more than 36 million Americans have filed new jobless claims. The unemployment rate hit 14.7 percent in April, with estimates suggesting it could reach 20 to 25 percent. One recent study projected that over 100,000 small businesses have shuttered permanently since the onset of the pandemic closed their doors. Coming back from that is going to take time.
In an interview with 60 Minutes that aired on Sunday, Federal Reserve Chairman Jerome Powell, when asked about the likelihood of a “V-shaped recovery,” emphasized that the important thing is to get back on the road to recovery at all. He said he thinks that can happen by the second half of the year, but it’s “very plausible” it will take some time for the economy to gather momentum.
“We’re not going to get back to where we were quickly,” he said. “We won’t get back to where we were by the end of the year. That’s unlikely to happen.”
Recovery is going to be a process, and some things will just never be the same.
The labor market will likely take a long time recover — the nonpartisan Congressional Budget Office projects unemployment will still be at about 10 percent by the end of 2021. There’s a lot of friction that happens in the labor market that slows things down, Sasser Modestino explained. Not all the jobs destroyed because of coronavirus are going to come back. Some companies are going to put in place more automation and technology, or they’re just not going to hire as many people back. A food processing plant is going to put in place more machinery, a daycare at partial capacity will bring back fewer employees.
“It’s very unlikely that all of the furloughed workers will be recalled in June, July, August,” Sasser Modestino said.
“The longer you stay shut down, the harder it is to snap back,” said Scott Baker, an associate professor of finance at Northwestern University’s Kellogg School of Management. Investments are slowed or redirected, jobs don’t return, workers lose contact with employers. And as with so many things in the economy, the recovery is unequal — big companies with access to infrastructure and credit have much better odds than small players. “They can weather this a lot easier,” Baker said.
The recovery is also likely to be split across socioeconomic lines — just because Wall Street makes a comeback doesn’t mean everyday Americans will, especially those hit disproportionately hard by the downturn.
“The people who are getting hurt the worst are the most recently hired, the lowest paid people. It’s women to an extraordinary extent. Of the people who were working in February, who were making less than $40,000 per year, almost 40 percent have lost their jobs in the last month or so,” Powell told 60 Minutes.
If the government wants a V-shaped recovery, it has the ability to accelerate growth
Jeff Stein at the Washington Post recently reported that President Donald Trump and many of his top advisers are predicting a quick economic recovery. White House economist Kevin Hassett told reporters on Monday he’s been “really positively impressed by how quickly things are turning around.” National Economic Council director Larry Kudlow said improvements in housing and gasoline demand were positive signs. That’s the same Larry Kudlow who a couple of weeks ago said the White House wants to take a “pause” on economic relief to see how things go.
It’s true that not everything in the economy is all doom and gloom, and some elements of the current situation, as Bloomberg’s Joe Weisenthal recently put it, are just weird.
A thought that I keep having during this economic crisis is that it is extremely strange and that I often feel like I must be missing something.
— Joe Weisenthal (@TheStalwart) May 19, 2020
It’s also true that we don’t necessarily want the economy to look how it did pre-coronavirus. Millions of low-paid workers have been deemed essential during the pandemic, and failures of the social safety net have been exposed.
But broadly, if the federal government wants to improve its chances of accelerating the economic recovery, it can. The Federal Reserve has already indicated it is more than willing to continue to use all the tools in its toolbox to keep the country afloat. Congress has passed three major coronavirus-related bills, and last week, House Democrats unveiled their proposal for a fourth.
States and cities have begun to sound the alarm that they are facing serious budget shortfalls. If the federal government doesn’t step in, they’ll have to cut back services and lay off workers, and that will ultimately slow the recovery even more. “We do not want to be adding public employees to an already long unemployment line,” Sasser Modestino said.
The truth is, no one knows what the future holds for the American economy. And it would be great if some treatment or vaccine appeared for coronavirus tomorrow. But hoping for a miracle is not a safe bet — focusing on actionable, tangible solutions is at least more realistic.
“There’s been real economic damage, of course, caused by these restrictions, and no amount of got assistance is going to fix all of that,” Hamrick said. “It’s going to be more of a recovery process than it will be an event.”
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