Popular Economics Weekly
The key to a robust recovery will depend on how American consumers react to the novel coronavirus pandemic and business shutdown.
We were slipping into a recession, anyway. COVID-19 just sped up the inevitable result of economic mismanagement since the 1990s of U.S. growth, in what is the longest economic expansion since World War II.
Why? Can you imagine what could have been accomplished with $2 trillion if it had been put into upgrading our infrastructure, instead of tax cuts for the wealthiest that corporations used to boost their stock prices? We might have avoided what may become another severe, maybe Great Recession that put some 8 million Americans out of work for years.
Economists had been conjecturing what might have been a mild recession beginning in March, anyway, as corporations (-$13T) and the federal government (-$22T) became so heavily indebted that default rates were already climbing—whether with students and consumers, or corporations falling behind on their debt payments amid declining profits this year.
Sustainable economic growth was no longer possible, in other words. COVID-19 was the nail in the coffin oof this recovery from the Great Recession, when the most basic investments that would prolong future growth had been drastically curtailed by a deadlocked congress through much of the Obama administration—in infrastructure, education, R&D, except healthcare.
First Quarter Real gross domestic product (GDP) decreased at an annual rate of 4.8 percent in the first quarter of 2020, according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2019, real GDP increased 2.1 percent, said the Commerce Department today.
“The decline in first quarter GDP was, in part, due to the response to the spread of COVID-19, as governments issued "stay-at-home" orders in March, said the BEA. This led to rapid changes in demand, as businesses and schools switched to remote work or canceled operations, and consumers canceled, restricted, or redirected their spending. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the first quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified.”It is a stark reminder of what has happened to economic growth since the nationwide shutdown. The question haunting economist will be the shape of the contraction—whether it is V, U, or L shaped—i.e., whether it will be a sharp and short contraction, or something more prolonged.
Any decent economic recovery will depend on whether consumers can weather the COVID-19 pandemic and maintain their jobs, of course. And that will depend on how quickly the pandemic curve flattens and so-called coronavirus ‘clusters’ are identified and isolated.
There is also a curve that measures consumers’ behavior. The moment consumer confidence begins to rise again from the dumps will be the earliest indicator of a revival—when American consumers feel secure enough to buy again, which is 70 percent of economic activity.
The Confidence Board is a survey that measures consumer confidence, and it has been sinking due to the shutdown. It weakened significantly in April, driven by a severe deterioration in current conditions, said Lynn Franco, Senior Director of Economic Indicators at The Conference Board.
“The 90-point drop in the Present Situation Index, the largest on record, reflects the sharp contraction in economic activity and surge in unemployment claims brought about by the COVID-19 crisis.(But) “Consumers’ short-term expectations for the economy and labor market improved, likely prompted by the possibility that stay-at-home restrictions will loosen soon, along with a re-opening of the economy. However, consumers were less optimistic about their financial prospects and this could have repercussions for spending as the recovery takes hold.”
President Roosevelt most famously said, “The only thing we have to fear is fear itself,” in his first inaugural address at the beginning of the Great Depression.
We could be entering another such depression, though this downturn will probably be much shorter because so sudden. The unexpected 8.7 percent plunge in March retail sales was another sign of its depressing effect on consumer behavior.
I have seen even more pessimistic scenarios. For instance, if the pandemic lasts into 2021, it could reduce the level of global GDP by 8 percent compared with the baseline, says Gita Gopinath, the IMF’s top economist.
New York Governor Cuomo is now echoing President Roosevelt’s call to unite to fight this pandemic with his words, “It’s not about me, it’s about we.” And that means consumers have gain confidence and can unite behind and believe in the science that will ultimately defeat the virus.
It would be nice if we had more confidence in our federal government, but that's not possible for the moment. Yet we can support each other, and that’s what 'we' must do to conquer this pandemic.
Harlan Green © 2020
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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