Which Letter Will Describe This Recovery?

Popular Economics Weekly

Conference-board.org

The Conference Board’s consumer confidence survey should help to predict the shape of this economic recovery from COVID-19. Economists usually described it as a letter in the alphabet, and I believe it will mirror the degree of “uncertainty” felt by consumers. Looking at past pandemics hints at what its shape might be.

In the words of Lynn Franco, Senior Director of Economic Indicators, “Following two months of rapid decline, the free-fall in Confidence stopped in May…Short-term expectations moderately increased as the gradual re-opening of the economy helped improve consumers’ spirits. However, consumers remain concerned about their financial prospects…While the decline in confidence appears to have stopped for the moment, the uneven path to recovery and potential second wave are likely to keep a cloud of uncertainty hanging over consumers’ heads.”

Economists are therefore trying to determine if the US economy sinks back into recession in a second wave of infections in the fall, or even a third wave nest spring, as in past pandemics. Right now, some economists are predicting a ‘V’ shaped recovery with GDP growth gaining traction after two quarters of negative growth.

Just under half of 45 economists responding to a Reuters poll earlier this month said the U.S. economic recovery would be “U” shaped, which probably means at least two quarters of negative growth, but a very slow recovery. Ten of those polled said it would be “V” shaped, and five said it would be “W” shaped.

Fed Chairman Powell in recent comments at a press conference following the U.S. central bank’s latest policy meeting indicated he sees even more disruption than even the “W” camp. Powell said he believes the economy may go through a series of peaks and troughs for at least a year or more as the world battles to keep the virus under control.

“John Kenneth Galbraith famously said that economic forecasting exists to make astrology look respectable,” said Powell. “We are now experiencing a whole new level of uncertainty, as questions only the virus can answer complicate the outlook.”

This happened with the 1918-20 Spanish Flu pandemic that killed some 700-900,000 Americans. Its fall resurgence in deaths after a summer created an 18-month recession from January 1920 to July 1922. It was considered a mild recession with GNP growth falling approximately 8 percent.

seekingalpha.com

A chart of the Spanish flu combined with the DOW-Jones Index shows how the stock market behaved during that time—the DOW fell with every resurgence of deaths. It wasn’t until the third death rate spike began to subside in early spring of 1919 that the DOW rose, though economic growth didn’t resume until the end of the recession in 1922, and the decade became known as the “roaring twenties”.

Two lesser-known pandemics based on bird flus in 1958 and 1968 caused more than 100,000 deaths in the US.

In February 1957, a new influenza A (H2N2) virus emerged in East Asia, triggering a pandemic (“Asian Flu”). It was first reported in Singapore in February 1957, Hong Kong in April 1957, and in coastal cities in the United States in summer 1957. The estimated number of deaths was 1.1 million worldwide and 116,000 in the United States.

Several short and mild recessions followed the two pandemics; the first in 1958 when GDP growth was a negative -1.54 percent in Q1 1958. GDP growth began to plunge again in Q1 1968 following the second Avian flu pandemic that killed approximately100,000 in the US, and ended with the 1970 recession.

The point is pandemics have always caused a substantial drop in GDP growth, and this pandemic is shaping into another Great Recession lasting at least two quarters, before beginning to recover in the fall or winter.

That is why Dr. Fauci has been so vocal in supporting continued vigilance and preparedness for an additional outbreak.

And Dr. Rick Bright, the recently transferred director of Biomedical Advanced Research and Development Authority director at HHS said, “The mortality of the pandemic could be “unprecedented” and ultimately outstrip the 50 million casualties of the 1918 influenza epidemic without a science-based national response to the pandemic.”

It’s going to be a difficult call, in other words, as to which letter will better describe the length of this recession due to the novel coronavirus.

Harlan Green © 2020

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