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At this moment, it is not too hard to be sanguine about the US economy. Data releases from early June show a rebound from March and April’s plunge. There are promising announcements of progress on vaccines or treatments for Covid-19. There have been bold policy responses from the federal government and the Federal Reserve. And, stock markets—which are supposed to be forward-looking—have surged back to February levels. These signs seem to be pointing to a V-shaped recovery: a sharp drop, then a quick rebound. Boom. We’re back where we started. While that would be a wonderful scenario, there are mounting signs that difficult times lie ahead.
To begin with, the apparently tranquil seas haven’t actually been that calm. While the unemployment rate did not shoot to 20% as some had feared, it did rise above 14% in May. And, the “rebound” in June still left the rate at 11.1%—worse than the nadir of the Great Recession.
This would be less troubling if the shock appeared to have passed and it was a simple matter of recovery. Instead, the latest weekly unemployment claims number (July 11) was 1.3 million. That marked the 17th straight week that initial weekly claims were over 1 million. To put that in perspective, there had never been a single week with more than 700K claims before the current crisis. Serious economic fallout continues.
What’s more, this is a bit like taking a sick patient’s temperature after giving medicine to suppress a fever. The numbers might look encouraging, but wait until the drugs wear off. For the economy, the most notable medicine has come in the form of the federal CARES Act, which came into force in late March. While it had numerous provisions, the main goal was to carry the economy across a brief rough patch and minimize the economic impact of the pandemic.
The Paycheck Protection Program offered potentially forgivable loans to small businesses such as restaurants and retail—if they spent most of the money on retaining employees and spent the funds quickly. Assistance to airlines similarly required employee retention. A limited run of stimulus payments and enhanced unemployment benefits was also meant to provide a temporary counterbalance to a dip in incomes and demand.
Had the pandemic receded as spring turned to summer, this might have sufficed. Instead, the number of cases in the United States has risen sharply, posing a multi-pronged threat to the economy.
First, data from the onset of the pandemic show that consumers respond to health concerns. In some cases, those responses meant increased spending—bread baking and home exercise equipment, for example. But for most, responses regarding entertainment, travel, restaurants, and retail translated into consumer pullbacks.
Second, the resurgence of COVID-19 cases is prompting threats of new closures that endanger the viability of some businesses that had barely managed to weather the first round.
Third, the resurgence exacerbates mounting concerns about debt and bankruptcy. Just last week, major US banks announced that they had set aside over $30 billion in provisions against expected loan losses. And, they were blunt about why. JPMorgan’s CFO said, “...Now we’re looking at a more protracted downturn, we’re reserved for a much more broad-based impact across sectors.” The problem is not just limited to banks; the CEO of Levi Strauss predicted a continuing stream of retail bankruptcies.
Fourth, the longer the dislocations of the pandemic continue, the greater the likelihood that consumption patterns may change more permanently. Even after the health crisis is addressed, will businesses return to abundant air travel? Will shoppers go back to brick and mortar, or stick with online purchasing? Will fans still lay out big money for concerts and sporting events? Will diners return to restaurants, now that they’ve learned to cook? One can argue whether such changes are good or bad, but the shifts can be clearly disruptive when businesses and communities have made substantial investments in the old approaches.
Finally, amid all this turbulence, the economic medicine is about to wear off. The loans that kept many small businesses afloat are running out. Expanded unemployment benefits expire at the end of July. And, airlines have begun issuing significant layoff notices.
This will pose very difficult questions for lawmakers in Washington, in what is already a charged political season. There was some consensus about how to react when the threat was seen as uniquely deep and brief. A more persistent threat seems much more likely to provoke political standoffs.
The economist Joseph Schumpeter used the term “creative destruction” to describe the way in which economies would destroy the old and create the new—a process that can accelerate in downturns. We appear to be entering just such a period as the short-term fixes have run their course. The current moment may feel calm, but it could very well be the calm before the storm.