America is now officially in a recession which the National Bureau of Economic Research says began in February. But this recession is unlike any the country has ever seen before. There was no economic boom and bust, no bubble that burst, no terrorist attack on our shores, etc.
Instead, the government unilaterally decided to flip the OFF switch on the economy in an effort to limit the spread of COVID-19 infections. People stayed home, businesses shuttered, tens of millions of workers were laid off and much economic activity ground to a halt almost instantly.
Thus, this recession was clearly “man-made” which is a subject of spirited debate. The question is whether the self-imposed economic lockdown was really effective in terms of saving lives. Increasingly, it appears the severe economic damage outweighs any benefits. Time will tell.
Now economists and forecasters wonder whether the economy can as easily be switched back ON. I can assure you the answer is NO, but I’m getting ahead of myself.
Lawmakers in Washington are preoccupied with creating another massive stimulus package for the economy, which I expect will be forthcoming in July at the latest.
Over 45 million American workers lost their jobs and applied for unemployment benefits in the three months since the middle of March. That’s more than one in four workers (27.3%); the total workforce was 164.6 million before the self-imposed lockdown.
The unemployment rate soared to a record 14.7% in April, but that number was misleading. The Labor Department admitted in its April jobs report that it did not count workers who were furloughed or had their hours cut to zero as unemployed. If it had included those unemployed workers, as it should have, the official unemployment rate would have been nearly 20%.
Fortunately, many of those 45+ million workers have returned to their jobs since the economic lockdown has begun to be lifted. If we are to believe the Labor Department, some 20 million laid off workers have returned to their jobs over the last month or so. If true, that still leaves about 25 million without jobs. We won’t know for sure until the next jobs report on July 2.
The burning question is, how severe was the economic contraction in the 2Q which ends next Tuesday (June 30)? Most forecasters believe GDP plunged 30%-40% in the 2Q, the worst decline since the Great Depression. We won’t see the first official 2Q GDP estimate from the Commerce Department until late July.
Another weird thing about the current recession is many economists believe it could be the shortest contraction in history – if in fact we do see a significant recovery in the second half of this year. While the Congressional Budget Office (CBO) predicts that 2Q GDP plunged by 40% (annual rate), it also forecasts a sharp recovery in the second half of the year.
The CBO predicts 3Q GDP will jump by 23.5% and the 4Q will expand by 20% or better. The CBO is not the only forecaster predicting such a strong economic rebound in the second half of this year. Most other forecasts I’ve seen for second half 2020 are in this same ballpark.
Yet these rosy forecasts are based on one huge assumption: Consumer spending will rebound to normal levels very soon. As anyone reading this should know, that is a questionable assumption. No one knows when consumer spending will get back to normal.
The number of new COVID-19 cases is now rising again in seven states including Arizona, California, Florida and Texas. There is still the threat of a second wave of COVID-19 in the fall. So, it is impossible to predict when consumers will feel comfortable spending at pre-crisis levels.
Consumer confidence fell off a cliff in March and April and rebounded only fractionally in May, as you can see above. Most forecasters expect a better bounce in June with the economy reopening, but it will likely take at least several more months to get anywhere close to a full recovery. Most of the sources I read believe it will take several years for the economy to fully recover.
And finally, there is the wave of bankruptcies expected in the second half of this year. More than 6,800 companies filed for Chapter 11 bankruptcy protection last year. It is widely believed that number will be significantly exceeded by the time 2020 draws to a close. If true, and I believe it will be, that will also weigh on consumer spending habits.
The New York Times reported on June 18, “A Tidal Wave of Bankruptcies is Coming. Experts see so many filings in the coming months that the courts could struggle to salvage the businesses that are worth saving.”
The bottom line: While this may prove to be one of the shortest US recessions, it’s not over yet.
Sorry, comments are closed for this post.