The economy shut down almost overnight. It won’t start back up that way.
Politicians and public health experts have sparred for weeks over when, and under what circumstances, to allow businesses to reopen and Americans to emerge from their homes. But another question could prove just as thorny — how?
Because the restart will be gradual, with certain places and industries opening earlier than others, it will by definition be complicated. The U.S. economy is a complex web of supply chains whose dynamics don’t necessarily align neatly with epidemiologists’ recommendations.
Georgia and other states are beginning the reopening process. But even under the most optimistic estimates, it will be months, and possibly years, before Americans again crowd into bars and squeeze onto subway cars the way they did before the pandemic struck.
“It’s going to take much longer to thaw the economy than it took to freeze it,” said Diane Swonk, chief economist for the accounting firm Grant Thornton.
And it isn’t clear what, exactly, it means to gradually restart a system with as many interlocking pieces as the U.S. economy. How can one factory reopen when its suppliers remain shuttered? How can parents return to work when schools are still closed? How can older people return when there is still no effective treatment or vaccine? What is the government’s role in helping private businesses that may initially need to operate at a fraction of their normal capacity?
South Carolina, for example, looks likely to be among the first states to allow widespread reopening of businesses. But if a manufacturer there depends on a part made in Ohio, where the virus is still spreading, it may not be able to resume production, regardless of the rules.
“We live in an economy where there are lots of interconnections between different sectors,” said Joseph S. Vavra, an economist at the University of Chicago. “Saying you want to reopen gradually is more easily said than done.”
The White House released a plan this month for a phased reopening of the economy, with restrictions easing as states meet public health benchmarks. States have begun to develop their own road maps. Gov. Andrew M. Cuomo of New York said Tuesday that parts of the state that had fewer coronavirus cases might be allowed to reopen more quickly than New York City and other hard-hit areas.
But those proposals are mostly rough schematics, leaving unanswered crucial questions about how the process will play out at the ground level. Those details may help determine whether the economy will bounce back relatively quickly once the pandemic ebbs or the United States will face a slow, painful turnaround, as it did after the last recession.
Under the White House’s three-phase plan, many businesses will be allowed to open in the first phase. Schools and day care centers will need to wait for the next phase. That means that millions of working parents could be asked to return to their jobs before they have any way to take care of their children.
Mr. Vavra and two colleagues recently estimated that nearly one-third of U.S. households have a child under 14, and that more than one in 10 has no other adult in the household to help with child care. In addition, many reopening plans call for younger adults to return to work first, while people over 55, who are at greater risk of severe complications or death, stay home longer to avoid exposure. But younger adults are also more likely to have young children at home.
Then there is the public health threat: If states reopen their economies too quickly, or without the right precautions in place, that could lead to a renewed outbreak, with dire consequences for both safety and the economy.
“The biggest risk is that you open too fast, too broadly, and you have another round of infections, a second wave,” said Mark Zandi, chief economist for Moody’s Analytics. “That’s the fodder for an economic depression. That would just completely undermine confidence.”
Partial reopening may not work for everyone.
In the early phases of reopening, businesses will almost certainly be required to operate at reduced capacity to allow for greater social distancing. That will require changes for virtually all companies, but in many cases it won’t present insurmountable hurdles.
Offices, for example, might operate in rotating shifts, with different departments coming in on different days and deep cleanings performed in between. In factories, production lines could be redesigned to allow more distance between workers and to reduce or eliminate contact between teams.
But other businesses could have a much harder time adapting. Most restaurants, for example, have tight profit margins even in the best of times. Operating at half capacity — or less — will mean losing money for many restaurants.
“It’s impossible in the restaurant business to be profitable at a 50 percent revenue clip,” said Alex Smith, president of the Atlas Restaurant Group, which operates upscale establishments in Baltimore, Houston and other cities.
For restaurants that were struggling before the shutdown, or that weren’t yet established enough to turn a profit, owners could decide that restocking kitchens and redesigning dining rooms to allow for social distancing is not worth the expense.
“If you were profitable before and your business was growing, then you need to hold tight and hope that there’s light at the end of the tunnel and things will come back,” Mr. Smith said. But if you were losing money before, “you really have to ask yourself, are you digging a deeper hole?”
The public debate has focused on government mandates: When should city and state shutdown orders be lifted? But just because businesses are allowed to reopen doesn’t mean that they will or, if they do, that customers will return.
Data from OpenTable, the restaurant reservation service, shows that people largely stopped eating out even before governors and mayors recommended doing so, and well before official shutdown orders took effect. Evidence from Sweden and other countries that have avoided formal lockdowns likewise shows that people have sharply reduced their activities even without government mandates.
“I don’t think it was really the government shutdown orders that shut down the economy — I think it was the virus that shut down the economy,” Mr. Vavra said. “Saying the economy is now opened is just lip service. The economy’s not going to be reopened until people want it to reopen.”
So far, there is little evidence that the public is ready. Despite scattered protests, surveys show widespread support for shutdown orders and little appetite for a rapid return. A recent Wall Street Journal/NBC News poll found that most Americans were more worried about lifting restrictions too early than keeping them in place too long.
“There’s no restaurateur in the country that believes that when the government says ‘Go,’ the restaurants will be packed again,” Mr. Smith said.
Mr. Smith’s greatest fear, he said, is that Americans will rush back to daily life too quickly, resulting in another flare-up and another lockdown. He can borrow money and reach into savings to reopen once, he said. A second time could be too much to manage, especially because a false start could leave customers even more wary.
“What scares most of us is Wave 2,” he said.
The government’s role isn’t finished.
The federal government has already spent extraordinary amounts to keep individuals and businesses afloat during the economic shutdown. Congress approved another half-trillion-dollar aid package in recent days, with more help expected in coming weeks.
But economists say the government’s role is only beginning. Businesses will need help weathering a period of reduced sales. State and local governments will need help, too, or they will have to cut programs to offset a sharp drop in tax revenue. Individuals will need unemployment benefits, food assistance and other aid to make ends meet in a recession that will almost certainly outlast the pandemic.
The scope of those problems isn’t yet clear. No one knows how many businesses have failed permanently, rather than shut down temporarily, or how many laid-off workers will be able to return to their old jobs. But the longer the shutdown lasts, the more permanent the damage will be, and the slower the rebound.
“You can press pause for a period of time, but not too long before that becomes bad loans and defaults and so on,” said Shubham Singhal, a senior partner at McKinsey, the consulting firm. “Then you have the negative cycle that feeds on itself for a while.”
The good news is that the government mostly knows how to deal with that kind of problem. Unlike the current shutdown, which required policymakers to develop programs in record time, the post-pandemic period will probably resemble a more traditional recession and demand more conventional policy responses.
The bad news is that, historically, political will for these programs has ended long before the need for them. After the last recession, calls to rein in jobless benefits began while the unemployment rate was still close to 10 percent.
Elizabeth Ananat, a Barnard College economist who studies poverty and inequality, said she worried that government support would again dry up before the economy was ready to sustain itself, prolonging the downturn and hurting lower-income families, who are typically the last to benefit from a recovery.
“In some ways, I’m even more anxious about the reopening than I am about the shutdown,” she said.
The US will need to spend trillions more as economy takes until 2022 to fully recover: CNBC survey – CNBC
The economy could take one to two years to rebound to full strength and the Federal Reserve and Congress, having already committed historic sums to fight the coronavirus pandemic, will have to commit trillions more, according to respondents to the CNBC Fed Survey.
With the Federal Reserve’s balance sheet already at an unprecedented $6.45 trillion, the 36 respondents see it rising on average to $9.8 trillion. The additional trillions will be added by the end of the current quarter, the respondents expect. Congress, having already committed about $2.5 trillion, is seen putting in an additional $2 trillion.
“My guess is that the virus itself will largely disappear within a year, but that the structural social and economic impacts will be with us much longer,” John Kattar, chief investment officer at Ardent Asset Management, wrote in response to the survey.
Jack Kleinhenz, chief economist for the National Retail Federation, said, “The policy response has been appropriate, but policy takes time to work its way into the economy and targeted sectors. … Many small businesses stand at risk.”
Despite the massive relief, respondents still see the unemployment rate rising to 19%, hitting that level in August. It’s expected to decline only gradually, to 11% by December and to 7% by the end of 2021. That would leave it at about double the rate before the crisis.
Second quarter of 2022
“With spiking unemployment and rising business closures … the prospects of a sharp rebound (is) far outweighed by the more realistic prospect of a longer-term structural disruption,” said Lindsey Piegza, chief economist at Stifel.
A 33% plurality believes the economy won’t be fully restored until the second quarter of 2022. But 19% believe it will be back by year-end and another 19% believe it can happen even earlier, highlighting a wide range of views about the speed and strength of a recovery.
“During the pandemic, production and consumption have been largely deferred and not lost,” wrote Rob Morgan, director of market strategy at US Energy Advisors. “This leads me to believe the economy will experience a V-shaped recovery beginning in the third quarter 2020.”
On average, respondents see gross domestic product falling by 24% this quarter, followed by a rebound of 4.7% in the third quarter and another strong quarter in the fourth. It won’t be enough to make back the losses in the first half. For the full year, GDP is forecast to decline by 5%.
Mark Zandi, chief economist at Moody’s Analytics, said a vaccine is essential for the economy to gain traction. “Until then, any recovery will remain something of a slog, characterized by halting growth and high single-digit unemployment. And even then, the economy won’t be in full swing and fully recovered until mid-decade.”
The Fed funds rate is seen remaining at zero for the rest of the year and rise to 1.9% in 2021. The Federal Reserve concludes its two-day policy meeting on Wednesday. Answers for CNBC’s Fed Survey from investors and economists were collected Thursday to Saturday.
The S&P is forecast to finish lower on the year at 2,844 than Monday’s close, and rise to 3,141 next year for a 9% gain by the end of 2021.
“I think the risk markets are anticipating a faster return to normalized economic conditions than we are likely to see,” says John Ryding, chief economic advisor at Brean Capital LLC.
Among the risks: Respondents place a 61% probability on a second round of contagion in the fall and winter.
White House reportedly considering another round of stimulus checks – Atlanta Journal Constitution
As the U.S. economy slowly reopens, Americans across the country are still grappling with job loss, furloughs and economic uncertainty. To combat the continued financial struggles some are facing, a White House official says the administration is “studying carefully” another $1,200 payment to citizens.
White House economic adviser Kevin Hassett told the media the administration is determining whether to provide those who qualify another round of stimulus checks, according to NBC News reporter Geoff Bennett. The additional financial support could be included in a phase 4 deal.
No word on when the package would be presented the House, but, with the virus still looming, House Majority Leader Steny Hoyer told the media Tuesday that the House will no longer come back next week after speaking to House physician, according to a tweet by Politico congressional reporter Sarah Ferris.
“We made a judgment that we will not come back next week,” Hoyer told reporters.
While the new stimulus checks are being considered, some Americans have not yet received the first round of checks. The IRS began cutting stimulus checks in mid-April. As of this week, about 90 million people have seen the economic bump in their accounts, according to economic news site Market Watch.
The hope is that the checks, which average about $1,200 a piece, will encourage spending and quell the financial pressure to pay essential bills as the COVID-19’s impact has shuttered manufacturing plants, retail stores and limited business hours for dozens of companies.
The IRS had distributed about 88.1 million stimulus checks as of April 17 and paid out $157.96 billion, according to statistics released April 24. That’s more than half of the $290 billion put aside for direct payments to individuals in the $2.2 trillion bill called the CARES Act.
Consumer confidence is still low
The Conference Board Tuesday reported that its consumer confidence index tumbled in the month of April, as millions lost their jobs and others feared for the current and future work conditions.
The Conference Board said Tuesday that its confidence index plunged to a reading of 86.9, down from 118.8 in March. The index is composed of consumers’ assessment of present conditions and expectations about the future.
The present conditions index dropped from 166.7, to 76.4, a 90-point drop that was the largest on record. The expectations index, based on the future outlook, improved slightly from 86.8 in March to 93.8 in April.
The numbers in the present conditions index “reflects the sharp contraction in economic activity and surge in unemployment claims,” said Lynn Franco, senior director of economic indicators at the Conference Board.
Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, said the confidence declines were worrisome because “consumers’ downbeat views about future income prospects can restrain consumer spending and the overall economy.”
Consumers drive about 70% of all economic activity in the U.S.
Many economists believe the country has already entered a recession that will be the largest economic disruption since the Great Depression of the 1930s.
The Associated Press contributed to this report.
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Goldman Sachs explains why stocks can keep rising even as a record-sized recession beckons – Business Insider
Drew Angerer/Getty Images
- Markets may continue to look past negative coronavirus news, especially if projections continue to show that the economy is expected to rebound after the pandemic, a Monday note from Goldman Sachs said.
- An analysis of GDP forecasts from the bank found that investors tended to discount the next two years of macroeconomic performance.
- Thus, metrics that focus only on growth over the next year “will overstate current valuations, given the large rebound expected beyond this year,” Zach Pandl, a cohead of global FX and EM strategy, wrote in the note.
- Read more on Business Insider.
Markets may continue to look past negative coronavirus news, especially if projections continue to show that the economy is expected to rebound after the pandemic, according to Goldman Sachs.
An analysis by the bank using changes to gross-domestic-product forecasts found that investors typically discounted at least the next two years of macroeconomic performance, a Monday note said.
That means that metrics that focus only on growth over the next year — such as multiples based on 12-month earnings expectations — “will overstate current valuations, given the large rebound expected beyond this year,” Zach Pandl, a cohead of global foreign-exchange and emerging-markets strategy, wrote in the note.
While the coronavirus-induced recession is set to be the deepest contraction in modern history, it’s also likely to be the shortest, Pandl said. Many economists expect that, after a dip in 2020, GDP will rebound in 2021 and 2022. By early April, consensus GDP forecasts incorporated a virus hit, down 4% this year. But forecasts are for 4% growth in 2021 and 3% in 2022 — an unusual pattern, Pandl said.
That means that more disappointing data in the near term may not weigh heavily on markets, as activity is expected to snap back “relatively quickly,” Pandl wrote. “The depth of the downturn matters much less than the duration of the recovery,” he said.
Goldman’s analysis came amid a stock-market recovery from March 23 lows. As US states weigh relaxing strict lockdown measures designed to curb the spread of COVID-19, stocks have slowly gained on optimism that the economy will soon reopen. From March 23 to Monday’s close, the S&P 500 gained about 29%, but it was down about 15% from all-time highs in February.
Still, many economists disagree that any rebound after the coronavirus pandemic will be a quick one. Instead of the sharp V-shaped recovery that Goldman is suggesting, many expect a rebound to take a softer U shape.
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