Coronavirus lockdowns are pushing the United States into a sharp and painful recession. But how long will it take for the economy to recover its pre-pandemic strength? And what does it mean for the more than 36 million Americans who have lost their jobs since mid-March?
How deep of a hole has the economy fallen into?
A really deep one. The Federal Reserve Bank of Atlanta’s GDPNow forecasting model currently sees the US economy shrinking 42.8 percent from April through June. That’s -42.8 percent.
As for the jobs market – Federal Reserve chief Jerome Powell said during an interview with CBS on Sunday that the US unemployment rate could peak at 25 percent. In April, the unemployment rate hit 14.7 percent – the highest since the Great Depression. And consider this: in February, before lockdowns started sweeping the nation, the jobless rate was a mere 3.5 percent.
That sounds more like an abyss. What’s it going to take to crawl out of it?
To get an idea of what it will take, you have to first understand exactly what lockdowns have done to the economy. To illustrate, we’ll start with Netflix.
But I don’t subscribe to Netflix. I watch Hulu.
Hulu, Netflix, Amazon Prime – any streaming service will do for this analogy.
Fine, then. Go ahead.
OK. So, you know when you’re binge-watching a programme and you start to feel hungry. So you hit pause, go to the kitchen, make some popcorn and then come back and pick up the programme where you left off?
I do that all the time. Is that what happened to the economy?
No. Hitting pause is what a business does when it closes for, let’s say, the weekend. It pauses activity and picks up Monday right where it left off. But that’s not what happened with coronavirus lockdowns.
When cities and states across the US – and countries all over the world, for that matter – started closing borders, ordering businesses to shut and people to stay at home, it was more like closing the Netflix app, turning off your computer and unplugging your wireless router.
That sounds drastic.
It was. That’s why economists keep saying that the pandemic has delivered an unprecedented blow to the US and global economies.
So, back to that abyss. How long will it take to crawl out of it?
The answer is riddled with uncertainty. Because the economy won’t power back up all at once. We have to plug the router back in, wait for it to boot up, then turn on the computer, scroll through the apps, select Netflix, wait for it to load, and find the programme we were watching. Then, if we’re lucky, we can start watching where we left off. Or we may have to start at the beginning and fast forward to where we were.
Any chance it powers up quickly and without a hitch?
What you’re talking about there is what economists call a “V-shaped” recovery – basically, a steep plunge, followed by an equally sharp rebound. That is the best-case scenario,
How likely is it that we’ll get a “V-shaped” recovery?
Anything is possible, but some economists are pretty convinced we’re more likely looking at a “U-shaped” recovery at the very least.
“U” as in ugly?
It is certainly uglier than a V-shaped recovery. In a U-shaped rebound, the economy tanks, then stagnates for a few quarters before ramping up sharply.
Is that the worst-case scenario?
Not by a long shot. Some economists are warning about a “W-shaped” recovery. That’s when lockdowns are lifted, the economy starts to recover, but we then get another wave of COVID-19 infections, forcing more lockdowns that tank the economy again.
Then there is the dreaded “L-shaped” recovery. That’s when the economy falls off a cliff, then goes through an agonisingly slow recovery characterised by chronically high unemployment, slow growth, stagnant wages and not a lot of business investment.
Have we experienced an L-shaped recovery before?
The Great Depression of the 1930s was an L-shaped recovery. So was the Great Recession of December 2007 through June 2009.
What’s the difference between a recession and a depression?
Check out this article for the answer to that question. But if it makes you feel better, the Fed’s Powell said on Sunday he doesn’t think we’re looking at another depression.
So what kind of recovery are we looking at then – V, U, W, L?
Again – no one can say for sure. Last week, Powell warned that we could be looking at an “extended period” of low growth and stagnant incomes. He also issued a call for more government spending if necessary to avoid long-term economic damage. Keep in mind that the Fed has already made trillions available in lending to help businesses and households through this crisis, as well as state and local governments. And Congress has enacted virus relief spending bills worth $2.9 trillion – or 14 percent of GDP- to help the country weather the pandemic.
What does that mean for the jobs market?
Again, it’s hard to say with any degree of certainty. During the Great Recession and its aftermath, the number of job seekers overwhelmed the number of open positions for years. And any extended period of low growth is fraught with peril for workers. Because the longer people are out of work, the greater the risk that their skills will become dated and their networks will dry up.
Is there anything positive that comes out of any of this?
A great disruption – and this one definitely qualifies – creates opportunities to fix many of the things that have been broken with the US economy, but that have been allowed to fester. Now could finally be the time that policymakers decide to meaningfully tackle growing income inequality, fix the sieve-like social safety net, enact student loan debt relief, rein in soaring healthcare costs, make supply chains more resilient, and incentivise more climate-friendly business activities.