Why the U.S. economy’s recovery from the coronavirus is likely to be long and painful

- Advertisement -
- Advertisement -
- Advertisement -
- Advertisement -

Some U.S. states are already trying to reopen for business and President Trump has repeatedly predicted economic growth will take off like a “rocket ship” once the coronavirus pandemic ends, but economists increasingly believe a recovery will be a long and uneven one.

The U.S. economy is on track to show the biggest contraction in the second quarter in American history — 25% or more, and gross domestic product for the full year is likely to shrink by the most since World War Two.

By the end of this year, the U.S. should start to rebound. Some economists even think it’s possible that growth will expand in the third quarter.

Yet barring a sudden and implausible cure for the COVID-19 disease, there’s little chance the economy will return to a pre-crisis state of health, analysts say. The disease has put tens of millions of out work, is likely to cause thousands of company failures, and will leave lasting scars on the psyche of consumers and business leaders.

Read:Coronavirus erases almost all the 23 million new jobs created since Great Recession

What’s more, some of the worst-suffering industry sectors such as airlines, hotels, restaurants, theaters and professional sports will have to adapt to the new reality of social distancing and increase spacing between customers, curbing sales, profits and employment levels. And the emerging share economy built around companies such as Uber could be stunted.

Business might never be the same.

“Once things restart, it would be naive to think the economy will bounce right back to ‘normal,’ ” said Citibank analysts Ashwin Shirvaikar and Andrew Schmidt.

Gaping wounds, big bandages

The federal government has tried to prop up the economy to cope with an unprecedented cataclysm. Washington has already passed $2.2 trillion in relief for households and businesses and the well is far from dry. Congress is on the verge of approving an additional $500 billion in aid and more spending bills are sure to follow.

Even all that money won’t be enough, however, to keep thousands of businesses afloat and help millions of Americans earn a paycheck. More than 21 million Americans have already applied for jobless benefits and economists estimate the unemployment rate has unofficially topped 15%.

The record number of unemployed has triggered a massive decline in demand. Sales and profits for most businesses have fallen off a cliff, forcing companies to lay off more workers and slash investment.

And the vicious cycle is feeding on itself.

“No matter how much fiscal stimulus Congress pumps in — and more is coming — business earnings across wide swathes of the economy will be crushed for an extended period,” said chief economist Ian Shepherdson of Pantheon Macroeconomics. The stock market DJIA, +1.98% has lost about a quarter of its value in a reflection of the damage.

The first step in any rebound, of course, is a gradual decline in new COVID-19 cases. The nearly nationwide lockdown and social distancing since the middle of March has started to slow the spread of the virus, but it’s unclear when the corner will be turned.

Some states aren’t waiting for an all-clear sign

Georgia and South Carolina have moved gingerly to lift some restrictions and others such as Texas and Tennessee are expected to soon follow. Those states haven’t been hit as hard as the Northeast or Northwest by the pandemic aside from clusters in some of the big cities.

Construction firms or outdoor companies face less risk of contagion, for instance, than sports venues, concert halls and public transportation such as subways.

“There will be no national consensus nor a uniform restart of the economy,” said Richard Curtin, director of the University of Michigan’s survey of consumer sentiment.

Crisis of confidence

Perhaps the biggest hurdle to a full-blown recovery is the mindset of Americans.

Polls show they are more worried about the economy reopening too soon and leading to more COVID-19 deaths than they are about the economic fallout. An estimated 45,000 American have already died from the disease — and counting.

Read:Americans Fear Lifting Coronavirus Restrictions Too Soon, WSJ/NBC Poll Says

As long as they are worried, the U.S won’t be able to operate even close to full tilt. Older Americans more vulnerable to the virus are particularly likely to continue social distancing and avoid large crowds, an unsettling change for an economy now dominated by services that involve lots of close personal contact.

Read:Restaurants and hotels, devastated by coronavirus, face long and painful recovery

“Lingering concerns about the virus may mean that individuals are reluctant to gather in public places like theatres and restaurants long after the official lockdown is lifted. There is some evidence that this is happening in China,” said Neil Shearing, group chief economist at Capital Economics.

Washington has already stepped in to bail out airlines with hardly any planes flying and restrictions on foreign travel likely to be prolonged. And this week the chief lobbying group for U.S. restaurants predicts the industry will lose $240 billion in 2020.

Read:Restaurant industry asks Congress for $240 billion in aid to survive coronavirus

“Our industry has a very long, uncertain path to recovery by virtue of state-mandated closures and the long-term effects of social distancing,” the National Restaurant Association wrote to congressional leaders this week.

Down on Main Street

Another big roadblock to recovery is the health of small businesses that employ nearly half of all Americans. If a critical mass of small businesses fail, the unemployment rate will remain elevated and it will take longer for the economy to revive.

Congress has rushed to pump more than $650 billion into a special relief fund for small businesses, but it’s unclear if it will be enough. Joe Brusuelas, chief economist of RSM, estimates the flood of demand for small-business loans could top $1 trillion “unless the crisis eases significantly.”

The worst thing that could happen, economists and business leaders say, is for another big viral outbreak to occur later in the year and force the economy to shut down again. The last pandemic to strike the U.S., the Spanish Flu in 1918, was more deadly in the fall than in the spring of that year when it first appeared.

“A second shutdown of the economy, local or national, would be extremely expensive to both firms and consumers,” Curtin said. “It would also lead to more bankruptcies across both sectors of the economy.”

Even in a best-case scenario, most forecasters say unemployment is likely to remain elevated for a few years. The jobless rate probably won’t return to its pre-crisis low of 3.5%, dragging out the recovery.

Originally Published on MarketWatch

Home of Science
Follow me

Latest posts by Home of Science (see all)
- Advertisement -

Discover

Sponsor

Latest

Buying this dip could get ‘very, very nasty’ for investors, trader warns

Buying the dip could sting. So said BK Asset Management’s Boris Schlossberg as U.S. stocks attempted but failed on Wednesday to claw their way back from a...

US and China heading towards a cold war: Ian Bremmer

Eurasia Group Founder and CEO Ian Bremmer believes that the U.S. and China are heading towards a cold war, as tensions rise over the issue...

Super Bowl – Adding Two More Championships to the Game

A few years ago the Super Bowl seemed to be a lost cause. The owners of the NFL wanted to save their yearly spectacle...

Venezuela’s new gasoline system fails to end epic lines

Hundreds of Venezuelans queued up in miles-long lines to try to fill their cars with subsidized gasoline over the weekend, a week after President...

The Ultimate Amazon Prime Package Review

The Ultimate Amazon Prime Package ReviewAmazon Prime is an online gift membership service for Amazon.com, starting at $99 per year. The deal is...
Home of Science
Follow me
Latest posts by Home of Science (see all)