What Kind of a Recovery Should We Expect?
The economic damage caused by the novel coronavirus has been catastrophic. As White House adviser Kevin Hassett noted last week, U.S. gross domestic product could plummet 20% to 30% and unemployment could soar to 16% to 17% this quarter. No doubt, the country will come back, but how and when are very much in question.
Between 1980-2020, the National Oceanic and Atmospheric Administration documented 258 billion-dollar weather and climate-related disasters, with a cumulative impact of $1.75 trillion. The Mercatus Center estimates that the first two months of coping with COVID-19 have cost the economy $2.14 trillion, not to mention the fiscal cost of the CARES Act.
Compared to the weather and climate disasters, there are several fundamental differences. First, there is no “edge” to this disaster – no safe space from which to stage relief. Every community across the United States is affected. Second, with most disasters, social distancing is not a requirement. This is a huge complicating factor. Third, pandemics can happen in waves as viruses mutate, take on different characteristics, and develop immunities to various therapies.
This is why the Institute for Sustainable Development (ISD) brain trust has been grappling with whether the recovery will be a V, a U, a K, or a W shape.
The best-case scenario is for a V-shaped recovery. From a fiscal policy perspective, the Trump administration, Congress, and the Fed have done more than ever before to inject stimulus and trigger a sharp V-shaped rebound. The hope is that COVID-19 is just an interruption, and that it does not affect any fundamental underlying demand or investment trajectories if effective testing and treatments come online very swiftly.
Unfortunately, the research findings on sudden onset disasters are not good. An estimated 25% to 40% of small businesses in a disaster impact zone can fail up to 12 months after the event. The Federal Emergency Management Agency (FEMA) asserts that the number may be as high as 60% in some cases. ISD research indicates there are a variety of reasons for this, including employee attrition, morale, and productivity, customer changes, operational requirements, supply chain challenges, and cash flow. This is why the initial social and economic damage may have happened in the past two months, but it may take six months or longer for communities to get back to where they were in February 2019. This is the U-shape recovery scenario.
Another ISD finding is that a K-type recovery can develop that can be very confusing. In Puerto Rico a year after Hurricane Maria, unemployment was down and GDP was up compared to the year before, despite the obvious evidence that large swaths of the country were still in repair mode and many people had left the island. Disasters can create mini booms in some sectors of the economy that can distort the overall picture. Construction, one-time capital expenses, disaster-related specialty services can have sharp growth spurts. Conference call specialists such as Zoom, pharmaceutical companies such as Gilead, and face mask and hand sanitizer manufacturers are examples of current success stories. These successes can mask the underlying weaknesses in the “normal” or pre-existing economy. As some sectors go up, other sectors –airlines, hotels, nursing homes, restaurants – are going down. This is why judging the recovery will not just be about the overall numbers, it will also have to do with the structure of the recovery. One of the keys to evaluating the recovery process will be how it helps the people who were working in industries that will not come back in the same way, if at all, after the crisis is over.
And then, there’s the W scenario. This may be the cruelest outcome – that we claw our way out from under this first shutdown, only to have a second shutdown in the fall or sometime next year. ISD advisors are very concerned about apprehension and anxiety leading to shut- down and withdrawal.
According to both Paul Brewbaker, principal at TZ Economics, and George Seay, executive chairman of Annandale Capital, our guests on ISD’s weekly podcast last Friday, we will likely see a “swoosh” – a trough followed by a gradual, incremental recovery, that incorporates many of the elements of the other scenarios.
The rescue package may help “flatten the curve” of business closures in June and July, but it may push more closures into the fall if customer spending and confidence in industries that depend on social contact decline. Enterprises (including non-profits and community assets like libraries and theaters) basically have three choices if they want to stay in business: hunker down and conserve cash flow, pivot, or transition.
Some businesses have no choice but to hunker down. Their supply chains are disrupted, and their customers have disappeared or expressly prohibited. Business lay-offs, furloughs, and suspensions have been unprecedented and felt across every corner of the country. One-third of the workforce in Hawaii has filed for unemployment. One of the critical tasks ahead will be to help repair the markets for these businesses to come back.
But American ingenuity is alive and well. Many store-front retailers and restaurants are pivoting to online sales, curbside pick-up, and delivery. Adaptation is happening in real time.
Finally, there are those who see the writing on the wall, and that their current business model will not survive this crisis. Helping entrepreneurs and established business owners and operators transition to the new normal is going to be a key factor determining how swiftly the recovery happens.
America has bounced back from tough times before. After the Spanish Flu epidemic of 1919, the United States enjoyed the Roaring Twenties. After World War II, the last time the country had such a massive debt-to-GDP ratio, we built the interstate highway system, paid down the debt, and enjoyed a very prosperous decade. We can do this again, but we can’t just sit back and expect the recovery to happen on its own. We have to help businesses and communities repair and upgrade their old business models and build new resilient ones for the future.