Devastated by the coronavirus, the U.S. economy is sinking. And the plunge is accelerating.
Now, as some businesses in a few states start to trickle back to work, hopes are beginning to arise that the economy, damaged as it is, might be poised to rebound by the second half of the year. If more employees and consumers were to gradually return to working and spending, the idea goes, the economy might be able to mount a sharp comeback.
Yet most economists have the same response: Keep such expectations in check.
Among their concerns is that the coronavirus could flare up again after the economy is re-opened, forcing reopened businesses to shut down again. Another is that people, employees and consumers alike, will remain too wary of contracting the coronavirus to return to anything resembling normal economic behaviour. If that were the case, no meaningful economic recovery would likely take hold.
“The virus has done a lot of damage to the economy, and there is just so much uncertainty now,” said Mark Zandi, chief economist at Moody’s Analytics.
The U.S. economy shrank at a 4.8 per cent annual rate in the January to March quarter, the government estimated Wednesday, as the coronavirus pandemic shut down much of the country and began triggering a recession that will end the longest expansion on record.
Yet the drop in the first quarter will be only a precursor of a far grimmer report to come on the current April to June period, with business shutdowns and layoffs striking with devastating force. With much of the economy paralyzed, the Congressional Budget Office has estimated that economic activity will plunge this quarter at a 40 per cent annual rate.
That would be, by a breathtaking margin, the bleakest quarter since such records were first compiled in 1947. It would be four times the size of the worst quarterly contraction on record set in 1958.
“The longer consumers are stuck at home and workers can’t get to their jobs, the greater the structural damage to the U.S. economy— permanent loss of household income, permanent business closures, permanent job losses, reduced business investment— which would prevent a strong rebound,” said Gus Faucher, chief economist at PNC Financial Services Group.
Hours after the Commerce Department issued its bleak report on the nation’s gross domestic product, the Federal Reserve signalled that it would keep its key short-term interest rate near zero for the foreseeable future as part of its extraordinary efforts to bolster the economy. Chairman Jerome Powell noted the gravity of the crisis in the face of the coronavirus outbreak and made clear the Fed would continue to do all it could to provide support.
“It may well be the case that the economy will need further support from all of us if the recovery is to be a strong one,” Powell said.
The government’s GDP report showed the first quarterly drop in six years. And it was the sharpest fall since the economy shrank at an 8.4 per cent annual rate in the fourth quarter of 2008 in the depths of the Great Recession.
“The longest U.S. economic expansion has ended,” said Gregory Daco, chief economist at Oxford Economics.
Daco predicted that the recession will cause a drop in output that will be three times the size of the economic decline during the Great Recession, which got that name because it was the worst economic slump since the Great Depression of the 1930s.
Zandi said he thought any prospects for a recovery will hinge on the eventual availability of a coronavirus vaccine. He doesn’t expect the economy to regain its footing on a sustained basis until perhaps mid-2021 — and that assumes that a vaccine would be ready for use by then.
“I would characterize this period as going through quicksand until we get a vaccine,” Zandi said.
In just a few weeks since mid-March, businesses across the country have shut down and laid off tens of millions of workers. Factories and stores are shuttered. Home sales are falling. Households are slashing spending. Consumer confidence is sinking.
The GDP report showed that the weakness was led by plummeting consumer spending, which accounts for 70 per cent of economic activity. Consumer spending tumbled at an annual rate of 7.6 per cent in the first quarter — its steepest decline since 1980. Business investment sank 8.6 per cent, with investment in equipment falling 15.2 per cent.
As the economy slides into what looks like a severe recession, the Trump administration continues to promote the notion that a recovery will arrive quickly and robustly once the health crisis has been solved — what some call a V-shaped recovery.
But economists suggest that many Americans could remain too fearful to travel, shop at stores or visit restaurants or movie theatres anywhere near as much as they used to. In addition, local and state officials may continue to limit, for health reasons, how many people may congregate in such places at any one time, thereby making it difficult for many businesses to survive. It’s why some economists say the damage from the downturn could persist far longer than some may assume.
The administration takes a rosier view. Speaking to reporters Wednesday, President Donald Trump called the economic downturn “a transitional period” that would lead to stronger growth as soon as summer and the stage for a “tremendous year” in 2021.
The president is basing his re-election campaign largely on the argument that he built a powerful economy over the past three years and can do so again after the health crisis has been resolved.
Faucher agreed that “assuming restrictions on movement are gradually lifted over the next few months, economic growth should rebound later this year.” But he cautioned, “risks are to the downside.”
“If consumers and workers remain housebound into the third quarter or if the pandemic fades and then re-emerges,” Faucher warned, “the recession could last throughout 2020.”