COVID-19 Economic Update: Recent Developments Offer Hope
The longer the pandemic goes on, the harder it will be to come out of. But economists still say a rapid recovery is still possible.
As has been the case since the beginning of the coronavirus pandemic, the duration of the virus’s sweep across the country will determine if the economy rebounds quickly or if it’s in for a longer recession, said Ali Wolf, chief economist of Meyers Research, in an economic update webinar on April 1.
Several developments in the past week offer hope. Abbott Labs developed a five-minute COVID-19 test, which will take some time to become widely available, and Johnson & Johnson emerged as a lead vaccine candidate, though vaccines need to go through clinical trials and the soonest one could be available is 2021. President Trump also extended social distancing guidelines through April 30, with some states issuing more stringent standards, such as Virginia’s extension to June 10.
Changes in the past week
The president also signed the Coronavirus Aid, Relief and Economic Security (CARES) Act, which addresses employee and small business assistance, unemployment insurance augmentation, health care support and economic assistance for certain sectors of the economy.
Stimulus checks, which an estimated 80 percent of Americans will receive, are set to go out mid-month. According to a Meyers Research poll, the vast majority of people will use the check to pay living expenses, followed by putting the money in savings, using it to maintain previous lifestyle, donating it or using the funds to buy discretionary items. Wolf says the checks are intended to maintain the economy rather than stimulate it.
Washington, Michigan, New York and Vermont joined Pennsylvania as states in which construction is prohibited, despite the Department of Homeland Security ruling housing as essential to maintain safety, sanitation and economic security. There is a balance to achieve, however, between keeping the housing and construction markets moving forward while not putting its workers in harm’s way.
Initial jobless claims tallied 3.3 million in a week’s time – an increase from the projected 2.25 million jobless claims – and a number that resulted in unemployment jumping from 3.5 percent to 5.6 percent.
New jobless claim numbers, reported by The New York Times, is 6.6 million. Before COVID-19, the most unemployment filings in one week was 695,000, back in 1982.
Consumer relief programs, including those for student loan relief, mortgage and rental payment deferments, are in place, where consumers will not have late fees and will not be reported to the credit bureau. Interest still will accrue, however, and debt will pile up. Consumers do eventually need to pay their loans and rents in full.
Economic recovery scenarios
As for economic recovery, Wolf says, “There is no playbook. Ultimately we’re in a very unique period we haven’t lived through.” Her first and second quarter numbers are lower than her previous weeks’ estimates:
- Q1: -3%
- Q2: -25%
- Q3: +13%
- Q4: +7%
- Full-year: -3%
A V-shaped recovery – where there’s a fast decline and a rapid recovery – generally lasts eight to 10 months. “The longer this goes on, the less likely the V-shape scenario becomes,” said Wolf. “We’re still in the window of opportunity for it, though.”
For a rapid recovery to become reality, the following must also become a reality:
- Americans must receive their checks soon,
- Most bills must be paid on time,
- More people must stay on the payroll to allow for a quick rebound,
- People must receive generous severance packages in the event of a layoff,
- There should be a short period of shelter-in-place while being careful to not rush it, and
- There must be a slowing of new COVID-19 cases.
The next scenario, a U-shape where the recession lasts an average of 16 months, isn’t out of the question. “The longer things are slow, the more problems emerge,” said Wolf. Problems include:
- Delayed payments starting to come due,
- Companies, cities and people taking on debt to survive,
- Mental scars and fear of job losses,
- Fear around if the coronavirus will have seasonality and return,
- Reduced consumer confidence, spending and behavior,
- State budget struggles, and
- People struggling to qualify to buy homes, thereby holding back the ability to boost the wider economy.
In this scenario, called a U-shaped recession, policy starts to work in boosting recovery at some point, says Wolf.
A third scenario, which Wolf describes an L-shape, is where the economy can not be boosted out of the U-shaped recession and it becomes a depression level. “It’s [the] Murphy’s Law of Recessions – whatever can go wrong, will go wrong,” she said. In this scenario:
- Companies, cities and people need to take on debt to survive but it gets harder to pay back,
- Developed and developing economies are slow worldwide, and
- Policy is ineffective at boosting growth and unsuccessful in incentivizing people to spend.
Although Wolf says the U.S. hasn’t seen a true L-shape, the Great Recession was a mix between a U and L shape and lasted about 18 months, though the ramifications lasted far longer.
Regardless of which shape this downturn takes, Wolf says the present time is more I-shaped, where the economy has a rapid fall – like what is frequently seen after a natural disaster– instead of a steady decline, like what the country saw during the mortgage meltdown of 2008.
March data will roll in through the next couple weeks, which Wolf says will help paint a clearer picture of where the economy is going. “[The data] won’t be pretty," she warns. "We have to hope, use logic and say that, if certain conditions are met, it’ll be okay and we’ll come out on the other side quickly.”
Housing responds
Tim Sullivan, senior managing principal at Meyers Research, said home sales are holding up, though at a slower rate, and there is concern about the future pipeline. Cancelations are also increasing. The resale process also has take a “huge hit” because it’s difficult to determine a home’s value right now.
Sullivan’s research shows online activity was down in March, but he anticipates this will change as builders focus on virtual work: how to interact with consumers and promote products virtually. “The virtual element is inescapable, irrefutable and absolutely required,” says Sullivan. That includes online shopping, architectural visualization, virtual home models in a 3-D environment and developing mobile platforms.
In the past week 25 percent of builders reported flat contracts while 97 percent kept base prices flat. About 33 percent increased incentives. Sullivan reported the labor market is still okay and 95 percent of builders have not furloughed or laid off employees. “The duration is critical,” said Sullivan. “If this goes on too long that will likely change.”
