At the time of this post, the United States economy clings is at a crossroads. The economic slowdown engendered by the coronavirus pandemic and measures to contain its spread were the deepest on record, but there are already signs that the recession may be over. There are lingering issues and pain from the recession, especially in the labor market. But there is a palpable sense that the situation may be resolving itself. However, the economy faces many uncertainties going forward. The question is whether the sense of recovery comes from false hope generated by temporarily good economic news or whether it signals a return to a “normal” economic situation. If the recent good economic news is reflective of a turning of the corner and momentum takes the economy upward, we can surmount the economic challenges presented by the recession. But if virus cases continue to surge as they have in many states, a new round of lockdowns and layoffs may proceed a new round of economic pain.
The defining characteristics of the pandemic recession we just endured were its speed and depth. The figure below gives one a sense of how far and how fast the economy fell compared to the 2008-09 recession. The data is for Monthly Real Gross Domestic Product, compiled by IHS Markit, the largest and most respected economic forecasting company in the United States (official Real GDP data is only available on a quarterly basis, which makes tracking difficult in such a volatile and fast evolving economic situation). During the 2008-09 recession (shown toward the left of the graph) , real economic activity fell by just under 5% during the approximately nine months from the peak of the economy in June 2008 to the trough of the recession in 2009. Over the last century, recessions have averaged slightly longer, about 15 months, from peak to trough. By contrast, in March of this year alone, real GDP fell by slightly more than 5%. And then in April, economic activity fell another 10.8%. It is hard not to overstate the depth of the fall in GDP that occurred. Putting the figures in another way, GDP in April was at a level not seen since December of 2012; the coronavirus-related recession took away over seven years of economic growth.
Source: IHS Markit.
However, there are signs that the recovery might already be underway. As lockdowns started to ease and businesses began reopening, real GDP bounced back over 4% in May, and early forecasts for third quarter economic growth show an expected increase of over 10% on an annualized basis.
The depth of the fall in economic activity and the hopes for a recovery can also be seen in “alternative” economic data. The graph below shows consumer spending data obtained from Earnest Research, an aggregator of credit and debit-card spending data. They track data on spending from a panel of 6 million households over time. They data is broken down by categories and sectors, but in this figure, overall consumer spending compared to the same week a year prior is shown for both Illinois and the rest of the United States (so a value of zero means that spending was the same as the prior year). Consumer spending started falling both in Illinois and the US during the week of March 19-25. The Illinois drop was slightly steeper, reaching a year-over-year change of -16.3% for the week of April 15. The comparable trough for the US was only -11.9% that same week. Both geographies show signs of recovery, with sales only down 0.2% year-over-year for the rest of the country and 6.2% in Illinois.
Source: Earnest Research.
One area where the most pain has been felt is in the labor market. The official U-3 unemployment rate reached 14.7% in April, higher than any other month since the Great Depression. And during the week of April 4, an estimated 6.8 million workers filed for first time unemployment claims, TEN TIMES higher than the previous highest week in October 1982. Once again, however, there are signs that the labor market is improving. U-3 unemployment is down to 11.1% as of the June report (to put this in perspective, the rate only briefly hit 10% in the last recession, and the highest point previously for this measure during the postwar period was in the 1982 recession, at 10.8%). Initial unemployment claims under the traditional state unemployment benefits program have been less than 1.5 million for the last two weeks.
However, caution is in order when looking at labor market data. The three main sources of data in this area are administrative data on unemployment claims from the Employment and Training Administration, the Current Population Survey (CPS), a survey of households done by the Census Bureau and Bureau of Labor Statistics, and Current Employment Statistics (CES), a survey of businesses undertaken by the Bureau of Labor Statistics. Normally, the figures in the different sources communicate pretty much the same thing. But ever since the pandemic started, the figures started to show somewhat different signals about the health of the labor market. Nonfarm payroll employment, taken from the CES, has bounced back strongly from a record drop in April. And the unemployment rate, while still high, has also recovered. But unemployment claims are still twice the previous peak in 1982. And wages data from the CPS has shown weakness.
Part of what makes it so difficult to assess the exact health of the labor market are the various definitions of unemployment that are used. In the unemployment report, a subjective judgment on whether people who answer a survey question in a certain way are laid off or “employed but absent” can cause a significant jump or fall in the unemployment rate. Even within each of the sources, there are issues to sort out. In the unemployment claims data, during normal times, economists tend to look at initial jobless claims and continuing claims data. But these are for the “traditional” state-run unemployment insurance programs. Those programs only cover people working in businesses subject to unemployment insurance contribution requirements. This leaves out many small businesses and workers in the new “gig” economy like ridesharing and delivery services. Because of this, the federal government enacted a new category of unemployment insurance benefits to cover those not subject to the traditional UI program, the so-called Pandemic Unemployment Assistance (PUA program). For example, in the week of June 13 (the most recent full data on unemployment claims), there were “only” 19.2 million continuing unemployment claims, down from a peak of 22.7 million at the start of May. However, there were almost 31.5 million people who were claiming unemployment insurance under all programs. That was the highest level ever. Many of those filing claims under PUA could be assumed to be temporarily unemployed, but it is uncertain whether or when they will return to work.
Obviously, there is no one best way to measure the health of the labor market. However, one more consistent and broad measure is the civilian employment-to-population ratio. It comes from the household survey (CPS) but is based on a simple and consistent specification of a question, as in “…were you employed…”. This allows for us to sidestep many of the definitional issues inherent in trying to figure out why or whether someone was unemployed. The figure below shows this ratio since the start of the Great Recession. In April, just over 51% of the civilian population of the US was employed. This is the lowest level ever for this measure. The previous low point was in October of 1949 at 54.9%. The ratio rebounded in June to 54.6%, still lower than that previous all-time low. This speaks of the depth of the decline in employment and the long way that we must go to fully recover.
Source: US Bureau of Labor Statistics.
The question which many people are asking is where the economy will go from here? Unfortunately, economists have no firm answer for this question, beyond the obvious statement that there will be a rebound in the third and fourth quarters of this year. Forecasts for what the economy will do in the second half of 2020 are widely dispersed. One of the best sources for consensus forecasting on the economy, the Survey of Professional Forecasters done by the Philadelphia Federal Reserve Bank, reported a median estimate forecast of -5.6% annual growth of economic activity for 2020 as a whole, implying a strong rebound from what will almost certainly be losses of 25% or more in the second quarter of the year. However, almost 45 percent of forecasters responding to the survey expected even deeper losses for 2020, as shown in the graph below. The range of estimates for 2021 is even larger.
Source: Philadelphia Federal Reserve Bank, Survey of Professional Forecasters.
The primary driver of this economic uncertainty is undoubtedly uncertainty generated by the course of the coronavirus and progress on treatments and vaccines to fight it. Without a proven vaccine or therapy that reduces deaths and long-term effects of the COVID-19 disease, the economy will be subject to rolling periods of lockdowns and reopening. This will not help small businesses. A new experimental survey product from the Census Bureau, the Small Business Pulse Survey, recently showed that nearly 60% of all small businesses nationwide had less than 2 months of cash on hand to pay bills. And almost 1 in 6 small businesses had missed a payment such as rent, utilities, or payroll. Every time a lockdown is established, some small businesses will run out of money and must close.
But there are other uncertainties. State and local governments are facing large budget deficits. As personnel costs constitute the bulk of those budgets, layoffs are inevitable if the federal government does not act to provide resources. Also, contracts to private firms for infrastructure construction and maintenance, building maintenance and operations, and other services will likely be impacted, producing effects in private sector businesses and jobs. The Federal Reserve Bank’s term lending facility for state and local governments is a novel and important step in helping them weather the storm. However, the debt issued under that program is short-term, meaning that governments are going to face another round of fiscal stress if the economy does not recover relatively quickly.
Another uncertainty is created by how consumers have shifted their behaviors in response to the pandemic. There is evidence that discretionary spending is falling as a percentage of overall spending. Another shift, one that contributes to the shortfalls in revenue that local governments are facing is a shift from in-store to online shopping. The data on consumer spending from Earnest Research highlights this. Online spending during the height of lockdowns was nearly 30% more than the year before, while in-store spending was nearly 30% less. There has been some retracement as reopening has occurred, but there is still an obvious loss of spending in local stores. This will have definite geographical impacts on the recovery.
In sum, there is no tidy answer to the question of how the economic recovery will proceed. We have most likely started to recover. And we most likely will return to long-term trend economic growth (just over 2% annually) sometime between now and 2022. Beyond that, the timing of the recovery will depend on developments in the pandemic, the magnitude of second order effects such as government layoffs and shifts in consumer behavior. The only thing certain is that we have a long road back to economic health.
Kenneth A. Kriz, Ph.D. is University Distinguished Professor of Public Administration at the University of Illinois at Springfield. Dr. Kriz conducts research focusing on subnational debt policy and administration, public pension fund management, government financial risk management, economic and revenue forecasting, and behavioral public finance.
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