The Economic Forecast After the Coronavirus Pandemic

Richard Smith

 

Opinion:                                                                                                

 

By proclamation, we are in a forced recession. Our second quarter will have distinction as the highest negative GDP growth in our nation’s history, having already had negative GDP growth in the first quarter. Two successive quarters of negative GDP growth is the technical definition of a recession.

       

So now the question is, when will the economic recovery happen and how will it look? Pundits frequently use shorthand language to describe the shape and duration of the economic recovery:

  • A “V”-shaped economic recovery is a sharp drop to a bottom followed quickly by a dramatic rise back to the top.
  • “U”-shaped is a drop to a bottom followed by a few more quarters of sluggishness, then a quick rise back to the top.
  • “L”-shaped is a sharp drop to the bottom followed by many successive quarters of slow sluggish growth, similar to the long “stagflation” recession of the 1970s.        

 

The late economist John Kenneth Galbraith wisely said, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” I will violate his maxim to provide the best “guesstimate” as to the shape of the economic recovery.

Current Landscape               

 

The current catastrophic natural disaster is unprecedented in modern times. A breathtaking 17-million people were thrown out of work over the past three weeks -- and we’re just getting started.

 

The recently announced $8.5 trillion monetary and fiscal rescue measures seem staggering, both meant to provide short-term liquidity to the consumer and businesses, with many small businesses needing them to remain solvent.

 

This package is about four times the number thrown at the Great Recession 11 years ago.

 

As documented in Understanding National Wealth, the country’s total consolidated net wealth (assets minus liabilities) is slightly under $100 trillion, so thankfully, we can afford the largest natural disaster relief effort in history. At least for now.

 

This governmental monetary and fiscal relief effort, as important as it is, serves only as a temporary measure giving business a fighting short-term chance to stay afloat and retain its workforce. If businesses are not allowed to restart operations soon, many will cease to exist, rendering most of these measures quasi-impotent.

 

Howard Schultz, the founder of Starbucks, asserted accurately in my opinion that unless we provide a backstop for restaurants, “we could see a situation around the country in which approximately 30 percent or more of small independent retailers and or restaurants never reopen.”

 

 

Guesstimate

 

Significant segments of the economy will remain severely depressed until a vaccine is approved, hence a hybrid of the “V”- and the “L-shaped recovery pattern make sense. Since the “L” is a 90-degree angle and “V” a 30-degree angle, the slope of the recovery should be closer to a 45-degree angle. Therefore, the recovery will take some time just to return to the 2019 fourth-quarter GDP level, possibly four to six quarters. Not a depression, but a deep and somewhat lengthy recession.

 

Let’s say Howard Schultz is half right and only 15 percent of the independent retailers and restaurants never reopen. That’s still a big number. And for the 85 percent that survive, how many people will a restaurant or bar be able to safely accommodate? Less customers results in reduced sales volume, and hence also fewer employees will be needed.

 

Even with widespread testing, until a vaccine is available, there are entire industries that will have less than half the pre-virus business: airlines, hotels, cruise ships, theme parks, and sports, to name a few, as well as myriad other businesses supporting or related to these industries. In addition, more than a few large retail department and specialty store chains will probably not make it. No need to list names, but they are the obvious weak ones prior to COVID-19.

 

In my view, GDP will shrink roughly 15 to 20 percent from 2019, and the unemployment rate could peak sometime during 2020, coincidentally in the 15 to 20 percent range. Given the April to May shutdown of major segments of the economy, the bottom of the recession will be second quarter. Now assuming the economy is completely “reopened” by July 1st, third-quarter sequential GDP growth rate will be strong double digits, but still significantly under the same prior-year period. Fourth-quarter 2020 will follow suit. If a vaccine is still in the works, this pattern may continue into the first few quarters of 2021. The vaccine is the essential factor.

 

The upshot: Unemployed people don’t have money to spend, and those who are employed will be more reluctant to spend. This brings lower aggregate demand for goods and services, which drives about 70 percent of the economy. Since a vaccine is required to alter this dynamic, GDP levels for the third and fourth quarter will be significantly lower than comparable 2019 levels.

 

We will get through the crisis, of course. We’ve been through difficult times before, but the COVID-19 pandemic is worse than most, probably somewhere between the Great Recession and the Great Depression. Let’s remain thankful that we can sustain a body blow and remain standing because of 250 years of stored-up financial reserves and moral courage built along the way.  

 

 

Author Bio:

 

Richard Smith, economic analyst and author of Understanding National Wealth: The Triumph of the Most Successful Political Economy in History has a range of business experience from private development-stage startups to $300 million public companies. As chief financial officer, he led a successful $132 million IPO and many private placements to fund and capitalize high-growth companies.

 

Smith is the managing director of an advisory firm specializing in analyzing economic and financial conditions and their impact on financial projections and operations. Smith received his MPhil from Cambridge University and is a certified public accountant.

 

Understanding National Wealth is available in paperback and eBook at bookstores nationwide and online retailers such as Amazon and Barnes & Noble.

 

Highbrow Magazine

 

Image Sources:

Folsom Natural (Flickr, Creative Commons)

Images courtesy of Richard Smith

Skitterphoto (Pexels, Creative Commons)

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