Markets and Economy
How Quickly Can the Economy Recover From COVID-19?
It took nearly a decade for the economy to rebound from its last recession, but the COVID-19 downturn looks quite different—and so may the recovery.
- The current economic situation is unprecedented—never before has an industrialized economy intentionally shut down.
- While the suddenness and severity of the downturn is alarming, the scale of the federal response has been commensurate.
- Past recessions were followed by relatively slow recoveries, but the COVID-19 rebuilding era may be more similar to the period following a large natural disaster.
Falling from a high point: The economy entered 2020 in an extraordinarily well-balanced position. And unlike previous recessions, no structural imbalances currently stand in the way of a rapid recovery.
- Going into 2020, the economic expansion was on solid footing. Inflation was running just shy of the Federal Reserve’s long-term two percent target, implying a sustainable level of aggregate demand.
- Unemployment had reached a 50-year low and the economy was running very close to its maximum potential.
Not your father’s recession: Previous recessions have been triggered by structural issues that took years to resolve. The current contraction is fundamentally different, and the ensuing recovery may unfold with considerable momentum.
- For example, in 2008, the housing bubble burst, destroying trillions of dollars in wealth and creating a wave of bad debt.
- This caused consumer demand to crater and lending standards to tighten. The lengthy rebalancing process created a tremendous amount of labor market slack.
- The economy in 2008 could not simply “snap back” to its prior condition—dislocations from the housing bubble had to be absorbed before sustainable growth could resume.
- Nearly a decade of above-trend growth was required for the economy to rebound at full strength.
- The recovery from COVID-19 in 2020 may be different—there are no structural imbalances that need to be rectified before the economy can begin rebuilding.
A commensurate federal response: A self-enforced shutdown has placed the economy in a holding pattern. Never before has the labor market contracted so rapidly. But the CARES Act has helped soften the blow.
- Approximately 26 million Americans have been laid off since the coronavirus outbreak began, with weekly unemployment claims spiking to record highs in the first weeks of April.
- The Bureau of Economic Analysis estimates that US GDP contracted at a 4.8 percent annualized pace in the first quarter, but this period only includes the first weeks of the shutdown in March. Second-quarter figures, which include data for April and May, will better represent the severity of the shutdown.
- Fortunately, Congress has responded to the crisis with an unprecedented aid package that may help small businesses retain nearly 60 million employees until the economy is able to reopen.
- In coming weeks, we are likely to see that many of the millions who were unemployed in early April before the help from the two-month grant provided by the Cares Act reached the small business community will go back on the books of their previous jobs (that is be counted as employed).]
- By allowing shuttered businesses to keep worker on the books, the Paycheck Protection Program (PPP) may accelerate the recovery and decrease the drag that typically accompanies rehiring.
- The PPP incentivizes business owners to bring their out-of-work employees back on the payroll.
- In another innovative wrinkle, unemployment insurance benefits have increased and expanded to cover 10 million freelance workers through the summer. This should help sustain consumer demand through the downturn.
- Despite worries that more generous benefits might deter workers from returning to the job, the relief funding is timed to expire in eight weeks when large parts of the economy are expected to reopen.
Mirroring a natural disaster recovery: Instead of gradually rebalancing and rebuilding demand over a period of years, the economy may rapidly recover from the COVID-19 shutdown. The process of reopening may be similar to the rebuilding period that follows a major natural disaster.
- The US may experience a disruption similar to what the Gulf Coast region went through after Hurricane Katrina in 2005.
- Businesses emerged from the storm in stages; some essential contractors began operating within days, while the hospitality and tourism sectors required years to rebound.
- With the support of an intact financial system and federal relief programs, the New Orleans metro economy was relatively quick to rebound. The city’s GDP growth paused in 2005 but returned to its pre-disaster trajectory by 2006.
- Of course, there are major differences between COVID-19 and Hurricane Katrina. The COVID-19 damage is not confined to a local region, and the disruptions from social distancing may persist to some degree for years.
- On the other hand, there has been no damage to the nation’s physical capital—there will be no need to wait for construction and cleanup once it is safe to reopen.
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Jim Glassman, Head Economist, Commercial Banking
Jim Glassman, Head Economist, Commercial Banking
Jim Glassman is the Managing Director and Head Economist for Commercial Banking. From regulations and technology to globalization and consumer habits, Jim's insights are used by companies and industries to help them better understand the changing economy and its impact on their businesses.