(CBSNewYork) — If anyone still believes a V-shaped economic recovery was in the offing, the Federal Reserve just laid waste to that notion. In a recent news conference, Fed Chair Jerome Powell said, “the extent of the downturn and the pace of recovery remain extraordinarily uncertain and will depend, in large part, on our success in containing the virus.”
Coronavirus Vs. Economy
Uncertainty seems to be the only certainty of late. Recent reports have revealed that while the spread of coronavirus has slowed in some parts of the country, it has quickened in other parts. The domestic death total has surpassed 113,000. The number of confirmed cases exceeds two million.
A vaccine remains many months if not years away. Producing, delivering, and administering any vaccine to millions of people extends the timeline even further. Herd immunity, meaning 70 to 90 percent of the population has been infected and become immune (if that’s where society is headed), would be further away still.
Despite the virus’s continued creep, the national economy is well into reopening. New York City, the early epicenter of the virus, is now seeing a small fraction of the cases it saw at its height back in late March and early April. It took its first step toward reopening this week with, among other things, curbside pickup at nonessential businesses. Local economies throughout the rest of the country are further along. But 17 states have seen an increase in daily new cases in the last two weeks.
Economic recovery is still in its infancy. “Activity in many parts of the economy has yet to pick up,” Powell said, “and overall output is far below earlier levels. Moreover, despite the improvement seen in the May jobs report, unemployment remains historically high.”
Is Unemployment Really Improving?
The recent unemployment report was unexpectedly positive. The official jobless rate dropped from its 14.7 percent high in April to 13.3 percent in May, despite most experts predicting a rise to 20 percent or higher. The official rate, as it’s usually measured, excludes many workers, so the real total is likely somewhat higher. A recently discovered categorization error — workers classified as “employed but absent from work” rather than “unemployed on temporary layoff” — means the April and May rates should be another three points higher.
All that said, the downward trend in unemployment is a welcome surprise. Workers who were laid off from their jobs are starting to return to work. And as the economy continues to open up, more of those temporary layoffs will turn back into jobs. But not all of them will, and other jobs will be lost. (The economy shed over two million jobs just last week.) A restaurant limited to 50 percent of capacity, won’t need 100 percent of its pre-pandemic workforce. A small business that closes its doors permanently won’t need any of their previous workers. And many more companies, having adapted to a new reality, will see their staffing needs change.
For the time being, people have received some reassurance from the one-time stimulus and an additional $600 in unemployment benefits the federal government provided through the CARES Act. The House has also passed the HEROES Act, which would include more aid, but it’s unclear if the Senate will.
“We know that the stimulus is unsustainable,” says Giacomo Santangelo, an economics professor at Fordham University and the Stillman School of Business at Seton Hall University. “In 2008 (during the Great Recession), all the various different stimulus programs stopped at some point. We lit all these fuses, now let’s wait for the fireworks to go off. Let’s wait for the explosion.”
Waiting For Recovery
Right now the economy is waiting for that explosion, even as many consumers have spent their stimulus checks and the unemployed face the end of extended benefits in July. Uncertainty looms for millions, with no guarantee the recovery will kick into gear in time. Priming the economy, while necessary, may not have been enough.
Rising consumer demand could theoretically bring back jobs (or create new ones) and drive economic growth. But consumers lack confidence in their present situation and future outlook. Historically high unemployment amidst a morphing health crisis will do that. The Consumer Confidence Index — a measure of consumers’ optimism about the economy and their own financial situation — dropped dramatically in March and continued to plunge in April. It leveled off in May, which is to say consumer confidence remained low.
Consumers are also uncertain about the safety of returning to stores and restaurants and, more generally, about returning to their lifestyle before coronavirus. Retailers nationwide are doing their best to accommodate shoppers, from requiring staff to wear masks and gloves to limit the number of people in stores to extreme and frequent cleaning. Transparent acrylic sheet dividers are everywhere. Nordstrom quarantines its shoes for 72 hours after someone tries them on. But will all the effort be enough to bring back customers facing questions about their health and financial future?
Some sort of certainty in the world might help to boost confidence. But with a bleak outlook for tomorrow, people spend less money and save more today. The stock market going into this week seemed to have a somewhat rosier view of recovery. The Dow Jones climbed from 18,591.93 in late March to 27,572.44 last Friday. But the bubble couldn’t keep out the bad news forever. The Dow dropped every day this week and then plunged 1861.82 points on Thursday (almost seven percent), after the Fed’s uncertain forecast and evidence of coronavirus’s continued spread.
Slow Climb, Uncertain Future
While the economic downturn was swift and steep, the return to normal is likely to be slow and gradual. According to Powell, “the extent of the downturn and the pace of recovery remain extraordinarily uncertain and will depend, in large part, on our success in containing the virus. We all want to get back to normal. But a full recovery is unlikely to occur until people are confident that it is safe to re-engage in a broad range of activities. The severity of the downturn will also depend on the policy actions taken at all levels of government to provide relief and to support the recovery when the public health crisis passes.”
A full recovery is a long way off if the economy ever gets there. And uncertainty will continue to be a major obstacle. How that uncertainty ripples through the economy is an open question. Santangelo outlines one example from his own experience as a professor.
Universities are currently trying to figure out how to hold classes in the fall. Even if campuses are open, many students will opt to continue learning remotely or take time off. Either way, those students won’t pay for room and board and will possibly forego tuition as well. The students who do show up may have to bear added costs.
“If they do jack up tuition costs, students are not going to be able to pay it,” says Santangelo. “So that just means that student debt is going to go up. And actually student debt is something that students cannot default on ever. So you’ll technically have a post-COVID-19 generation of students with even more debt than the pre-COVID-19 students. And we were saying that the pre-COVID-19 students had way too much debt.”
That’s just one scenario with implications for the economy’s long-term health. There are many, many others. Every consumer has their own individual uncertainties that limit their spending and slow the economy. “Expectations of safety are at the heart of the economy moving forward,” says Santangelo. “An expectation of attending school, going on vacation, being able to attend theater without the risk of COVID-19; the expectation of equality of opportunity will be driving forces in the recovery.”
For now, every dollar not spent extends the recovery a little longer.