Economic data releases this week painted a darkening view of the U.S. economy as it starts its third quarter of contraction. Declines in economic activity from February through June were stark. I pen this column before the release of Second Quarter GDP growth, but there is little doubt it will be the worst single quarter of growth in U.S. history. The consensus is that it will be somewhere between twice and three times as bad as the sharp drop in 1958 that accompanied the flu pandemic of that year.
More ominously, nearly every other indicator suggests a deepening economic downturn. Consumer confidence continues to plummet, rates of return on capital drop and we see an uptick in initial jobless claims. I could use the entirety of this column to describe the cascades of bad economic news. Instead, I will discuss the single piece of good news, and explain why it is a mirage.
The spike in unemployment that took place from March through May is receding. Many workers faced temporary lay-offs due to interruptions in supply chains and initial reactions to government shutdowns. Those whose businesses remain are returning to work at a rapid pace, providing the illusion of a quick recovery in the monthly job reports. This disguises two other indicators of a weak economy.
The first is that a large share of workers who now report temporary job losses are mistaken. Business surveys suggest maybe half those currently unemployed face permanent job losses. These workers will not go back to their old jobs. The second problem is that we’ve stopped counting the 7 million or so workers who have exited the labor force since February. These are workers who report they are not actively looking for work. Many of these are parents of young school-aged children and cannot substitute childcare, while others understand there are no jobs available in their region.
Taken as a whole, the economic data are confusing and liable to be exploited for short-term political gain. To be sure, it is welcomed news that temporary lay-offs are ending. However, the spike in joblessness in March and April were nearly tenfold worse than the previous record. If we looked only at the permanent job losses, overall GDP growth and expectations by consumers and businesses, there is only one obvious trend. The U.S. economy continues to decline at a pace and depth that ensures a full recovery is more than two years away, at best.
Projecting economic conditions in the face of this pandemic is hazardous because the world economy is beholden to the effects of the disease. Until the spread of Coronavirus is controlled, we continue to lose permanent jobs and see the bankruptcy of previously viable businesses and the erosion of tax revenue used to sustain schools and other public services. So, my caveat is that a full recovery will take more than two years from the date an effective vaccine is widely available, or until the spread of the disease has run its natural course.
Taken as a whole, these data suggest we are in the opening months of a depression. I define this as a downturn deep enough to reduce GDP and employment by more than 10 percent for a full year, and one in which recovery takes more than 36 months. I hope I am wrong. In any case, the failure of the United States to stem the spread of COVID-19 will rank as the most stunning policy failures in modern history. We remain an international outlier, in the ineptitude of our response.
To place this failure in context, COVID-19 has already killed more Americans than the attack on Pearl Harbor and the ensuing campaigns to defeat Japan. Worse still, within six months of Pearl Harbor, the U.S. began offensive actions in the Pacific, winning the pivotal Battle of Midway. In contrast, more than seven months since the first COVID warnings, our national strategy is focused on discussing the magical value of a Hydroxychloroquine regimen.
Instead of attempting FDR’s call to national unity and purpose, our president has empowered an anti-mask fringe movement whose members complicate the most mundane efforts at protecting public health and restoring the economy. Perhaps it is unfair to compare our current presidential leadership with that of Franklin Roosevelt. Instead, I will simply posit whether or not a school superintendent making such claims would still be employed. He would not, which gets us back to the dangers to the economy.
Until the disease spread is contained, the U.S. economy will continue to contract. We should not mistake evidence that an economic free-fall is over for that of an actual recovery. We are not recovering, and the damage of continued spread of this disease will be with us through the foreseeable future. The sooner we get about the business of serious efforts to stop the spread of the disease, the faster the economy will recover. But, as a nation, we are a long way from serious, sustained, and well-informed efforts to stop the disease. Most worrisome, there is no evidence the current administration is capable of such efforts.
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