A Fork in the Road
-By Diane Swonk, Grant Thornton
The U.S. economy is at a proverbial fork in the road. Either we tame the COVID-19 virus and provide more support for households and firms ravaged by the humanitarian and economic effects, or we will suffer a deeper and longer recession. The push to reopen states before the pace of infections has crested, combined with the pushback to more stimulus from our elected officials, suggests we have chosen but it is not too late to course correct.
U.S. Joins Global RecessionReal GDP growth fell at a 4.8% pace in the first quarter, ending the expansion of the 2010s. Consumer spending and investment plummeted in advance of school and state closures as uncertainty surrounding the COVID-19 pandemic intensified. The World Health Organization did not declare the outbreak a pandemic until March 11. Government spending slowed at the federal, state and local levels while inventories were drained. The only offset was the trade deficit, which narrowed as imports fell more rapidly than exports.
Prospects for the second quarter look much worse. Real GDP in the U.S. will plummet by nearly 36% on an annualized basis because much of the global economy came to a standstill in April. States began lifting restrictions in May, before new COVID-19 cases actually fell. Consumer spending and a shart drop in inventories will drive those losses. Business investment is also collapsing. A surge in federal spending on checks to individuals, enhanced and expanded unemployment insurance, small business PPP loans, tests, ventilators and funding for hospitals offset the weakness in state and local spending. (Remember: Schools and courts were closed.)
The rebound in the second half of the year is expected to be muted. Growth in the third and fourth quarters is now expected to average 5.5%. Real GDP for the year is forecast to fall 7.2%, the worst performance since 1946 when millions of soldiers returned home from WW-II.There are no “Field of Dreams’’ scenarios where if we build it, or reopen, consumers will come. The idea that we can trade health for economic policy is a false narrative; shutdowns allow stronger and more sustained recoveries. We learned this from the 1918 pandemic and are only reinforcing those lessons as countries emerge from lockdown ahead of us. A recent paper by the researchers at the Federal Reserve Bank of New York also suggests that a shortfall in funding for municipalities with the greatest deaths following the 1918 flu pandemic in Germany fueled the rise in voter support for Nazis.
Fear of infection and trust in the government matter. This was laid bare by what happened in China as it reopened. Consumers are still reluctant to return to public spaces more than a month after Wuhan reopened. The China Beige Book offers insights into the hurdles we face. More than 90% of businesses surveyed were reopened by late April, most with workers on site, but they were still operating at less than 50% of capacity. Global demand remains weak, which is further complicating their efforts to ramp up. More than 80% of executives worry about a resurgence of the virus and more than two-thirds think that business will hold at April lows for some time to come.
States that reopened before the virus crested are seeing a similar response. Malls and restaurants in Georgia are still almost empty even after the state lifted its shelterat-home mandate. Many businesses remain shuttered as the benefits of reopening against the backdrop of social distancing don’t justify the costs of staff and electricity. It is hard for a restaurant that relies on heavy crowds Thursday through Saturday to cover overhead, let alone waitstaff, when it is only allowed to be 25% full.
