Analysts expect the forthcoming report on the first quarter 2020 gross domestic product to show the economy dropped 3.5-4% on an annualized basis. Since the Dow Industrials were still over 29,000 as recently as February 20, the economy likely collapsed as much as 3% over the last few days of February and the month of March.
With more than 26 million people filing unemployment claims over the last few weeks, collapse is probably a mild word. Think about the energy sector. Unlike grains, you can’t just pile oil up on the ground. And even when you take the coronavirus out of the medical care equation, hospitals and ambulatory care facilities are facing bankruptcy.
Both the federal government and the Federal Reserve stepped up to mitigate the impacts of COVID-19 on the economy, spending multiple trillions of dollars. There are at least a few more pieces of assistance legislation to be passed before we get to the other side.
This first quarter GDP report is “look-back” data. If you don’t know the economy has taken a body blow, how was your trip to Mars? More than one economist suggests we will see contraction at the 20-25% level for the second quarter of 2020.
Where do we go from here is the question on everyone's mind. Pick up any newspaper or magazine and you will find three or four op-eds on those authors' views. So what the heck, here’s mine.
Let us leave all the politics behind. Should we have locked down? Should we have been better prepared? From the economy’s standpoint, none of that finger-pointing matters now. We are where we are. Sometime between now and the middle of May, I’m going to guess several governors are going to at least partially reopen their states. We may not be to the point of movie theatres and bars in operation, but most retail, manufacturing, construction and other activities will likely be open again. That does not mean they will be running at the same level of intensity as pre-outbreak levels, but some employees will return, some revenue will start to come in.
Those retail operations that do open will likely see a reasonable pop in sales. Pent-up demand is a commonly taught subject in econ 101 classes, and that is undoubtedly building now. (I need a new pair of working shoes, badly.) How many of us men have had hair this long in the last 20 years? But beyond the necessities, will many of us be willing to go out and buy a new car or other big-ticket items until we are sure the economy is on more solid footing? We will spend more than we are now, but it is not clear we will spend as we much as we did six months ago. So economic growth in the third quarter may show some improvement over the second quarter, but there will still be a lot of ground to make up.
And even when the governors give the green light, people will still be entering hospitals for COVID-19. People will still be dying due to the virus. Will we be ready to charge back out there, or will we remain cautious and only make those few purchases we qualify as necessary while dodging the coronavirus?
Even so, I am going to go further out on that limb and suggest that by the end of June even bars and eat-in restaurants will reopen, but with distancing rules still in place. However, one of the big questions is whether or not employees will be willing to come back to work. With the $600 top-up, many in foodservice are making more from unemployment than they were when restaurants were fully open.
Hospitality and leisure is the largest employment category of all, making up 11% of nonfarm payroll employment. The group includes not only restaurants and bars but accommodations and all other arts and entertainment. Given that this will likely be one of the last categories to open and even then, it may not fully come back online till after July 1, it will be a GDP drag well into the third quarter. Think about movie theaters, which are part of this category. What movies are they going to show with all the release schedules thrown so far off?
There will be hundreds of factors we need to work through on the back end of this economic shutdown. Restarting supply chains will not be easy. Going back to the restaurant sector, how will those supply chains come back after crop destruction and packing plant shutdowns? What about imported products? Sure we will all want to go out to eat when things open - once. But then what?
We would all like to see a V recovery, with the economy bouncing back up as hard as it bounced down. But it may well be more of a W than a V: Bounce up, bounce down and hopefully bounce back up again. It will take time for our economy to stabilize. It will take time for other countries’ markets to also come back and time for our supply chains to gear up again, as well as for our export markets to return to some normalcy.
Look for signs of recovery as early as July, but another economic downturn related to any secondary outbreak of the virus later in the year is also a good possibility.