The Wall Street Journal - December 23, 2020
Our Covid winter has begun on a grim note: Job growth is stalling, consumer spending is wilting, and a fast-spreading virus strain has raised the prospect of crippling new lockdowns.
Yet after this most unusual of years, there are three good reasons to think next year will be better—perhaps much better than you think. It all comes down to the unique character of both the recession and the policy response.
Most recessions begin when rising interest rates or stressed financial markets undercut demand for goods and services, driving up unemployment, which further crimps demand. This one began with a natural disaster, like a hurricane or earthquake, which interrupts the supply of goods and services.
When a disaster of that sort ends, a V-shaped recovery ensues. But this disaster, the most widespread and longest lasting in a century, isn’t over. There was a partial V-shaped recovery in the third quarter as lockdowns were lifted. But since the pandemic was never brought under control, restrictions and social distancing never ended and indeed have recently tightened.
Those restrictions are repressing consumer spending. IHS Markit estimates personal consumption is running 7% below its fundamental level as dictated by wages and salaries, government payments, wealth, interest rates, taxes and demographics. In the 2007-09 recession, it ran close to or above its fundamental level.
If vaccines are effective—of particular concern as a fast-spreading variant paralyzes Britain—most of the population should be vaccinated by midyear, allowing social-distancing restrictions to end. It isn’t outlandish to think consumer spending could snap back to its fundamental level by year-end (though that isn’t IHS’s forecast). That could boost growth in 2021 to 5%, the best since 1984.
This week’s $900 billion fiscal package will ultimately bring total stimulus since February to $3.5 trillion, according to the Center for a Responsible Federal Budget. That is more as a share of gross domestic product than the response to the 2007-09 recession and it is being spent in less than two years instead of five.
President Trump called the $600 per person stimulus check “ridiculously low” and some liberals feel similarly about the $300-a-week bonus unemployment benefit. In fact, together with March’s higher payouts, they represent an unprecedented funnel of federal cash that in aggregate—though not for every individual—more than replaced all the wage income lost during the pandemic.
Meanwhile, Federal Reserve Chairman Jerome Powell said last week, “the concerns that we had at the very beginning of really serious, deep shortfalls and massive budget cuts on the part of state and local governments have not yet occurred.”
To be sure, states expect 11% less revenue in the current fiscal year, which ends next June, than originally budgeted, according to a report released Wednesday by the National Association of State Budget Officers. But the hit has been less than feared, in part because the pandemic has disproportionately hurt lower-paid workers who pay less income tax and services that carry less sales tax than goods, said Kathryn Vesey White, director of budget-process studies for NASBO.
State and local governments didn’t get the general assistance they hoped for from this week’s fiscal deal, but $122 billion is earmarked for schools, higher education, vaccine distribution, transit systems, and testing and tracing.
Federal largess is all the more powerful because the Federal Reserve is amplifying it. When recovery kicks in, investors often price in higher interest rates. But the Fed short-circuited that process by promising that interest rates, which are near zero, will stay there until and unless inflation reaches 2% and unemployment drops to pre-pandemic levels. This unprecedented commitment is of limited help while a rampant pandemic is holding down activity. But once restrictions are lifted, it could turbocharge asset prices and consumer and capital spending.
Recessions often do long-term damage by wiping out entire businesses along with hard-to-re-create relationships among customers, suppliers, and employees, and by keeping some people jobless so long they leave the workforce altogether.
It is early days, but there are signs that scarring may be minimized this time. Bankruptcies usually rise when unemployment soars, but this time they are down, according to Epiq Aacer, which tracks filings. Chapter 11 filings by business are up, but well below levels reached in the previous recession. Chris Kruse of Epiq Aacer expects filings to rise, especially once eviction moratoriums protecting delinquent tenants and homeowners expire. But those moratoriums and forgivable federal loans will in the end spare a lot of people and businesses bankruptcy court.
Even after seven months of solid growth, total employment stood 9.8 million lower in November than in February, a jobs deficit larger than in February 2010, the low point of the last cycle. But 38% of that number are people who permanently lost their jobs, compared with 77% then. Goldman Sachs estimates 60% of the missing jobs are in virus-sensitive industries, most of which will return with a vaccine.
True, jobs or businesses destroyed during the pandemic’s darkest days are gone forever—and there are more dark days to come. But a rapid recovery next year offers hope that many unemployed will avoid the trap of long-term joblessness and new businesses will soon rise from the ashes of the old.
By Greg Ip
Write to Greg Ip at email@example.com
Dow Jones & Company, Inc.
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