It’s likely that every human on the planet has been affected by COVID-19. Though it’s sad that it took a disease to bring us together, it reminds me of how deeply connected we all are — and how much our daily existence depends, not just on our community, but on people we’ve never met on far-flung corners of the world.
The very interconnectedness is what makes this pandemic so dangerous to us and the economy. Economists believe we entered a recession in March, and the latest data continues to show the economic damage.
Retail sales dropped 8.7%, the biggest drop since the government started tracking the data in 1992. Spending on travel, restaurants and shopping overall is way down, though grocery stores and delivery are up. The number of new unemployment claims skyrocketed to over 25,000,000 people — erasing the job gains since June 2009.
Despite the ugly economic data, stocks just wrapped up their best performance in decades. What gives? Irrational exuberance. To quote Alan Greenspan, “Stocks are famous for rallying in the face of bad numbers, and it’s clear that investors are expecting government stimulus to lead to a quick recovery, as states emerge from the lockdown and businesses pick up.”
Are bullish investors right? Will the economy recover quickly? It’s impossible to say right now.
How long the downturn lasts and how soon the economy recovers depends on answers to some critical questions.
- When will widespread testing, tracing and treatment allow lockdowns to ease? Reopening American too soon and igniting a fresh wave of the pandemic with prolong the pain.
- Will employers maintain relationships with their laid-off staff? You can’t just flip a switch and reopen a closed business without skilled workers. The longer the shutdowns continue, the harder it will be for companies to staff up.
- How soon will consumer spending return? Deferred demand, that’s pent up and just waiting for restrictions to ease, could cause spending to surge. Destroyed demand, that’s not coming back, could cause spending to remain depressed for longer. Here’s a simple example: Deferred demand would be rescheduling a cancelled vacation, destroyed demand would be deciding to skip it entirely.
- Will we see a V, W, L or swoosh recovery? The shape of the eventual recovery is being hotly debated because it gives us insight into what would need to happen, and how long it could take. A “V” shaped recovery is a short, sharp decline and then a quick rebound. It’s the best scenario. In this case, lockdowns lift soon and spending surges, driven by pent-up demand and government stimulus. A “W” shaped recovery is a double dip recession. It’s the worst case scenario. It could happen if the easing of restrictions leads to another wave of infections and lockdowns, of the economic damage causes a second downturn. A “L” shaped recovery represents a sudden plunge in fitful recovery if lockdowns continue through the year and growth is slow to return. A “swoosh” shaped recovery is a sharp downturn followed by gradual recovery as lockdowns are eased cautiously across the country.
We can’t predict what the road ahead will hold, but we think it would look less like a return to normal and more like a way to live with the way COVID-19 has overturned ordinary life.
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