It is looking more and more as if the effects of the Coronavirus recession may be a prolonged downturn rather than a short recession. The Trump Administration’s optimistic view is that jobs will return almost as quickly as they were lost when the economy is reopened, but an analysis by JP Morgan paints a darker picture.
The Bureau of Labor Statistics announced today that the unemployment rate has reached 14.7 percent. The 10.3-point jump over the past month and the 14.7-percent unemployment rate are both the highest recorded since the metric began to be published in 1948.
In an interview with Bloomberg, JP Morgan Chief Investment Officer Bob Michele said that it could be more than a decade before the US recoups the job losses that it has incurred over the past several months due to the global pandemic. Michele said that the recovery won’t be as simple as flipping a switch to turn the economy back on.
“It’s going to take years, or longer to get back to where we are, or where we were,” Michele said.
Michele said that unemployment is predicted to peak at about 15-20 percent. The recovery from the peak will take months.
“When you look at the congressional budget office forecast for the end of 2021, they have unemployment at nine percent, so sure, materially better than where we’re going to peak in the high teens, but during the peak of the financial crisis, unemployment hit 10 percent,” he said. “So even looking out a year and a half from now, we’re still going to be roughly where we were at the peak of the financial crisis.”
“The other thing that we are focused on is what happens when the people return and the PPP [Paycheck Protection Programs] run out?” Michele said. “Are businesses going to find that their customers aren’t returning the way they were pre-crisis and are they going to end up starting a round of layoffs that nobody has anticipated?”
There is evidence that layoffs are coming in some industries when the PPP money is exhausted in September. United Airlines has already begun a process that will furlough more than 4,000 pilots and a third of its management and administrative staff.
“One of the things we did was to just predict a downdraft in the second quarter, somewhere around 10 percent, so call it 38 to 40 percent annualized, and say that’s the trough, and then start this journey back up to the long-term trend rate,” Michele said. “To catch up to the long-term trend rate that’s been in place, call it 1.5 percent, pre-crisis, to fill that output gap, we estimate it will take ten to twelve years.”
“That’s a long time, but is it unrealistic?” he asked rhetorically. “No, after the financial crisis it took about eight-and-a-half years to catch up to the long-term trend line.”
The length of the downturn may be dependent upon whether a vaccine or treatment for COVID-19 is found. Many people will not want to travel or congregate in public places until they can be reasonably certain that they won’t contract the disease or that it can be successfully treated if they do.
The economic difficulties would likely have been encountered regardless of whether the economy was shut down or kept open. Sweden, which was one of the few countries that did not suspend its economy and order a shelter-in-place, is also forecasting gloomy times ahead per CNBC. Decisions by Swedish citizens to social distance and stay home more often, even without a government order as well as a slowing global economy play into the forecast.
Michele also warned that the “massive” amounts of debt that are being undertaken by governments, businesses, and consumers could also be a threat to the recovery. Central banks will need to ensure that the cost of funding that debt does not escalate out of control, he added.
Michele did advocate “actual stimulus” as opposed to the government spending that has so far been aimed at minimizing losses to businesses and individuals.
“What about a trillion-dollar infrastructure spend, instead of spread out over 10 years, maybe spread out over four or five years?” he asked, “Something out there that creates new aggregate demand while we recover.”
One problem with additional deficit spending on infrastructure is that the United States is already deeply in debt from deficit spending during the good years. With spending increasing and the economy contracting, the national debt is poised to explode both in terms of real dollars and as a percentage of GDP. The implications of a post-pandemic debt crisis are uncertain but it can be assumed to very bad.
The good economy was to be the touchstone of Donald Trump’s re-election campaign. In the space of two months, however, the economy has been reduced to a shambles that will take years to rebuild. We will find out later this year whether voters trust the president to lead the reconstruction effort.
Originally published on The Resurgent
No comments:
Post a Comment