What Sort of Recovery?

Chief Economist Scott Brown discusses current economic conditions.

For the most part, assessments of the economic impact of COVID-19 have been more qualitative than quantitative. Data reports are backward-looking and often distorted. However, in recent weeks, the unprecedented surge in jobless claims has helped us to begin assessing the economic damage from social distancing. In turn, the view of a sharp near-term decline in economic activity has become somewhat clearer. However, the outlook beyond 2Q20 remains uncertain. The pace of recovery will depend on whether we can halt the spread of the virus (good signs so far), develop palliatives, and begin to end social distancing. Expectations vary, but we should begin to see the economy starting to rebound in June. However, there are a wide range of views on the pace of recovery and there are likely to be long-lasting changes in consumer behavior.

Jobless claims totaled 6.6 million in the week ending April 4, a bit lower than the week before, but still extremely elevated. Prior to seasonal adjustment, 15.1 million people have filed claims in the past three weeks – that’s 9.2% of the labor force – and the claims figure understates the degree of job losses (as not every laid off or furloughed worker has been able to file). The Bureau of Labor Statistics has indicated that there were collection issues in the payroll and unemployment surveys for March. Many furloughed individuals, those with hours set to zero, should have been counted as “unemployed through temporary layoff,” but weren’t. This misclassification reduced the unemployment rate by nearly a full percentage point. In other words, the March unemployment rate should have been reported at 5.4% rather than 4.4% (up from 3.5% in February). The BLS does not go back and make ad hoc corrections, so the reported number stands. In any case, the problems with the March unemployment data illustrate an important issue. Much of the incoming economic data reports will be subject to distortions due to collection problems. Barring collection and reporting issues, the unemployment rate is likely to rise to 12% or more in April and we could see further increases in the months ahead.

The University of Michigan’s Consumer Sentiment Index posted a record decline in mid-April, dropping to 71.0, from 89.1 in March and 101.0 in February. The report had a cautionary tone, noting that further declines are expected in the weeks ahead. Moreover, anticipation of a quick and sustained economic expansion “is likely to be a failed expectation, resulting in a renewed and deeper slump in confidence,” according to the report. Consumers don’t spend sentiment. Income, wealth, and the ability to borrow are the key drivers. However, consumer attitude measures generally provide insights into consumer fundamentals, which have been deteriorating rapidly in recent weeks.

Fiscal policy efforts will help, but more is needed, especially aid for state and local governments. Economists have been quick to label the CARES Act as “disaster relief” rather than “fiscal stimulus.” Sending cash to unemployed workers and idled businesses won’t boost overall economic activity in the way one would see in a normal recession, but these efforts should help to limit the damage and carry us through.