Garrett Fisher
April 3, 2020
After an extensive analysis of apocalyptic economic doom, one might note that I skipped over coronavirus. At the time of the 2013 article, and even now, an ironic worry in our minds is not about how we are utterly screwed at present; rather, it is an addiction to presumption that future consequences to present action will do us in. Interestingly, economic gluttony occurring now, during the virus crisis, is the very sort of excess that I predicted in 2013 that the market would punish. Yet, here we are, in 2020, predominately wondering how we’ll pay someday down the road for the mess created by measures in response to coronavirus mitigation. Thus, I will step back from worrying about the long-term future and delve into my predictions about the near term.
As of this writing, unemployment numbers for the second week of the crisis have come out, indicating that in the past two weeks, 10 million Americans have filed for unemployment. What surprises me is how many people do not want to believe how bad this is going to get economically. Before lockdowns became an American certainty, there were illusions of the infamous “V shaped” recovery, which only now is the zeitgeist of public discussion beginning to interpret as unlikely, with official predictions showing perhaps three calendar quarters of recession, followed by the beginnings of a recovery. Only this morning has Bank of America finally come out and said that this recession will likely be the deepest since World War II.
I would like to preface that we have had GDP and unemployment estimates from a variety of economic sources for up to two weeks, and they have been nothing short of gory. The word “unprecedented” is bandied about quite a bit, and it is my determination that accepting the sheer misery of what is coming may be incentivizing for many to focus on the fact that the external trigger for this coming recession is biological; thus, the idea remains that we may avoid some inherent languishing economic toxicity.
The coming recession will be worse than 2008 and not as bad as the 1930s.
Why would I say such a thing? A maxim that I have recently heard explains how recessions work: “cost cutting for one business is the loss of revenue for another.” Economic incentives for survival call for nearly all of us to restrain spending, shelve optional projects, delay starting businesses, delay that move, avoid buying a new car, and avoid that coming vacation. This is merely a fear reaction, whereas for those 10,000,000 Americans in that last two weeks, it is a financial reality that has struck with a fury that none of us have ever seen. If the stock market crash of 1929 was enough to set the Great Depression into motion, a shock global dislocation of employment, services, retail, and industry is exponentially greater.
We must remember that the 1930s, while triggered by the end of a boom that had turned into a bubble, was a series of colossal mistakes and bad luck. The administration of the time pretty much did the exact opposite of what the economy needed. We lacked many of the institutions that form the backbone of our financial system, such as the FDIC. Just imagine how much worse this situation would be if literally half of our banks fail now (as had occurred in the Depression), trade barriers were imposed, credit actually restrained (instead of stimulated), and the government sat by and did little.
What is different now, aside from the existence of a tremendous amount of institutions and protection mechanisms, is the willingness for governments to act with incredible nimbleness, frankly with no precedent, to prop up the economy. Central banks have been rolling out mechanisms to safeguard liquidity and keep financial institutions safe with a shocking speed. Congress within a month rolled out three separate legislative packages, including the largest spending event in American history. One glue that holds this bipartisanship and speed of operation together is that the virus wasn’t anyone’s fault. In 2008 and especially in 1929, politics expressed a prevailing view that someone was to blame for the boom and bust cycle, and they ought to be punished. Bailouts were politically risky and would only pass when the problem was so bad that we would all go down together. Resentment lingered for years in the electorate from the event, reflecting on underlying greed that spiraled out of control. In this situation, there is no blame to go around for the cause of the event, and people from the electorate to politicians are relatively supportive of decisions being made, which allows for fast action.
So, what does our future hold?
In the immediate term, we will see muddled numbers as to unemployment in America as stimulus mechanisms work their way into the economy. Small businesses are effectively being paid to keep their workers on staff, with no layoffs or reductions, for an 8-week period. Enhancements to the Family Medical Leave Act, including coronavirus sick leave, paid for by the government via employers, is also working through the system, some of which has just come into effect on April 1. These mechanisms, all funded by the stimulus package, will feign that Americans are still working, when they are really receiving government benefits through their job. We will know what kind of cliff edge remains on the other side of the expiration of these measures, though I must note, that is what the stimulus package was for.
Many retail, restaurant, hospitality, and travel businesses will cease operating and will not come back. While there will be some volatility in that certain businesses may close, only to be replaced by a similar one in the same location later on, many struggling firms will be extinguished a) as part of trends away from retail and b) because the barrier to entry to reestablishment will be too high. We do not know the exact amount, though it is reasonable to assume that it will be painful.
As a consequence, commercial real estate will suffer decreased occupancy rates, lower lease rates, and ultimately lower property pricing. I expect this reality to go on for two years at minimum, as it takes a period of time for businesses to formally go bankrupt, get evicted, close, repurpose the space, list for sale, and for landlords to accept new lease rates (or for the landlord to default on the underlying mortgage). As a matter of reference, the bottom of the residential real estate market after the 2008 crisis took four to five years to be reached as the foreclosure and demise process worked its way through.
Initially, service sector sentiment numbers cratered with the lockdown having closed many businesses. Curiously, manufacturing has initially remained resilient. However, that cannot continue. As businesses try to hoard liquidity and as demand shock propagates through the system, manufacturing and industrial sectors will begin to slow down with some consistent momentum. This, in turn, will feed the classic cycle of a recession, as it continues to impact the job market. Most sectors will suffer some noticeable decline in revenue and margins, which may take months to bottom out. Not all shocks instantly propagate due to the nature of how supply chains operate.
The varying spread of the disease poses one of the greatest risks to the global economy. As one nation opens for business, others will remain closed. Second waves of the disease in Asia are already a concern as I write this and will continue to be so likely until a vaccine or treatment is developed. That alone is nearly a worst-case scenario as, instead of a brief and sharp period of lockdown, we could see extended hybrid restrictions on travel and business, leaving such a hangover of negative sentiment that we will take quite some time to get out of.
Nonetheless, the idea of a brief boom following some months after the reopening of the economy is somewhat fallacious. People will fear disease resurgence and will therefore continue to modify their behavior for many months after acute lockdowns are over. We are likely to continue to have social distancing requirements to prevent second waves, which means that entire sections of society normally reserved for social interaction through spending will not be available, which would cement the demise of these businesses. It is another matter to consider how our societies will change for the long haul, which I will consider another time.
Any sort of spending that involves mid-term decision making will likely suffer harshly. Business investment, business travel, personal travel, home building and purchasing, expansions of any sort…all of these will remain on hold due to risk that money and plans will be lost due to cancellation.
I don’t see the need to specify why the fall of these dominoes will lead to a very sharp recession. It is extremely simple that a gutting of demand will take place, which will have downward pressure on employment, wages, asset prices, and liquidity. It is a perfect storm to shrink GDP as fast as possible if someone were trying. China is an example, as while they have come up from their rock bottom position, they remain significantly behind many year-over-year measures of economic activity. We can expect the same in the West.
On the flip side, there are things we do not know regarding government involvement. If retail, restaurant, travel, and hospitality remains substantially closed for months on end, we will see the end of portions of entire industries, for which standard economics will offer no solutions in the mid-term. Sure, maybe a year from now, there will be excellent details on foreclosed hotels, though in the interim, unemployment numbers would stay high with little hope for a private sector solution to the problem. What ingenious business innovation will take place that can thrive when demand is nonexistent?
Depending on the temperature in government, we may see innovative solutions, similar to the 1930s, where the government puts people to work as their industries have disappeared. Most of the western world has an atrocious backlog of infrastructure disrepair. We may see governments using strategic spending to keep people working while solving an existential societal problem at the same time. While it will reek of debt and deficit spending, it will also solve something that needed to be solved anyway, so it is substantially a solution to the problem. The other option, which we have seen already, is a massive expansion to unemployment benefits. It is likely that such a thing will continue in line with the problems created by the virus. That alone would blunt a lot of the dominos that could fall as the unemployed fall into starvation.
In a nutshell, it is not going to be pretty, and there is much we don’t know about how long parts of our economy will remain shut along with what governments will do in response. In the meantime, there is little expectation for anything other than a very strong downturn, with an unknown and likely lengthy recovery period. It is my expectation that it will be years before we reach economic barometers existent before the virus struck. It is another matter to consider how our society will have changed from this crisis.