The Roller-Coaster Recovery

posted by Michael Lewis on April 17, 2020 - 12:00am

After a Devastating 20Q2 (-30% or More Drop in Real GDP), The U.S. Headed for Big Summer Gain, Late Fall Slump, and then a Sustained Post-Vaccine Expansion. Real GDP Should Finally Surpass Its 19Q4 Peak in 21Q3

The current downturn (fated to become a record-breaking recession) is both more predictable and less predictable than nearly every other U.S. business cycle. Rather than the result of the complex interactions within a $19-trillion real economy as in a typical cycle, this recession is driven entirely by elected officials slamming their collective boots on the “brakes.”
In March, government officials shut down the “non-essential” parts of the economy to fight the spread of the COVID-19 virus. They can re-start the economy almost as easily. And they will do so.
The question is when. More precisely, the first question is when; the next question is what’s next.
Given the most likely virus developments ahead and officials’ reaction to them, FMI expects that the first steps to restart the economy will begin in May, pick up steam in June and be far along by the end of summer. The process will be far from smooth, however. In short, expect a roller-coaster economy for the next year.
The shape of this “roller-cycle” is fairly clear: the current deep dive will be followed by a solid bounce up this summer, then gradual steps forward, mixed with a step back or two. Another but more moderate deceleration will likely occur in late fall/early winter as COVID-19 cases and fears begin to rise again (prompting excessive restrictions in many states and other countries).
Finally, aided by a COVID-19 vaccine, there should a sustained expansion, perhaps even explosive growth, beginning on or about spring, 2021. Consumers will make up for lost time, and businesses will ramp up investment.
Less predictable is the amplitude of these growth waves, which will depend on when, where and how quickly the current restrictions on activity are lifted. After a real GDP decline of around -9% in 20Q1 (Advance Report to be released April 29), FMI is now tracking a -30% collapse in real GDP growth in 20Q2, but it could be worse, say -40% or more. There is also a chance for somewhat less of a decline this quarter, but the odds for that are fading fast as state officials slow-walk plans to re-open.
The steeper the 20Q2 decline is, the stronger the subsequent rebound will be. Based on the steep decline in the first half of the year, FMI expects a solid double-digit rally in 20Q3, more than +20%. If 20Q2 were to be down -40%, the summer surge would likely near +25%.
Even so, it would take five quarters of net expansion, from 20Q3 to 21Q3, to recoup all the recession losses and hit a new GDP peak.
Real growth would continue at a brisk pace this fall, but the reappearance of some COVID-19 cases late this year would push real growth briefly to near zero. The announcement of a vaccine will trigger a cascade of spending to celebrate, plus the return of major league sports, stadium concerts and festivals, the Olympics, et al.
A number of virus-related factors could affect the amplitude of individual quarters. For the most part, these would be offsetting -- there could be a smoother course or bigger growth swings. In any case, we would still be looking at a five-quarter comeback to the new GDP peak in 21Q3.
If, like most flus, the virus goes dormant in hot weather, this summer’s rebound could be bigger. If herd immunity becomes greater, i.e., more people fought off the virus with few or no symptoms and now carry antibodies, the winter return of the virus could be limited. If a vaccine were announced sooner, within the next several months, the benefits would also come sooner. Though it would still take a year or more to manufacture and distribute the vaccine, planning for the 2021 revivals would proceed at full speed.
If the news proves to be much harsher -- a vaccine remains out of reach, touted treatments prove ineffective, COVID-19 thrives in the heat -- obviously, these projections change. In that case, we expect that the public will rapidly adjust to a higher but manageable number of virus-related deaths. Americans tolerate levels of, say, auto accidents and murders, that shock many other nations. Left with a choice of maintaining this status quo for a year or more, the people will choose the economy. It won’t be close.
A few weeks ago, President Trump mused that it would be “wonderful” if the economy re-opened by Easter. During this Easter week, economies are beginning to open… overseas. Austria, India, Denmark and Norway will begin gradually lifting restrictions imposed to impede the spread of the COVID-19 virus. Austria is leading the way by opening businesses starting this week. India is opening some factories. The Scandinavians are re-opening schools first, then businesses later. (Their neighbor Sweden has declined to impose much in the way of official restrictions so far, trusting their people’s good sense).
Meanwhile, the U.S. is still considering. The president’s social distancing recommendations are slated to last until May 1. State governors, who imposed the shutdowns of “non-essential” businesses, have varying strategies. Texas has indicated it may begin normalizing activities within two weeks. In contrast, Virginia’s governor has extended his shutdown order into mid-June (he is limited to just a single term and is perhaps less responsive to what the public wants). Most other governors are holding their cards close to the vest; more than a few appear not to have a clue.
Essentially, we expect a reversal of the shutdown process. Starting in early March, some very scary model projections prompted a few governors to announce restrictions. Other governors, reading the same models and seeing their peers get away with unprecedented impositions on the economy, followed suit. This, in turn, spurred the first governors to add more restrictions. And so on.
Now, the models, fed by hard data, are becoming much more upbeat. U.S. estimated deaths down from 90,000 to 60,000; projections of hospitals choked with victims dissipating fast, even in hard-hit areas like NYC. The first governors, in Texas or wherever, will ease restrictions and see immediate upticks in the economy. This will bring pressure to bear on the other governors.
President Trump, who has only issued advisories about domestic business so far, plans to modify that approach to encourage regional modifications. The administration plans to issue ratings for every county as low, medium or high risk from the virus. These could come in early May. Presumably, low risk counties would then demand relief from their respective governors.
Long before governors took out their executive-order-signing pens, the public had already moved toward social distancing. Frequent handwashing, avoiding crowds, working from home etc. Many would have started wearing masks except that public health experts told them not to do so. So, what will happen when those same experts, or their elected leaders, tell people it is safe to return to work and shopping?
FMI expects a stampede, albeit one with people standing on blue tape every six feet in check-out lines and wearing masks. Bars, restaurants, car dealerships, open houses for home sales and more will see brisk traffic. Air travel abroad will not be appealing for quite a while, but domestic flights to see family -- or just to see someplace else -- will be booked. Even cruise ships will sail again; their fans have shrugged off shipboard public health nightmares for years. Those all-you-can-eat buffets must be incredible…
People will not have the option for a few months to go to a theater, basketball game, or concert; many would be wary about going back to those venues anyway. But they will come quite quickly when (we hope) a vaccine is found.
Those who believe that this terrible episode has altered the American character or way of life, or permanently scarred the economy are mistaken.