As the economy crashes around them, economists are flying blind.
There are no real precedents to point to; no data that mean much. The last time a major pandemic struck the United States — the Spanish Flu in 1918 — was years before the federal government even began calculating a national unemployment rate, let alone all the other detailed measurements it now conducts on the health of the US economy.
For economists, that dearth of hard information and history leaves them floundering as they try to gauge how deep and long the looming coronavirus recession will be.
But just as the unprecedented nature of the crisis is stoking fear and anxiety, it is fueling some hope. Because this is such a different blow to the economy — a sudden and overwhelming shock instead of the slow breakdowns that triggered the Great Depression and the Great Recession — maybe the recovery will also be quicker.
One can dream.
“The Great Recession was totally different than this recession. That was a financial and economic collapse. This is one where we are actually forcing the economy to shut down, which is causing a pullback in spending,” said Jack Kleinhenz, chief economist for the National Retail Federation. “Fortunately, we were on pretty firm ground going into this situation. In fact, we thought this was going to be a good year.”
Mark Zandi, chief economist at Moody’s Analytics, an economics research and consulting firm, doesn’t agree. In his view, the economy was not in great shape heading into the crisis. After a steep decline this spring, Zandi predicts a robust bounce-back in the third quarter before the economy settles into a period of relatively flat growth before picking up in the second half of 2021.
But Shai Akabas, director of economic policy at the Bipartisan Policy Center, thinks that "the possibility of us just flipping the light switch back on and getting back to full steam is very unlikely at this point.”
The extent of the outbreak’s economic damage is just starting to emerge as the first reports roll in — and it’s stunning.
Nearly 10 million people filed for unemployment benefits in the second half of March, including a staggering 6.65 million in the most recent week that was double the record set just the week before. The latest employment report, which doesn’t come close to capturing the full coronavirus impact because it’s based on data from the middle of March, showed the biggest decline in overall job growth, 701,000, since the depths of the Great Recession.
And just like with the virus outbreak, economists are warning the worst is yet to come.
Forecasts call for the unemployment rate to more than double — at least — in the coming months, meaning millions more people will lose their jobs. A “back of the envelope” projection from a researcher at the Federal Reserve Bank of St. Louis sketches one extreme scenario: 47 million Americans out of work, rocketing the unemployment rate to 32.1 percent, higher than at any point during the Great Depression.
“They’re going to get worse before they get better. That I can say with certainty,” economist Jared Bernstein said of job losses. “How much worse is more of a question for an epidemiologist than an economist."
“What we know is when you put an economy in deep freeze, you get massive cascading layoffs,” said Bernstein, a senior fellow at the Center on Budget and Policy Priorities. "What we don’t know is when we can thaw out and what will happen when we do.”
To understand the effect of coronavirus on the US economy, think of the outbreak as a major storm. Let’s call it Hurricane COVID-19.
The pandemic has spurred people to stock up on supplies and cower indoors while shutting down virtually everything except emergency services. Just as with Hurricanes Katrina, Sandy, and Harvey, coronavirus has spread devastation in its wake. It’s the size of that economic wake that’s the game-changer.
“It’s like the entire globe is getting hit by a hurricane,” Zandi said. "With a hurricane, you know it’s going to pass ... and that gives you the sense of, ‘OK, I can survive for six hours.’ With this, you have no idea.”
Further complicating the forecast is the lack of a recent precedent.
The 1918 Spanish Flu pandemic killed about 675,000 in the United States and 50 million worldwide. But estimating its impact on the US economy of that time is difficult.
A 2007 study from the Federal Reserve Bank of St. Louis noted that “the greatest disadvantage of studying the economic effects of the 1918 influenza is the lack of economic data.” The research paper relied on newspaper accounts to determine that effects were “short-term."
A new study from researchers at the Federal Reserve and Massachusetts Institute of Technology looked at the economic effects of the 1918 pandemic based on state- and city-level manufacturing activity available at the time. They found that cities that took “early and extensive” nonpharmaceutical measures such as social distancing suffered no negative economic effects in the medium term, and that cities that intervened earlier and more aggressively saw “a relative increase in real economic activity after the pandemic subsided.”
But Bernstein said it’s hard to draw any broad economic conclusions from the 1918 outbreak.
“We don’t have the data,” he said. “We have more powerful tools to push back against contractions than we used to. But we’ve never had a pandemic like this.”
The federal government has taken bold steps to keep the economy afloat, with the Federal Reserve lowering its interest rate to near zero percent while promising to purchase hundreds of billions in bonds. Congress has approved three major coronavirus bills, including a $2 trillion measure that expands unemployment benefits, sends up to $1,200 to many Americans, and provides hundreds of billions of dollars for small businesses and large corporations.
But that’s not nearly enough, Zandi said. The economy will need another $2 trillion just to keep going, with additional longer-term stimulus to pull the nation out of recession, he predicted.
“We’re just getting started here,” Zandi said. “I think people need to buckle in. This is going to be very difficult.”
He estimated the US economy will contract by about 18 percent from April through June and the unemployment rate will peak at 12 percent this spring. Those figures could be worse if efforts to contain the outbreak fail.
“It’s not hard to go very dark here,” Zandi said. “There’s no precedent. Nothing comes close. The only thing that was in the same species was 9/11 because we had broad-based shutdowns for a day or two and people were rattled for a week or two.”
The US has plenty of company. With the virus striking worldwide, a new poll by Reuters of more than 50 economists in North America, Europe, and Asia had a median forecast that the global economy will contract 1.2 percent this year. The worst-case scenario was a 4.9 percent contraction.
Those economists, like many in the US, expect a rebound starting this summer. But the economic data just can’t keep up with the outbreak.
After Thursday’s record jobless claims, two researchers at the Century Foundation, a progressive think tank, calculated that the true unemployment rate last month was 18 percent, given the troubles many workers have had filing for benefits and those not covered. For Massachusetts, their calculations were even worse: 27 percent.
“The impact of this at the very micro level is going to be much worse for one group of people: those who are just not insulated against this kind of shock,” Bernstein said. “They don’t have paid leave. They don’t have any savings. They work in services, which expose them to other people.”
A quick rebound will be difficult given economic problems the crisis has exposed, like troubled unemployment programs in some states and the huge amount of student loan debt, Akabas said.
It’s all left economists scrambling for analogies to try to explain an unprecedented situation. Kleinhenz likens the outbreak to a massive traffic jam. The longer the coronavirus pandemic rages, the longer the backup gets.
“Just imagine this backup could be hundreds of miles,” he said. “To start that first car going at 10 mph, then the next one then the next one, it’s a sizable achievement for this economy to get back on track.”