Economic recovery may be fizzling as disruption from virus lingers
When states and cities began closing most businesses in March, the idea was to smother the virus and buy time for the medical system to adapt. Jared Kushner, the president’s son-in-law and a senior White House adviser, spoke of hopes “that by July the country’s really rocking again.”
But without a uniform federal strategy, many governors rushed to reopen their economies before bringing the virus under control. Now states such as Florida, California, Texas and Arizona are setting daily records for coronavirus cases and more than 70 percent of the country has either paused or reversed reopening plans, according to Goldman Sachs.
After two surprisingly strong months, the economy could begin shedding jobs again this month and in August, Morgan Stanley warned Friday. Many small businesses that received forgivable government loans have exhausted their funds while some larger companies are starting to thin their payrolls in preparation for a longer-than-expected downturn.
Fresh labor market weakness would represent a profound disappointment for millions of American workers and President Trump, who is eager to highlight economic progress with only a few months remaining before the November election.
“ ‘Stalling’ is the word I’m using,” said Jim O’Sullivan, chief U.S. macro strategist for TD Ameritrade. “But the risk there is that the numbers start turning negative again.”
Several regional Federal Reserve officials last week expressed concerns about the recovery petering out. Raphael Bostic, president of the Federal Reserve Bank of Atlanta, warned that economic activity “is starting to level off.” Thomas Barkin, who heads the Richmond Fed, cited “air pockets” in new business orders.
At the White House on Friday, however, the president insisted that his plans were on track.
“I created the greatest economy we’ve ever had. And now we’re creating it again,” he said before leaving for Florida.
A day earlier, he told a group of Hispanic leaders he had launched “the fastest economic comeback in history.”
The economy did regain a total of 7.5 million jobs in May and June, faster than many economists anticipated. But that was just one-third of the number lost to the pandemic.
In a worrisome sign, more than two months after states like Georgia lifted their shelter-in-place orders, layoffs are spreading beyond companies that provide services requiring direct human contact. As disruption from the pandemic lingers, this could mean that the job loss is starting to feed on itself in a classic recessionary spiral, economists said.
Harley-Davidson last week said it was eliminating 700 jobs as part of a restructuring plan it described as unrelated to fallout from the pandemic. In April, the company said: “The crisis has provided an opportunity to reevaluate every aspect of our business and strategic plan. We have determined that we need to make significant changes to the company.”
Indeed, the pandemic, which marked an abrupt end to a nearly 11-year expansion, is prompting companies to rethink their operations and to trim fat that accumulated while the economy was growing. Wells Fargo, the nation’s fourth-largest bank, is drawing up plans to cut “tens of thousands” of jobs later this year, according to a Bloomberg News report.
“While the timing seems to coincide with the stalling of the economic reopening process in over 30 states, there may well be something more strategic in play — that is, pressure on a growing segment of corporate America to ‘right size’ for what increasingly looks like a longer road back to full economic recovery,” said Mohamed El-Erian, chief economic adviser at Allianz, via email.
The unemployment rate never reached the Depression-caliber level of 20 percent that many economists had feared in March, topping out so far at 14.7 percent. But layoffs that initially were described as a temporary response to a health crisis are hardening into something more permanent, leaving millions of workers scrambling to regain their footing in a changed economy.
The labor market remains a ruin. First-time claims for unemployment benefits have exceeded the previously unheard of figure of 1 million for 16 consecutive weeks.
Including a new program for freelancers and gig economy workers affected by the pandemic, weekly claims are rising. Almost 33 million Americans now are collecting some form of unemployment benefits, according to Morgan Stanley.
Even allowing for some double-counting in the figures, that means nearly 20 percent of those who were working in February are now jobless, according to economist Julia Coronado, president of Macropolicy Perspectives.
It is no longer a question of returning to the pre-pandemic environment that existed as recently as four months ago, economists said. Under the remorseless influence of the pandemic, the U.S. economy is being reshaped. There will be fewer jobs in airlines, hotels, restaurants and traditional retail and more in e-commerce and technology industries.
Shifting workers from fading industries to the handful that are experiencing rising sales will not happen quickly. During the Great Recession, which began in December 2007, it took nearly 10 years for the unemployment rate to fall back to its 4.4 percent low.
For Levi Strauss, booming online sales were not enough to offset the impact of the closure of most of its retail outlets in March and April. The company said last week it would lay off 700 workers, aiming to trim quarterly expenses by $100 million.
“Businesses have to be conservative and cautious and resize their business for the worst-case scenario of an economy that doesn’t bounce back,” said Coronado. “We’re now seeing the normal recession dynamics we were trying to avoid.”
As the virus has raged longer than first expected, some companies are concluding that they just don’t need as many workers as they did in February, said Heidi Shierholz, former chief economist at the Labor Department.
“These are more of a normal recession layoff. It definitely has a more permanent feel to it,” said Shierholz, now with the Economic Policy Institute.
Employment and spending data suggest the recovery sagged after June 22. The number of people telling government researchers they were not working rose in each of the past two weeks, climbing by more than 1.4 million, according to an experimental Census Bureau survey of American households.
Likewise, consumers appear to have grown more cautious over the same period, according to Jesse Edgerton, an economist with JPMorgan Chase. Citing data from 30 million credit and debit card files, he noted “a modest pullback” in spending across all states, not just those where the virus had flared anew.
“Spending has begun to flatten out at a somewhat lower level than the peak seen on June 22,” Edgerton wrote in a note to clients.
Millions of additional layoffs could come soon from cash-strapped state and local governments, unless Congress provides additional relief, and small businesses that have exhausted their borrowing under the Paycheck Protection Program. In a survey of its members, the National Federation of Independent Business said more than half of respondents had used up their loans and 22 percent planned to lay off workers as a result.
“As owners finish using their loan, more are finding that economic conditions are unable to support current staffing levels which were previously supported by the PPP loan,” the industry group said.
None of this means that the economy is destined to repeat its sickening March plunge. But many economists expect what Rubeela Farooqi of High-Frequency Economics calls a “stop-and-go recovery” that will advance or retreat depending upon public health.
Nowhere is that clearer than in doubts about whether schools will operate normally this fall. The president insists the nation has no choice but to resume instruction for millions of students, both for their benefit and to enable parents to return to their jobs. But with coronavirus cases soaring just weeks before the first bells are scheduled to ring, it is not clear whether that will be practical.
Treasury Secretary Steven Mnuchin said Thursday that he was “highly optimistic” about a coronavirus vaccine by the end of the year. But the economy can’t wait for a cure. Individual and government efforts to blunt the pandemic’s spread must intensify to prevent a deeper or extended downturn, economists said.
“I don’t think any of us think we’ll get the economy back to 100 percent before there’s a medical answer,” said James Glassman, JPMorgan Chase’s head economist for commercial banking. “The longer it goes on, the more damage it does.”