After the shortest-lived recession in U.S. history, the economy appears to be slipping through our latex gloved-fingers again. Businesses are continuing to lay off workers and file for bankruptcy. They said things would be back to normal by July. Well, July is here and this is far from normal.
Meanwhile, the stock market is acting as if it never heard the word recession. The Nasdaq is at all-time highs, fueled by tech stocks whose market valuations appear impervious to the economic reality. What is going on in the world these days?
To get some answers on the current and future state of the economy and stock market, we spoke with Alan Levenson, chief U.S. economist for T. Rowe Price. He shares his outlook for the economic recovery, such as who will lead and who will lag, and what impact the upcoming elections may have. Here are edited excerpts from that interview.
If the recession is really over, will the U.S. lead or lag the economic recovery?
The strong growth in employment, manufacturing production and retail sales in May confirmed that the U.S. recession ended in April. Spanning only two months, it was the shortest recession in 80 years; but it was also the deepest, with real gross domestic product falling by 15.6% from February to April.
China is leading the recovery, and there is not a clear prospect for the U.S. leading or lagging the eurozone, in my view. While U.S. states’ economies reopened a bit earlier than European countries, production and sales data from Germany, the currency bloc’s largest economy, show recovery began in May, in sync with the U.S. And while the U.S. monetary and fiscal policy responses were earlier and larger than those of other advanced economies, its public health response — most important, given the nature of the shock — has been weakest, especially at the federal level.
What market sectors will lead or lag the recovery process?
Sectors of the economy that entail a high degree of social proximity were hit earliest and hardest in the recession. Specifically, restaurants, bars and venues for recreational services (everything from gyms to professional sports) were the first to close in March in response to increased consumer caution and state government mandates. These two sectors make up just 10% of total nonfarm employment but accounted for half of the 1.37 million jobs lost in March. The recession broadened in April with the near-national application of state-level, stay-at-home orders and closures of nonessential businesses, yet these two sectors still accounted for a third of the 20.8 million jobs lost that month.
To be sure, unemployment in these sectors bounced sharply in May and June, but headcounts are still less than 75% of February’s levels, compared with 92% for the rest of the economy. The persistence of the virus has already reversed the trend of restaurant and bar reopenings and will be a challenge to these businesses and “large crowd entertainment” until a successful vaccine or interim mitigation technologies boosts the safety of these activities and convinces consumers of that fact.
The strongest sustained recovery is likely to come in manufacturing. Social distancing protocols are generally easier to implement than in customer-facing, service-producing industries, and inventories need to be replenished after the sharp drawdown during mandatory stay-at-home orders. At the other extreme, the challenges of safely reopening restaurants and entertainment venues are already apparent.
The restocking dynamic I described should benefit consumer goods production. Light vehicle production ground to a halt in April (sales didn’t), and we can all tell stories of shortages in consumer staples when we tried ordering them online.
What impact do you think the swelling government debt will have at the state and federal level?
Very little, at least within the next three to five years. Federal dissaving is being offset by a spike in private sector saving — typical of recessions and early recoveries. In addition, after adding $1.5 trillion to its portfolio of Treasury securities, the Federal Reserve plans to accumulate at least $80 billion per month — $960 billion annually — over the coming months. I expect these purchases to continue into 2022.
Where do you see income tax rates going? What ramifications do you think the upcoming election will have?
Up, certainly over a longer-term, five-plus year horizon. A period of consolidation will be important for fiscal sustainability after the period of crisis-related spending has passed, and higher taxes are likely to play a part, especially if voters want to retain enhancements to unemployment insurance and health benefits that remain in place once the crisis has passed. While President Donald Trump’s agenda for a second term is unclear at this point, a Biden administration would aim to reverse some of Trump’s tax cuts to pay for an ambitious infrastructure and energy program.
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