Reopening: The Road To Recovery Or Another Outbreak?

A new battle for the direction of the economy is underway. The desire for freedom from doctor- prescribed sheltering at home is wrestling with fear of contracting the COVID-19. Pity the poor economist peering through the fog of that battle to determine which will prevail, whether the economy will resume its healthy upward trajectory as President Trump is predicting (hoping?), or remain in the ICU, as Democrats are predicting (hoping?).

The usual indicators are close to useless. Final data on GDP 5% down in the first quarter according to last Thursday’s report) come too after-the-fact to provide a guide to the economy’s direction in the here-and-now. The monthly jobs reports tell us the jobs market is horrible, which we already know. And even that showing lags the more current, weekly data on unemployment claims, which now total 40 million. And that doesn’t take account of the 6 million Americans who have dropped out of the labor force, given up looking for jobs.

The good news is that the speed with which detailed – “granular” is the current descriptive – economic information is now gathered and published provides sufficient up-to-date information to allow reasonable guesses as to whether the economy has bottomed out, and is poised to creep or rocket upward, or will continue to make the Great Recession of 2008 seem like a mere hiccup.

This economist sees more positive than negative signs. Part of that seeing is with my own eyes, part of it from bits and pieces of economic information now available. A tour of a few shopping areas shows neither the empty desert of a few weeks ago nor the bustle of a few months ago. Restaurant patios are close to crowded, and OpenTable is reporting an uptick in the number of diners nationwide as innovative restauranteurs devise ways of making customers feel safe.

The government reports that retail sales, especially of apparel, plunged 16.4% in April. But it seems there was a pick-up in May: Jan Kniffen, a consultant to investors in retail companies, reports that re-opened malls are doing business at 55% of last year’s traffic, and off-mall stores at 85%, both double forecasts.

A drive to those areas is on roads neither as devoid of other vehicles as they were a few weeks ago, nor as crowded with the traffic tie-ups that advocates of mass transit contend roil drivers, who in fact are contentedly listening to their stereo systems, putting on last bits of make-up, or dangerously texting away.

Start with the hard-hit travel industries. Demand for air travel dropped by more than 90% when the virus hit, forcing the profligate carriers to rattle their begging bowls at the White House door, to good effect, perhaps in part because in 1992 the President was forced to take his Trump Shuttle through the bankruptcy courts, faux-marble, gold-plated toilet fixtures and all. On the Thursday before the long Memorial Day weekend, for the first time since March 23, more than 300,000 passengers passed through airport security checkpoints. That’s well below the 2.67 million that flew on that day last year, but far more than the 99,000 going through checkpoints a week before the 300,000 mark was reached.

The hotel industry was as devasted as the airlines. In mid-April only 21% of US hotel rooms were occupied, far below the March 61.8% occupancy rate before the virus raged. Those rates have risen for five straight weeks, to 32.4% during the week ended May 16. Weekend bookings by the house-bound are leading the recovery.

Move on to housing. Defying predictions of a more-than 20% drop, new home sales increased by 0.6% in April. In part this was because estate agents found there was no social distancing problem – potential buyers could visit new, empty homes unaccompanied. In part it was because New York City and other urban residents are seeking residences in suburban areas after being imprisoned in small apartments with children and, in some cases, spouses best seen daily but briefly.

Signed contracts to buy new homes soon are down, but mortgage applications to buy new homes rose for the sixth consecutive week towards the end of this month, bringing the gains for that period to 54% since early April. This was despite a slight uptick in mortgage interest rates and even as lenders tightened credit standards. Little wonder that lumber prices are up 45% from their April 1 low.

Add to this talk of a re-opening of Disney World, the possibility that the baseball and basketball
seasons will be salvaged on a no-live-audience basis, Bank of America CEO Brian Moynihan’s view, “You’re starting to see the economy come out of the hole,” and JPMorgan CEO Jamie Dimon’s prediction, “You could see a fairly rapid recovery” beginning in the third quarter.

Ian Shepherdson, the well-regarded founder and chief economist of Pantheon Macroeconomics agrees with the bankers. “The economy is beginning to pick itself up from the floor … the near-real-time numbers are all rising, from their incredibly depressed lows last month….” He “guesses” (his word), there will be “a hefty rebound in Q3, with GDP rising at a 30% annualized rate, followed by a 10% increase in Q4.”

Don’t break out the champagne just yet. For one thing, we don’t know how the virus will behave. For another, the Federal Reserve’s latest survey of business conditions finds “business leaders pessimistic about the pace of recovery.” Finally, Jose Maria Barrero and colleagues at the University of Chicago estimate that 42% of recent layoffs will result in permanent job losses, real GDP may not surpass its 2019 level until the second half of 2021 or later, and the return to full employment will take even longer. Worse: relief efforts are propping up dying companies that cannot survive in the long run, postponing the redeployment of resources “to viable businesses.”

The looming problem of a less efficient economy has not discouraged investors, who are driving share prices close to pre-pandemic levels. Nor politicians facing an election in only five months. They are intent on preserving existing businesses and jobs rather than encouraging long-term, optimally efficient redeployment of the nation’s resources. That problem is on their to-do lists. Some day. Perhaps something will turn up before then.