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Analysis: Recovery depends on a lot going right, but the economy isn’t broken

The forecasts seem impossibly wretched.

Economists at JPMorgan Chase project a 40 percent decline in gross domestic product in the second quarter. Trillions of dollars in economic activity abandoned in the wake of COVID-19. April’s unemployment rate is expected to hit 20 percent or more. That’s 25 million without work. More than 817,000 filed for unemployment in Michigan in the last three weeks — and that’s only those who could access the state’s system.

The numbers are all far, far worse than we saw in the Great Recession. But there is reason to think the bounceback might also dwarf the long, slow recovery from the 2008 crisis.

While the greatest economic decline in recorded U.S. history is certainly depression inducing, it’s still only a temporary economic recession — for now.

The economy is largely shut down because, and this is an important distinction, political, business and health leaders forced it to. This is intentional and not a fundamental crack in the global, national or local economies. Economic activity cratering is exactly what we want. We, collectively, hit the pause button on the economy.

That has ramifications, such as the aforementioned job losses and a near total loss of demand for everything but streaming services and groceries — U.S. consumer discretionary retail spending is down 80 percent to 90 percent right now, according to credit rating agency Fitch Ratings Inc. But jobs aren’t being wholly being destroyed.

The U.S. and Michigan purged jobs during the Great Recession at a rate that looks almost laughable today. In January 2009, the highest weekly unemployment claims figure was 665,000 in the U.S. and 76,702 in Michigan. Last week, those figures were 6.6 million nationwide and 384,444 in Michigan. But because the economic fallout was, by comparison, a much more slow-rolling disaster, policy decisions were also delayed.

The Great Recession was declared a recession in December 2007, yet the Emergency Economic Stabilization Act of 2008, later to become the Troubled Asset Relief Program, wasn’t signed until October 2008. The government spent only $439 billion on recovery efforts, which it mostly recovered by 2014.

Congress reacted much more quickly this time around. Mostly because the issue was impossible to ignore, but also because TARP proved the Keynesian theory of recessions worked. When consumer spending dries up, inject government spending into the economy to prop it up.

U.S. Congress earmarked $2.3 trillion in economic aid within weeks of the coronavirus outbreak in the U.S. Some may argue it was still too slow and too late, but still much quicker than in 2008.

“The recession we are seeing is an investment in public health,” said Gabe Ehrlich, associate director of research seminar in quantitative economics at University of Michigan where he forecasts the US and Michigan economies. “What we want to be seeing is happening, but the government needs to be taking steps to mitigate the pain. We think the programs that have been announced are on par with what is needed, but they have to be implemented successfully to be effective.”

The latest UM forecast calls for an unemployment rate of 24 percent in the second quarter this year, but a rebound over the summer because of the quick actions of the government.

The U.S. Treasury Department confirmed Friday that it began processing economic stimulus checks — $1,200 maximum for individuals below a certain income, more for families with children — for direct deposits. Those checks should arrive in accounts early next week, they said. Some argue it’s not enough.

The expansion in unemployment insurance also occurred rapidly and is including contractors and “gig” economy workers — though many state systems are overwhelmed with claims and struggling to get people registered.

“If you look at the expansion in unemployment insurance, the maximum benefit is $962 per week,” Ehrlich said. “That’s more than many people were making. That’s not meant to downplay a very scary situation because when that benefit runs out people are going to be going out in the labor market in a very precarious economy. But we are protecting incomes and that’s critical to maintaining spending, as long as the economy starts opening up.”

The U.S. and Michigan is facing a two-faced devil, the virus and the economic fallout. They are interconnected and difficult to unravel separately. That battle, often drawn between political lines, is already raging over when the state’s economy needs to reopen or stay closed until the virus is better contained.

The truth, of course, is both.

The question of when and how the economy recovers hinges on the ability to control the virus and its health impact. But it’s also true that at some point business are going to have to reopen or we face an even deadlier version of the virus in tragic economic fallout.

China has largely returned to work — its auto sector is running at least 90 percent pre-coronavirus capacity. Southfield-based Lear last week released its “playbook” on how it reopened plants in China and CEO Ray Scott and a host of other multinational CEOs are advising Gov. Gretchen Whitmer on how they were able to do that.

But let’s not pretend it’s back to normal. The Chinese are likely not falling over themselves to pack movie theaters and hot pot restaurants.

The same will likely occur in the U.S. The economic slog could carry on for some time — economic predictions range wildly, forecasting a full recovery as early next year or not until 2031. The shock could linger like the Great Recession, which saw unemployment stuck at 9.4 percent in 2010, recovering only to 8.2 percent in 2011. Unemployment didn’t fall below 5 percent until early 2016.

But the economy did recover and experienced 10 years of economic growth, the longest in U.S. history, on the back end of the recession. Whether that happens again is largely up to the virus and health officials’ ability to contain or eradicate it.

Nevertheless, the economy isn’t broken. And, for that, there’s reason to hope.


Posted By: Crain’s Detroit Business on April 10, 2020.  For more information, please click here to read the source article.

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