Assessing the Economic Damage of COVID-19
It will take a long time for people to feel comfortable consuming and for businesses to return to normal operations. While the recession was the shortest in history, the effects will last for years to come.
This was Dr. Mark Zandi’s message at the C2ER/LMI Institute (Virtual) Annual Conference Economic Outlook Keynote, Assessing the Economic Damage. The chief economist at Moody’s Analytics spoke on COVID-19 and the global recovery on Wednesday, June 3.
While Dr. Zandi reported that the recession due to the March 2020 COVID-19 response was over, this shortest recession in history, (March, April, and May) was one of the most severe. Since a recession is categorized as a fall in GDP in two successive quarters (in other words, a period of economic decline) May will be the first month of economic recovery – GDP has started to rebound due to the reopening of businesses in previously locked down counties. (Two days later, on Friday, June 5, the Bureau of Labor Statistics reported 2.5 million jobs were added in May and an unemployment rate of 13.3%, down from 14.7% in April.)
Still, federal funding (Paycheck Protection Program, stimulus checks, state aid, and increases to unemployment insurance) may not be enough to help states out of the downturn. Absent additional federal assistance, there will be a shortfall of about $500 billion in state and local government budgets at the beginning of September, assuming that all state and local rainy-day funds are exhausted, and the federal government continues to pay for the health care costs associated with fighting COVID-19. (Through the CARES Act, $100 billion was already allocated to health care providers who will test, diagnose, and provide care for COVID-19, including Medicare, Medicaid, and non-profit providers.)
Given the lack of knowledge about the virus and the lack of predictability, consumers are not spending, and businesses are struggling due to decreased demand. The most affected sectors are struggling with business-to-business payments: hotels, movie theaters, performing arts, restaurants, museums, clothing stores, and transportation industries are paying increasingly late. While the residential housing market has held up well, commercial real estate prices will fall 20-25%, mainly due to an overvalued market, lack of governmental support, and an expectation of decreased demand for office space as the employers begin to implement remote working policies.
While the economy would have been much worse without intervention, Dr. Zandi predicts a “dark side” to the debt that the US and other countries around the world are accumulating, potentially leading to a global fiscal crisis in a few years and diminished economic growth.