U.S. ECONOMIC RECOVERY WILL TAKE TIME

Even if the U.S. business restart goes reasonably well, and the virus remains largely contained, a surge in business failures and bankruptcies is likely and will impede any economic recovery. Too many of the unemployed won’t have jobs to go back to. New businesses will ultimately form and fill the void, but that will take time.

Households will also struggle to pay their debts. Many homeowners with government-backed mortgage loans caught a break. They can receive forbearance on their mortgage payments for up to a year. However, with unemployment likely to remain high and house prices to weaken, foreclosures are sure to increase. As losses on these loans mount, the financial system and markets will come under renewed pressure.

The Fed’s firewall will almost surely be tested again once investors actually see the extent of the losses from the failures, bankruptcies and defaults. A necessary condition for any kind of economic recovery is for the firewall to hold.

Any economic recovery will remain something of a slog, characterized by halting growth and high single-digit unemployment. And even then, the economy won’t be in full swing and fully recovered until mid-decade. Even once the economy starts to reopen, measures will likely be put in place that curtail economic activity to some degree—travel will be less common, businesses will have to space workers and customers further apart, restaurants will be serving fewer customers at a time, and sporting events, concerts, and other activities involving large crowds probably will remain off limits for a long time. And even if the rules allow, many people may be reluctant to return to life as it was before the pandemic. So, there will likely be no quick recovery. A key question is whether damage to the economy’s capacity to produce goods and services will be long lasting. That damage comes in several broad categories:

1. Consumer spending accounts for about 70% of total US economic activity and U.S. consumer debt is now at a record high, $ 14 trillion. It is likely that  wary consumers will keep a tight grip on their wallets and purses as the viral clouds begin to lift.
2. Many businesses will continue grappling for months or even years with significantly lower sales.
3. Workers that have lost their jobs have had to draw money from their savings and increase borrowing. That may delay payments on mortgages and credit cards, and their credit ratings may decline. And they may become more fearful about the future. That means that even once the economy opens up again they may be unable or unwilling to spend as readily as they did before the virus appeared.
4. State governments will have to cut spending mostly by cutting employment or raise taxes.
5. If a business declares bankruptcy and shuts down during the pandemic, restarting a new business will take time and money, and make the recovery slower. In addition, even once the economy reopens, firms may be fearful that it will close again either from a resurgence of corona or from a new virus and may be less likely to invest in equipment or research and development. This decline in investment could make the firms less productive than they would have been, also holding down GDP.
6. Workers that have been laid off might start looking for other jobs, or they may leave the labor market altogether. That means that all that human capital will be lost. Once firms can reopen, they may have to start the process of finding and training workers again. This will also slow the recovery.