Why are we not in another great depression?
It’s a major mystery, at least for most people. The U.S. economy collapsed dramatically last spring when the daily number of COVID-19 cases peaked on April 24 with 36,741 new cases. GDP plunged in the steepest drop on record, and millions of workers lost their job Almost instantly. So now, with around 200,000 new cases a day, why don’t we suffer from the same – or something much worse?
The outlook for a pandemic is the bleakest it has ever been. CDC Director Dr Robert Redfield says the coming months will be among “the most difficult in the history of public health in this country.” The hospitals are almost full. Redfield predicted that the total number of deaths from COVID-19, recently around 277,000, could approach 450,000 by the end of February.
Fortunately, economists seem oblivious to all of this. The view of 26 economists polled by Consensus Economics is that the US economy will grow at an annualized rate of 3.6% in this quarter and 3.1% in the first quarter of next year. Some brave souls are darker. The JPMorgan team is forecasting -1% in the next quarter. For comparison, remember that the contraction in the second quarter of this year was -31.4%.
Yet these optimistic economists may be right, at least generally. They cite four factors to justify their seemingly clueless optimism:
The economy has adapted quickly. Almost everything in the 2020 economy has happened at Formula One speed. Last spring, America’s GDP fell more in a matter of weeks than it did in three and a half years during the Great Depression. He then recovered most of that loss in just a few months. An important advantage of such rapidity is that the economy has suffered few “scars”, as economists say. During a long downturn, workers’ skills rust and machines deteriorate or become obsolete. Not this time. Businesses innovated quickly, and although many businesses failed, entrepreneurs started new businesses at the highest rates in at least a decade. The economy resumed growth during the summer lull in new cases and continued to grow as cases increased until the fall.
The vaccines are on their way. They won’t vaccinate a significant portion of the population for months on end, but just knowing they’re on their way prompts companies to start planning for a recovery. While the winter can still be bleak for businesses, it won’t be as bleak as if they were considering potential lockdowns indefinitely. Goldman Sachs’s latest forecast“V (accine) -Shaped Recovery” – predicts: “As the population builds up their immunity to the virus in the spring and summer, we expect economic activity to rebound sharply in depressed sectors such as travel, accommodation and catering services. “
A substantial stimulus package and continued support from the Fed is assumed. These are crucial. The optimistic forecast is conditional on Congress passing at least one similar, if not equally important, stimulus package to the CARES Act and other measures last spring. Goldman is assuming a trillion dollar package “potentially adopted” ahead of Joe Biden’s Jan. 20 inauguration. JPMorgan, which forecasts a 1% contraction in the first quarter, is also assuming a trillion dollar package, but not until the end of the quarter. Everyone’s assuming the Fed’s low interest rates as far as the eye can see.
The economy is still coming out of a hole. The U.S. economy was flying high before the pandemic hit, and even after a few months of rebounding, it still isn’t producing as much as it was a year ago. This means that the country has idle capital and labor, waiting to be used, so that at least the components of growth are more available than they were. There is certainly room to grow: even after its recent surge, GDP is expected to grow 3.6% to return to its level at the end of 2019.
Economists are notoriously reluctant to predict a recession and, in any case, no one has had an experience like this. If COVID-19 cases and deaths continue to increase on their recent steep trajectory, it is difficult to see how the economy could escape another decline. But the pandemic has been full of surprises, and one of them may well be that even during the projected long, gloomy winter, the country may at least be able to maintain the material well-being of the people.
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