It’s Ugly Out There

The data is catching up to reality and it is … unpleasant.

If you stop the economy, some activity is going to drop to zero, which will yield some pretty substantial monthly declines. And that means you are going to get some pretty crazy annualized changes. Like this for retail sales:

And this for industrial production:See also the Beige Book for some distressing anecdotal discussions of the economy. Also, as should have been expected, this wasn’t a classic supply shock that produced a jump of inflation. Instead, the demand side weakness dominated and dragged inflation down:Of course, we really shouldn’t have expected anything else. Once we made the decision to shut down large parts of the economy, the data and anecdotes are going to follow in a fairly predictable way. In fact, a failure of the data to collapse would indicate that the shutdown was not successful. The collapse in data is almost not a bug, but instead it’s a feature of the broader policy.

Yes, even if expected, it is still a bitter pill to swallow. Making it more bitter is that the policy response is looking shaky. Certainly, some of the shakiness of the policy response is more about the execution rather than the intention. The objective was correct; attempt to keep as many people as possible attached to their employers and provide a generous safety net to those who lost their paycheck. Getting the money out the door, however, has proved a bit more complicated.

The enhanced unemployment benefits scheme looked good on paper but fell victim to woefully unprepared state governments. Partly the lack of preparedness is understandable. Even well-prepared states might fall short of the mark if they built systems for the “worst case” scenario of the Great Recession. But the technological limitations speaks to a broad-based failure to modernize the programs. I suggest that states adopt a “presumption of benefits” standard and push out the money while the paperwork is still in the pipeline.

The Payroll Protection Program (or PPP, an acronym  I hate because I can’t read it without thinking “purchasing power parity”) also found itself under the constraints of an underpowered system that has delayed the release of money. Moreover, the money has now all been spoken for and Congress needs to boost the size of the program.

That said, the money is beginning to flow and will flow harder in the coming weeks. That’s good; it will help keep a floor under the economy. More though will still need to happen to support the economy through the shutdown. Congress will advance another support bill to extend the PPP. Congress should also deliver more aid to state and local governments. And there is still that thorny problem of completing the chain between renters and investors in the commercial real estate space.

If Congress wants to keep the economy afloat, it needs to keep shoveling the money. The Fed has implicitly given the green light to spend away, and Congress should take it up on that offer.

I think the short story is that, from a macro policy perspective, we are moving in the right direction but more needs to be done to hold the economy together. Still, the ultimate constraint on the economy is that it can’t begin recovery until we can start to loosen the extreme social distancing and stay-at-home orders that are dragging dragging down activity.

Eventually that time will come (but don’t rush it or all the work we just did will be in vain; I am hoping by the end of June if not the beginning), and we should anticipate the economic numbers to pop on the upside. Think of the same story in reverse. Even assuming that reopening the economy is like turning up a dimmer switch, there will still be pent up demand activated and some activity will be starting from a base of almost zero. There is little place to go but up.

Keep a pragmatic outlook. Don’t confuse that pop for a V-shaped recovery. It isn’t. There will be some lasting damage to the economy. Arguably, PPP should have come first and more forcefully and then perhaps fewer layoffs and furloughs would be working through the system. Moreover, more now PPP might be cold comfort to firms that have already folded. I think it is hard to fix that damage, which will in turn slow the eventual recovery.

Moreover, we will open the economy gradually. Social distancing restraints will ease but not disappear. No large gatherings, fewer seatings at restaurants, etc.  And I anticipate people will approach many activities only cautiously. Ultimately, we the public will decide when the economy reopens, not the government. Travel, leisure, hospitality will face a tough road in the year (or longer) ahead.

Still, on the theme of pragmatism, don’t dismiss the importance of that first pop of activity. It marks a turning point, a place to begin rebuilding the economy. The level won’t be where we want it to be and we will need to maintain pressure for ongoing policy support to foster the economy, but the economy will be moving in the right direction. Don’t become too enamored with either the pessimists or the optimists; the reality will fall somewhere in-between.

Bottom Line: Controlling Covid-19 requires drastically constricting economic activity; the proof that the plan is working is that the data collapses and we bend the infection curve. The former has definitely happened and it looks like the latter will as well – social distancing works. We still have a long way to go until we return to some semblance of normality, but expect people to begin working in that direction when the restrictions on activity ease. Most important now is to keep the pressure up on Congress to provide sustained support for the economy; that support should be open-ended, based on economic conditions not time or dollars.