This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here
Is the recovery going to take 10 years? What happened to the V-Shape recovery?
In a recently published analysis, the Congressional Budget Office (the CBO) painted a grim picture of the recovery path of the U.S. Economy.
On top of a depressing short-term view, in its 10-year outlook, the nonpartisan agency indicated this: The sharp contraction in 2020 will cause a long and slow recovery in which the U.S. Economy does not catch up to the previously reached Q4-2019 level until Q4-2029!
Their projections included the CARES stimulus program enacted by the U.S. Congress. That foresees additional liquidity being injected from both monetary and fiscal policy channels. Those measures were only “partially mitigating the deterioration in economic” conditions the agency described.
In alphabet soup terminology, this still classifies as a V-Shape. In the sense the CBO does not foresee the U.S. economy remaining at rock bottom too long.
But the right side of the V is not as steep as originally envisioned (or hoped?).
However, their updated forecast comes on the heels of a strong bounce-back in equity markets. Stock market traders appear to be fairly convinced: the V-shaped recovery is already in the bag. On top of that, the newly published ISM manufacturing survey rebounded slightly in May from 41.5 to 43.1, providing initial signs of a turning point.
But these numbers are still in negative territory. We need to be cautious when it comes to using them as predictions for a path back to normality. The CBO’s projection appears overly pessimistic.
It might be reasonable to ask then. What caused the CBO’s lack of optimism? Or are they simply being realistic?
As general rule of thumb at Zacks, we consider forecasts by economists beyond 5 years a sign economists have a sense of humor. Acknowledge the colossal amount of uncertainty surrounding any future that far out. In particular the possibility for both positive or negative aggregate demand and supply shocks.
Therefore, it remains an important point. Any forecast has to be based on assumptions that no unseen (+/-) shocks occur. For instance, suppose the economy gets exposed to a positive tech productivity shock years from now (similar to the introduction of the steam machine). That prompts a completely new growth path vision.
Nevertheless, we believe CBO projections focus on an important issue. Demand by consumers makes up 2/3s of the U.S. Economy. Current weakness by individuals to spend money (in physical ways) is concerning. Admittedly, we continue to see online purchases. An apparent reality that restaurants and travel entities likely see subdued demand for some time remains concerning.
That is, even after governors and counties and mayors have opened up a 50-state economy to the fullest extent, we are still going to witness a level of unease. Particularly, when it comes to consumption of goods at large congregations. And in enclosed venues, such as restaurants, bars, sports and music events. And crowded train, bus, and airplane travel.
Make no mistake: A lack of income by those who can’t work remotely will continue to be a drag on both the U.S. and global economy for some time. Any durable recovery will depend on how the spread of the virus continues, and on whether people collectively start to forget, or worry less about these things going forward.
Finally, there is yet another challenging aspect -- one that is going to be more difficult to revert. In our view, this is the adjustment currently happening at many employers. They are learning to get by with a smaller staff. A willingness or necessity to hire everyone suddenly back will be subdued. That creates a long-term drag on the financial, emotional, and spatial recovery of those left in their homes. This surely holds back aggregate demand.
Government actors (at federal, state and local levels) should assist such workers and help them undergo structural skill changes. They may have to transition from sectors that experience lower demand, towards areas with more hiring such as the tech sector.
Consider if UBER and Lyft drivers would go back to school for a coding class.
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