We have been delaying our update to the Recession Scorecard until more data have become available but it is clear that the U.S. economy is experiencing its worst economic collapse since the Great Depression, and perhaps even exceeding that historic decline. That said, our Scorecard shows 21 of 27 measures in recession, with 5 giving mixed signals, and only 1 (hourly earnings) showing strength. [And that increase is a bit misleading because it is partly due to the elimination of many lower-paying jobs.] Our new Scoreboard shows a substantial deterioration from our December report which had 11 measures showing continued growth and only 6 pointing to a recession.
The situation on the ground is undoubtedly worse than our Scorecard indicates because some of the most recently available data are from March or earlier. Consumer loan delinquencies and corporate profits are sure to worsen when more recent data are released. The only debate now is whether the economy is in a recession or a depression and whether fiscal and monetary policy can do any more than has already been done to slow the decline.
Mis-Calculating the Economics Costs of the Shutdown
There has been some debate regarding the costs of the shutdown engineered to slow the spread of COVID-19. Most of the thinking involves a comparison between actual GDP in 2020 (or other economic measures like employment and income) and pre-Covid projections of 2020 GDP. For example, in early February, the Philadelphia Federal Reserve released the consensus forecast from its Survey of Professional Forecasters. [RCF is a participant in that survey.] At that time, the consensus was that 2020 GDP would be somewhat more than $22 trillion. At the end of the year, actual 2020 GDP will be considerably lower, perhaps $20 trillion, perhaps even less. At that point some will say that the shutdown cost the economy $2 trillion or more. There will be additional considerations: whether the decline is temporary or permanent, how the added debt from the relief package is treated, what are distributional impacts across individuals, states, and businesses. But to the extent that the calculations are based on actual GDP versus projected GDP, they are the wrong calculations.
The calculations are wrong because the earlier projection of 2020 GDP at $22 trillion was a projection made for a world that no longer exists; a world without the shutdown but also a world without Covid-19 at all.
A proper estimation of the costs of the shutdown is a comparison of actual 2020 GDP with what 2020 GDP would have been if the shutdown measures were not taken. No one knows how that counterfactual world would have looked but it stands to reason that the virus would have spread more aggressively and that more people would have become sick and more would have died.
It is foolish to think that substantial increases in the number of people sick and dying would not have had significant negative impacts on the U.S. economy. Even without government decrees people would self-isolate. They would travel less, eat out less often, and avoid large gatherings. In addition to the large number of deaths, millions more might be out of the workforce because of illness and to care for those who are sick. In short, a world with Covid-19 and no shutdown would be one in which GDP falls substantially, businesses close, joblessness skyrockets, and many Americans’ incomes would plummet. For perspective, Sweden, which did not impose many restrictions on activity, is expected to see 2020 GDP fall as much as 8 percent.
The corollary to this is that it will take more than the removal of restrictions on activity to get the economy “back to normal.” It will also require the development of effective treatments and, ideally, a vaccine that will allow people – not governments – to decide that it is safe to resume the lives they had just a few months ago.
For more information, contact Peter Bernstein, RCF Vice President, at 312-431-1540 ext. 1515, pbernstein@rcfecon.com.
