It was Supreme Court Justice Louis Brandeis who called the states the “laboratories of democracy,” but it’s unlikely he meant that literally. As the country starts to consider what an economic re-opening might look like, there have been some substantial policy divergences across regions. Georgia, for example, has started to reopen. New York and California, two epicenters of the disease, effectively remain on lockdown. In terms of both the potential positives and the negatives, these differing approaches will soon provide a window into what a re-opening might look like for the broader U.S. economy.
Being in the midst of a crisis is like standing at the bottom of deep canyon: The sky is up there, but it’s hard to know how you’re going to climb out. But we know from past experience that every crisis eventually ends, and this one will, too. Economists, epidemiologists, academics, market prognosticators and most everyone else are all weighing in on what will happen next. Just as many early predictions about the coronavirus turned out to be inaccurate, forecasters are likely to miss some things here as well. We have never seen the economy shut down as abruptly as this, so we have never experienced a restart.
Recovery forecasts range from a year or more to something quicker and sharper. Realistically, getting back to anything approaching what economic activity, and even daily life, was like before is likely to take time. Many of the jobs that were initially lost were in service industries, like restaurants and travel; their recovery will depend on how quickly people begin to dine out, travel, and interact socially again. Other industries have suffered as the effects of the shutdown cascaded through the economy. Some, like mall-based retail for example, may see the decline that they were already experiencing accelerate by orders of magnitude.
One positive: unlike most downturns, the economy was in generally good shape going into this, so that should provide some support for a return to normalcy.
Markets, for their part, tend to be forward-looking. The recent recovery from the lows suggests that investors are starting to look beyond the current data, which has been almost uniformly awful. But as the economy advances in fits and starts, volatility is likely to persist. Earnings season is off to a rough start, and the unemployment numbers have been grim. Forward-looking data has been mostly negative, too. Pushing back against this tide of terrible economic news has been government spending, which at the latest check was around $3 trillion, or more than 10% of annual U.S. GDP, and the Federal Reserve, which has pledged to provide liquidity to the markets.
This is all new territory, and that makes forecasts of everything from oil prices to consumer spending more uncertain than ever. One thing we can forecast: there will be surprises, on both the upside and the down. There’s been major economic damage, but there’s also huge pent-up interest in getting going again. The phased lifting of restrictions will probably serve to attenuate the impact of that enthusiasm, but it’s the direction and not so much the pace that is likely to capture the attention of investors.
And there’s always the possibility of a positive exogenous event (hard is it may be to believe after what we’ve been living through the past few months, they do happen): progress on developing a treatment for the disease, or even meaningful steps forward in developing a vaccine. That’s an outcome we can all get behind.