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This is a tsunami, with a number of big waves dead ahead.”
Mark Zandi is not an epidemiologist, and he was not talking about the rapid spread of the coronavirus. He is the chief economist at Moody’s, an analyst highly regarded by both political parties, and generally not prone to hyperbole. Yet when I spoke with him on the phone yesterday, he immediately reached for the metaphor of a devastating natural disaster to describe the toll that the pandemic will take on American commerce—the businesses it will destroy, the jobs it will wipe out, the retirement nest eggs it will crack and shatter.
That there will be economic pain is already clear. The stock market has lost more than one-third of its value, giving up all of the considerable gains it’s made since President Donald Trump took office in 2017. The urgent call for social distancing across much of the country has forced the closure of just about any business where human beings congregate. The restaurant, live-entertainment, tourist, and airline industries are being crushed. Public and private mass-transit systems—many already unprofitable—are facing budgetary crises. State and local governments, legally required not to run a deficit, will soon be overwhelmed both by the strain on their public-health systems and by the ensuing burden on their balance sheets.
Yet the full scope of the economic ramifications of the coronavirus is, like its cascading effect on the health-care system, only just beginning to become apparent. On Thursday morning, the government reported that 281,000 people nationwide had filed unemployment claims in the previous week, a jump of 33 percent and the most in two and a half years. Add another digit to that number, and you’ll get the projection for how many people will file jobless claims in the weeks ahead.
Economic number-crunchers are struggling to keep up with the speed of the slide. On Sunday evening, Goldman Sachs projected that economic growth would be zero in the first quarter of the year, which ends March 31, and that economic activity would fall by 5 percent in the second quarter. Just three days later, J.P. Morgan put out a new forecast: The gross domestic product would fall by 4 percent this quarter and then plummet a staggering 14 percent in the next three months.
“We’re talking really big numbers,” Heidi Shierholz, who served as chief economist for the Department of Labor during the Obama administration and is now a senior fellow at the Economic Policy Institute, a progressive think tank, told me on Thursday morning.
By Friday, Goldman Sachs had revised its figures: The investment bank was now expecting a 24 percent drop in the second quarter. “Holy hell,” Shierholz said in an email flagging the update for me.
To put the data in perspective: These second-quarter forecasts would mean the deepest, fastest drop in economic activity since the government began calculating the nation’s GDP on a quarterly basis in 1947. Before now, the worst three-month plunge was 10 percent in early 1958, which happened to coincide with a flu pandemic that began the year before.
Shierholz and her colleagues have been working to translate the Goldman Sachs and J.P. Morgan projections into the statistics that people care most about—namely, jobs. A nosedive along the lines of what J.P. Morgan is predicting, she told me, would mean that 8.5 million jobs would be lost by the summer, spiking the unemployment rate from its current 3.5 percent all the way up to roughly 8.7 percent. Under the Goldman Sachs estimate, the jobs gone would total 14 million. By comparison, a rough total of about 8.7 million jobs disappeared in the Great Recession a decade ago, but those losses were spread out over years. This would occur in a single springtime.
And whatever data the government produces will likely understate the true reality of the economic hit, because the unemployment rate measures only people who are actively looking for work. Unemployed waiters might not apply for jobs when all the restaurants are closed. Neither, in all likelihood, would many hotel staff, casino workers, theater ushers, or others.
“All the economists I’ve talked to are as freaked out as they’ve ever been,” Jared Bernstein, who served as chief economist to Vice President Joe Biden in the Obama administration and informally advises his presidential campaign, told me.
Yet what is scariest about the new economic projections is that they are probably too rosy. Both Goldman Sachs and J.P. Morgan foresee big rebounds in the third quarter, over the summer, due in part to assumptions that the Federal Reserve will accelerate its moves to stabilize the financial system and Congress will soon enact another enormous fiscal-stimulus package. But the crisis might not be over by then. A federal-government plan to combat the pandemic estimated that it could last 18 months and hit in “multiple waves” that would require some degree of prolonged social distancing. Modeling by Imperial College London indicated a similar duration.
“The economy isn’t going to recover before the social distancing is over,” Shierholz said.
And even when life returns to some semblance of normalcy, the economic trauma won’t be over. According to Zandi, at least three big waves will hit American economy activity. The first is occurring now, as businesses close and the economy grinds to a halt. Next will be the job losses.
“The third wave will hit when people realize they are worth so much less, particularly the Boomers, who are focused on their retirement,” Zandi told me. “When they realize their nest egg has evaporated, they'll go into panic mode and cut back on spending, and that further exacerbates the problem.”
If there is any hope in this dark outlook, these economists told me, it is that the federal government likely has more power to soften the economic blow than it does to contain the virus. And unlike during the last economic crisis, in 2008 and 2009, both parties are in general consensus about the scope of the fiscal response required, deficits be damned. People who have lost jobs or who have seen their hours cut dramatically need immediate money to buy food and stay in their homes, while businesses need funds to stay afloat and postpone layoffs as much as possible.
“We know we’re going to cause a recession when we shut down huge parts of the economy, and it’s the right thing to do. It’ll make us better off in the long run,” Shierholz said. “But we need to make sure households are as whole as possible, so we don’t start to see a whole wave of foreclosures, bankruptcies—all the things that don’t have to happen.
“Those things don’t have to happen,” she emphasized. “We have total control over that.”
With warnings that the unemployment rate could hit a staggering 20 percent—by far the highest since the Great Depression—if Congress doesn’t act, Trump and his advisers have called for $1 trillion or more in stimulus spending. That’s in addition to the smaller emergency measures lawmakers have already enacted in recent weeks. On Thursday, Senate Majority Leader Mitch McConnell unveiled a Republican proposal that would send one-time payments of $1,200 to individuals earning up to $75,000 a year (those amounts double for married couples) and an extra $500 per child. The plan also contains hundreds of billions in loans for businesses and corporate tax cuts to encourage big companies like airlines and hotel chains to keep their idle workforce on salary.
Democratic leaders immediately criticized the proposal as too heavily skewed toward corporations; they are pushing for a significant expansion of unemployment benefits and other measures that would more directly help laid-off workers and low-income Americans who are most vulnerable to the economic shock.
Yet even progressive economists like Bernstein agreed that just as individuals need fast help through cash payments or other means, so do businesses.
“Basically, we have to put the economy in a deep freeze or a coma to help meet the containment requirements of the virus,” Bernstein told me. “But to strain the analogy, you want to be able to thaw from the deep freeze or for the patient to be able to wake up from the coma. That means we have to preserve not just people, which are first on my list for obvious reasons, but businesses.
“There have to be businesses to bounce back,” he said.
And as unpopular as industry bailouts are, Bernstein said the government must step in to help both corporations and mom-and-pop shops. “Do we need Delta Air Lines to be alive on the other side of this? That’s one big question,” he explained. “But then do we need Joe’s Dry Cleaner around the corner to be there on the other side? And my view is we probably need both. I would err on the side of ensuring that businesses are held whole as possible.”
How quickly the economy can recover likely depends on time—how fast, and aggressively, Congress can act, and how long social distancing lasts.
The economists I spoke with all said that this economic free-fall was sharper than the financial crisis that sparked the Great Recession, but that because the government this time essentially turned the economy off like a light, the recovery needn’t be as long or slow. “So much of this depends on the effectiveness of the policy response,” a veteran Republican economist, Douglas Holtz-Eakin, told me. “I think we still have time. The clock’s ticking, though.”