Uncertainty rules: Economists offer varying assessments of recovery
The Federal Reserve has made it clear it believes the economic recovery depends on how the coronavirus progresses, and it expects a long return to a pre-COVID levels, but economists beg to differ, offering their own view of the shape of the rebound.
At the beginning of the pandemic-related shutdown, many believed it would be a V-shaped recovery. The economists at Morgan Stanley believe the V-shaped recovery they envisaged will happen “faster than originally thought.”
“By 2Q21, a global synchronous recovery should take hold, with all engines of the global economy registering strong growth,” said Chetan Ahya, chief economist and global head of economics at Morgan Stanley. “We now see the global and domestics economies returning to pre-COVID-19 levels a quarter ahead of our original forecast. The global and U.S. economies will reach their respective pre-COVID-19 levels by early fourth quarter of 2020 and third quarter of 2021. The U.S. will achieve pre-recession output levels in six quarters (by 2Q21) versus the 10 quarters it took during the global financial crisis and in our earlier forecasts the U.S. economy reached pre-COVID-19 levels by 4Q21.”
Nick Mazing, head of research at Sentieo, disagrees. "The only V-shaped recovery that we have seen is in for those directly benefiting from market investments and in the Fed-supported credit spreads," he said. "It is a whole different ballgame in the 'real economy,' as we saw in last Friday's employment report. The employment data looks nothing like a V. We lost more than 20 million jobs in two months, and we have regained less than half of that in four.”
Many economists since abandoned the idea of a V-shaped recovery, “and this realization left many searching for an alternative description,” according to Tom Kozlik head of municipal strategy and credit at Hilltop securities. “Some thought a ‘W’ shape might be a more appropriate and others were even thinking a Nike-like ‘Swoosh’ would more properly describe what the coming economic expansion would resemble. A new letter is now being used to describe the formation the new economic data is beginning to form. It is the letter ‘K.’"
That letter, he suggested, shows some sectors of the economy "flying," with other "industries like travel, airlines, in-person entertainment, and hospitality services” forming the downward slope on the K.
Aleksandar Tomic, an economis, associate dean at Boston College, and program director of the MS in Applied Economics, agrees."COVID-19 has had a very uneven impact on industries where some are booming and some are suffering, and 8.4% unemployment is a sign of labor market adjustment that could not have been instantaneous, which is why we had a spike in unemployment followed by the drop," he said. "This is the re-shuffling of jobs between different industries and how permanent it will be, depends on how permanently our habits change which, again, depends on how long COVID-19 remains a threat to public health."
While the economy has improved, it's hard to tell if it's just from the stimulus, said Brian Koble, chief investment officer at Hefren-Tillotson. “Fiscal stimulus has been like starting a campfire with gasoline — there's a big flame, but it's not clear the fire has caught,” he said. “Economic data has come in better than expected, but it may take more stimulus to ensure the recovery is self-sustaining.”
Phil Mesman, head of fixed income at Picton Mahoney Asset Management, noted the Federal Reserve has been in “whatever-it-takes mode.”
“While constructive on markets, with low yields and tight credit spreads the corporate bond market is at risk,” he warned. “The Fed’s intention is to ensure a functioning credit market and not to support every company’s bonds. As the real economy impact hits financial assets, we expect to see increasing divergence within the bond market over time. Credit picking is critical.”
Mesman expects more fiscal stimulus and only anticipates "more monetary help" if “markets materially correct."
Robert R. Johnson, chair and CEO of Economic Index Associates, noted the recovery has been fueled largely by the “unprecedented” liquidity provided by the Federal Reserve. “The inability or unwillingness of the federal government to provide a coordinated response to the coronavirus pandemic forced the Federal Reserve’s hand and Jerome Powell delivered,” he said. “While the Fed intervention has been both necessary and effective, additional fiscal stimulus is also needed. And, not simply direct coronavirus relief payments to individuals, but infrastructure spending that this country so desperately needs.”
While he’s “optimistic” that the recovery will continue because the Fed promised rates will remain low for the foreseeable future, “the lack of a coordinated federal government strategy will slow the economic recovery.”
Sentieo's Mazing added, "We view the ongoing political uncertainty in D.C. on the stimulus as credit-negative across everything: consumer credit, munis, corporates.”
Tomic added that while government stimulus package has played a huge role in softening the blow of the initial shock to the economy, and he does not think it should be ended abruptly.
"Americans probably still need some stimulus, but it is not clear that it needs to be at the scale of what was already implemented," BC's Tomic said. He sees stimulus depending on the elections. "If Congress and the president end up being from the same party, we will probably see quicker, more generous stimulus. If they are at odds, then the process will be prolonged and much more uncertain."
While a vaccine will allow people "to resume many of their pre-pandemic activities," Mark Hamrick, senior economic analyst at Bankrate, said, "there will be some persistent economic damage affecting individuals' personal finances even after the pandemic."
Business failures and lost revenue to state and local governments will have a "negative impact ... on employment," he added.