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As states relax shelter-in-place orders, the economy should bounce back a bit this month and next. Continued fears among consumers and businesses mean the US won’t be back to February’s levels any time soon, but the early April collapse might mark a low as we adjust to our new pandemic normal. The bigger worry might be July, as three key pillars of economic support are set to go away. Without strong momentum building during the next couple of months or extensions of fiscal relief, we could have another downturn toward the end of the summer.
A variety of measures suggest that economic activity bottomed in the second week of April. This coincided with concern about the threat of coronavirus beginning to wane and as Americans began moving around outside their house a little. It’s not hard to show a little growth relative to a period when most Americans are locked down. It bears noting how even rapid growth for several weeks is barely making a dent in the hole that exists in some industries. For example, although passenger traffic for air travel is up about 50% from the lows in mid-April that just means it’s down roughly 94% year-over-year rather than 96%.
If this pattern continues throughout May and June as shutdowns are relaxed, it’s a good bet that consumers, workers and businesses are all adapting to our changed way of life. What nobody knows yet is just how much lost activity will be recouped. Curbside-food pickup and delivery might offset some of lost dine-in traffic, and family road trips might be seen as safer than air travel. But large events with crowds aren’t coming back any time soon, and everyone from Warren Buffett to General Electric has warned about how long it might be before demand for new airplanes comes back.
The bigger test for the economy will come at the end of June. Much of the support for this nascent recovery has come from programs put in place by the Federal Reserve, Congress, state governments and banks to provide relief for consumers, homeowners and businesses. Some of them, such as those of the Fed, will continue indefinitely. But others are scheduled to phase out soon.
The Paycheck Protection Program offered eight weeks of subsidies for wages and other expenses for small businesses, provided they retained their employees. It’s unclear what will happen once the program expires in June. The economy won’t be anywhere close to normal by then. Will Congress extend the program? If not, what will businesses that received PPP funds do? Presumably that would mean new layoffs; it’s
just a question of when and
how many.
Similarly, states such as California worked out deals with banks in late March to provide 90-day grace periods to homeowners when it comes to paying their mortgages. If not extended, those too will expire at the end of June. Those grace periods are providing support not just to households struggling to pay bills, but also to the housing market by keeping borrowers who can’t pay their mortgage from having to sell their homes or face foreclosure.
—Bloomberg