Despite the current downturn stemming from the coronavirus, the economy may stage a strong comeback in the second half of the year as people return to work and demand surges for currently unavailable goods and services, though wild cards are baked into the recovery, according to a report released Friday by the head of the UC Riverside Center for Economic Forecasting.
“All forecasts right now, at some level, are a leap in the dark, but I think the frightening and unprecedented nature of the coronavirus crisis has led to some overly negative predictions,” said Christopher Thornberg, director of the UCR Center for Economic Forecasting.
“When we analyze the basic economic questions that approximate how much sustained damage will be generated from the halt in economic activity, we do not arrive at the conclusion that there will be an extended contraction,” he said.
Thornberg acknowledged that the unprecedented increase in unemployment claims nationwide– topping 26 million five weeks into the pandemic — and the dramatic decrease in business activity, as well as productivity, are alarming. But he and researchers from Los Angeles-based Beacon Economics, which he co-founded, concluded that a pullback in economic activity from health emergency mandates is not the same as a shattering recession from a financial bubble bursting, like what led to the Great Recession of 2008-09.
“What is happening today is nothing like what happened in 2008,” according to the Beacon quarterly report. “The vast majority of people currently applying for unemployment are being laid off from profitable, sustainable businesses that have been shuttered temporarily as a result of public health mandates.”
The report estimated a 10% loss in gross domestic product, or GDP, for the second quarter of this year — “larger than anything experienced in the past.” But as COVID-19 mitigation measures are relaxed, the economy will likely bounce back in the third quarter, with 25% growth possible between July 1 and Sept. 30, according to the report.
The forecasters said the vast infusions of financial relief from the federal government — upwards of $2 trillion — were offsetting many of the ills that might otherwise grip the economy, and Thornberg and his fellow researchers reasoned that household saving was far better than during the 2008-09 financial collapse, positioning consumers to better weather the downturn tied to the federal and state mandates.
According to the economists, data point to decreasing infections, and hence the basis for gradually undoing regulations that are keeping people out of the workplace.
“Many households and businesses are being denied income because of the public health mandates,” according to the report. “But those who aren’t losing income are being denied the ability to make desired purchases. This will likely lead to a build-up in demand and financial savings that will give the economy a boost when it reopens.”
The forecast stated the “fundamentals of the U.S economy are fantastic,” noting that just before the COVID-19 emergency began, the labor market was suffering from a shortage of workers.
“The pacesetter of consumer spending growth has been in travel, recreation and restaurants,” the report says. “Business investment has been moderate. In short, nothing appears to be out of balance or due for collapse.”
Unless the mandates are protracted, the real estate market should bear up, with plenty of value behind mortgages, and though corporate debt levels as a share of GDP are high, low interest rates and access to capital offset risks, the economists said.
“The second quarter will definitely post record negatives, but that will be followed by record positives in the last half of the year, as we quickly return to normalcy,” according to the report.
But the report points to “two major wildcards” that could throw even the sunniest projections out of whack. The first is the possibility that “coronavirus (could) spiral out of control again,” and the second is consumer behavior.
“Will consumers stop going to ballgames and music festivals? Will they be too afraid to go to restaurants?” the economists questioned. “We can’t really know. But it is worth noting that for hundreds of years people have faced pandemics that were far deadlier and more frightening than this one because they didn’t have the science or the medical responses we have today.”
The full report is available at www.beaconecon.com.