U.S. Economic Recovery Expectations

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U.S. Economic Recovery Expectations

The following research explores the economic recovery expectations in the U.S. based on the impact of the corona virus (COVID-19) and expert projections. It also looks at the impact of COVID-19 on the business environment.

Major Economy Projections

Optimistic Outlook

  • According to KC Mathews, “executive vice president and chief investment officer of UMB Bank”, changes have been rapid and difficult to interpret but predicted that the GDP will “contract by 26% in the second quarter”. Pent-up demand from consumers and the stimulus provided may help the GDP to improve in a short time.
  • Economic contraction was due to reduced production brought on by stay-at-home-orders. The economy should be able to recover quickly when those orders are lifted.
  • Fewer people experienced permanent dismissals compared to previous crisis-affected months and there was an increase in temporary layoffs. Where layoffs are temporary, they can easily return to work.

Neutral Outlook

  • The success of social distancing and lockdown efforts will depend heavily on whether there is a resurgence. If there is a resurgence, economic recovery will be “muted”. Under these conditions, the US economy would not recover to pre-crisis levels until the first quarter of 2023. With a stronger public health response and effective virus control within each country, the US economy could recover by the third quarter of 2020.
  • The National Bureau of Economic Research predicts that COVID-19 will have a strong but negative impact on the economy lasting “more than a few months”.

Pessimistic Outlook

  • According to Senior Lecturer in Public Policy at Harvard Kennedy School, Linda Bilmes, the U.S. economic recovery will probably take longer than the 5 years it took to recover from the 2008 global recession with the “[s]tate and local governments” seeing long-term revenue shortfalls.
  • While mid-March lockdowns were intended to slow the spread of the virus, employment, business investment, trade, productivity, and housing market figures buttress the expectation that recovery will be slow.
  • KC Mathews stated that the U.S. economic recovery will be “an upward sloping “L” shape, or swoosh” with a slow return to normalcy and modest growth leading into 2021.
  • An EY survey found that less than half of U.S. companies expect the recovery to be v-shaped with recovery occurring in the third quarter of this year.
  • Against the backdrop of declining economic activity, the employment rate in the U.S. rose to 14.7% in April, which translated to a loss of 20.5 million jobs. This is in contrast to the previous World War Two record of just 10.8% .
  • Although workers displaced by COVID-19 received stimulus packages, Dean of the Woodrow Wilson School at Princeton and Professor of Economics, Cecilia Rouse, believes that the “state and local governments” will experience big financial distress. This is due to workers possibly needing help longer than ideally intended and the repercussions if that help is not provided.
  • The Atlanta Fed’s GDPNow Survey found that the first-quarter GDP was -4% which suggests that the U.S. will face a full-blown recession.
  • Based on growth projections from the IMF, the US economy is expected to shrink by 5.9% for 2020. This is against the backdrop of a 2.3% growth in 2019.
  • N. Gregory Mankiw economic downturns are highly persistent. Temporary stay at home orders can turn into permanent job losses if it continues. PARAPHRASE

Consumers

  • US consumers have less spending power with personal income having decreased by $382.1 billion (2.0 percent), and disposable personal income (DPI) by $334.6 billion (2.0 percent) in March. There was also a 7.5 percent decrease in personal consumption expenditures, equivalent to a reduction of $1,127.3 billion.
  • The sharp reduction in consumer spending contributed to a first-quarter shrinkage in the gross domestic product of 4.8%. “Consumer spending is the main driver of the U.S. economy, accounting for more than two-thirds of the country’s total economic output.”
  • A survey conducted by Mckinsey and Company showed that there has been a gradual decrease in consumer optimism, with 32% expecting the economy to rebound within two to three months. 50% of those surveyed reported reduced spending in the two weeks prior and 32% indicated reducing their spending in the two weeks to come.
  • Discretionary spending intent is on the increase with online purchasing of groceries and entertainment at the fore, due primarily to millennials and higher-income earners.
  • There will be adjusted brand loyalties as consumers who have switched to new brands or retailers during the crisis intend to stick with them. Two-thirds of customers using a new brand indicated their likelihood to continue.
  • There is a strong intent to continue with digitally-enabled pastimes while reducing in-person activities such as attending the movies, concerts, and travel. The intent for physical outdoor activities has also seen an uptick.

Impact of COVID-19 on the Business Environment

Business Strategies are Changing

  • In response to COVID-19, businesses are moving away from what was normal to a fast-changing 'never normal era' where business practices will be more responsible and brand purposes will be renewed.
  • Accenture suggests that businesses should invest in becoming more digital, data-driven, cloud-based, and automated with a variety of cost structures.
  • The global health crisis signals that supply chains need to be built with resilience and that there might be longer-lasting reconfigurations based on shifting trade policies.
  • Chief Economist at Moody’s Analytics, Mark Zandi, purported that businesses should be mindful of reopening too soon because a second wave of the virus would have a strong negative impact on the country’s economy.

Small Business Impact

  • Small businesses make up the majority of all businesses in the U.S. but their cash reserve cannot last beyond a month.
  • The National Bureau of Economic Research reported that because of COVID-19, the average business may not have sufficient cash on hand to last a month and their monthly expenses exceed $10,000.
  • The blow in the number of jobs that could be lost is high since "[small businesses] employ about half the US workforce" and the states that were hit harder are homes to many of the local small businesses.
  • A 'startup depression' is also possible since startups may not want to "enter the job market" during COVID-19.

Some Industries Strongly Depend on Consumer Visits to Survive

  • Travel cancellations have had a negative impact on the hospitality and travel industries. Closure of restaurants and bars and the lack of consumer confidence have also impacted businesses in these two industries.
  • Businesses such as “restaurants, hairdressers and car repair shops” are feeling the impact of COVID-19 because the federal stimulus provided is not enough for these businesses that depend on customers to survive.
  • 11% of restaurants are expected to close for the rest of the pandemic while 3% have already closed.
  • Other industries that have suffered because of the pandemic are the manufacturing and construction industries.


Research Strategy

In our research, major economic projections were defined as issues discussed by experts (e.g. economists) that are expected to affect the U.S. economy at the local and/or state level and insights were determined based on common themes surrounding the impact of COVID-19 on the business environment, discussed across multiple reputable sources inclusive of interviews with experts, data from surveys and other business news sources (e.g. Forbes and Business Insider).


Sources
Sources