Macro-Economic Update: Week Ending April 4, 2020

ACEC News / Market Forecast

April 6, 2020

Macro-Economic Update: Week Ending April 4, 2020

By Erin McLaughlin

March Marks Beginning of Labor Market Collapse

Total payroll employment fell by 701,000 in March, reported the Department of Labor’s Bureau of Labor Statistics (BLS) in their monthly report released on April 3, 2020. This was the largest monthly decline since March 2009, which was the worst month for job losses during the Great Recession. BLS estimates that 459,000 of the losses were in the leisure and hospitality sectors, with other notable declines in the health care and social assistance, professional and business services, retail trade, and construction sectors. The unemployment rate rose to 4.4 percent from 3.5 percent in February. This is the largest one-month increase unemployment since January 1975 noted the Wall Street Journal. Forecasting firm Oxford Economics projects that by May the U.S. will have a 16 percent unemployment rate (27.9 million jobs lost), which would erase all the jobs gained since 2010.

Understanding the “Shapes” Economic Recoveries

Economists are discussing, with some forecasting, what “shape” the recovery will take. Most agree that it is unprecedented that the fate of an economic recovery largely lies in the hands of a global society conforming to social distancing in order to keep a virus from spreading. The resulting “shape” of the recovery will be most influenced by the “shape” of the spread of COVID-19.

Earlier in March many thought a V-shaped recovery was likely; however, this week more are predicting that the COVID-19 recovery will take a traditional U-shape, or even a “Nike Swoosh” shape. The most pessimistic of forecasters think the more atypical recovery shapes—such as an L, W, or a more mangled shape that resembles foreign alphabet letters—are not out of the realm of possibility.

Let’s look at what would constitute the shape of each recovery, which was discussed in detail in Bloomberg’s “V, L or ‘Nike Swoosh’? Economists Debate Shape of Global Recovery” (April 1, 2020):

V-Shaped:

• Virus clears up in the Americas and Europe in April or May
• Pent-up consumer and spending demand feeds recovery
• Fiscal and monetary stimulus was quickly and successfully deployed
• Unemployment recedes
• There is a return to pre-crisis economic levels by early 2021

U-Shaped (the shape of the Great Recession recovery):

• Virus doesn’t recede until June
• Consumers are spending cautiously
• Stimulus measures lacked the impact many hoped for
• Unemployment lingers, giving all a lack of confidence
• An upward trend of recovery doesn’t begin until 2021 and lasts several years

“Nike Swoosh”-Shaped (also referred to as “Hockey Stick-Shaped”):

• The virus winds down slowly over 2020
• Spending gradually resumes, but many are cautious
• Some are dealing with too much debt
• Unemployment improves, but may be impeded by a mismatch between skills and job openings
• Recovery to 2019 levels takes about two years

L-Shaped:

• Virus is still spreading into the second half of 2020
• Consumers have sharply cut back on spending and are staying home
• Debts are a concern for businesses and individuals, and a credit crunch develops
• Further government stimulus is needed
• Continued high unemployment
• The upward trend of recovery does not begin for years

W-Shaped:

• Spread of the virus declines—along with social distancing measures—but then returns in the third or fourth quarter of 2020
• Restrictions are re-imposed
• Economic recovery is reversed into another sharp downturn
• A recovery timeline is highly uncertain

Erin McLaughlin is ACEC Vice President Private Market Resources.

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