The recovery begins, but where will it take us?

Based on the 2.5 million new jobs reported in the May Jobs Report, the economic recovery from Covid-19 has officially started (yes, there were some technical problems with the report, which made it look better than it was, but any way you slice it, it was a positive report). While it’s wonderful that the recovery is underway, the far more important question is where the recovery will take us. Will we end up with a stronger economy than before the virus, or a weaker one? It’s not a surprise that a chunk of the economy would come back quickly. But, the lowest hanging fruit gets picked first. Picking the entire tree probably won’t be so easy.  

If our economy claws back to 90% of its previous glory, that might sound like a victory. But, that implies a 10% recession, which would be the 2^nd worst of all time. As a comparison, during the Financial Crisis in 2008, the economy only fell 4.3%. During the 2001 recession (caused by 9/11 and the bursting dot-com bubble), the economy fell less than 1%. So, we may have a deep hole to dig ourselves out of.

Thankfully, there is good news. As many parts of the world reopen, emergency rooms haven’t been overwhelmed. In addition, trillions of dollars were tossed at this problem, so, there’s lots of money floating around the economy. Also, gas prices are low, interest rates are low, and there’s pent-up demand from the millions of people who’ve been stuck in their homes eagerly waiting to go buy stuff.

But, there will be bumps along our road to recovery. Obviously, the biggest bump would be a major recurrence of the virus. If hospitals become overwhelmed in reopened parts of the country, the economy could suffer even more. However, even in the best-case scenario, in which Covid-19 fades away forever, there will still be a price to pay. Nearly every family, business and government across the world has less wealth, more debt, and more uncertainty as a result of all this. Because of that, the whole world may tend to spend less, save more, pay down debt, and lick their economic wounds.  In China and Italy, which reopened their economies first, consumer spending has only recovered modestly. That’s not all bad, of course. Saving more and paying down debt is a good thing. However, it is not a recipe for a quick, robust economic recovery.