WASHINGTON (AP) — Devastated by the coronavirus, the U.S. economy is sinking. And the plunge is accelerating.
Now, as some businesses in a few states start to trickle back to work, hopes are beginning to arise that the economy, damaged as it is, might be poised to rebound by the second half of the year. If more employees and consumers were to gradually return to working and spending, the idea goes, the economy might be able to mount a sharp comeback.
Yet most economists have the same response: Keep such expectations in check.
Among their concerns is that the coronavirus could flare up again after the economy is re-opened, forcing reopened businesses to shut down again. Another is that people — employees and consumers alike — will remain too wary of contracting the coronavirus to return to anything resembling normal economic behavior. If that were the case, no meaningful economic recovery would likely take hold.
“The virus has done a lot of damage to the economy, and there is just so much uncertainty now,” said Mark Zandi, chief economist at Moody’s Analytics.
The U.S. economy shrank at a 4.8% annual rate in the January-March quarter, the government estimated Wednesday, as the coronavirus pandemic shut down much of the country and began triggering a recession that will end the longest expansion on record.
Yet the drop in the first quarter will be only a precursor of a far grimmer report to come on the current April-June period, with business shutdowns and layoffs striking with devastating force. With much of the economy paralyzed, the Congressional Budget Office has estimated that economic activity will plunge this quarter at a 40% annual rate.
That would be, by a breathtaking margin, the bleakest quarter since such records were first compiled in 1947. It would be four times the size of the worst quarterly contraction on record set in 1958.
“The longer consumers are stuck at home and workers can’t get to their jobs, the greater the structural damage to the U.S. economy — permanent loss of household income, permanent business closures, permanent job losses, reduced business investment — which would prevent a strong rebound,” said Gus Faucher, chief economist at PNC Financial Services Group.
The Commerce Department said that the gross domestic product, the total output of goods and services, posted a quarterly drop for the first time in six years. And it was the sharpest fall since the economy shrank at an 8.4% annual rate in the fourth quarter of 2008 in the depths of the Great Recession.
“The longest U.S. economic expansion has ended,” said Gregory Daco, chief economist at Oxford Economics.
Daco predicted that the recession will cause a drop in output that will be three times the size of the economic decline during the Great Recession, which got that name because it was the worst economic slump since the Great Depression of the 1930s.
Zandi said he thought any prospects for a recovery will hinge on the eventual availability of a coronavirus vaccine. He doesn’t expect the economy to regain its footing on a sustained basis until perhaps mid-2021 — and that assumes that a vaccine would be ready for use by then.
“I would characterize this period as going through quicksand until we get a vaccine,” Zandi said.
In just a few weeks since mid-March, businesses across the country have shut down and laid off tens of millions of workers. Factories and stores are shuttered. Home sales are falling. Households are slashing spending. Consumer confidence is sinking.
The GDP report showed that the weakness was led by plummeting consumer spending, which accounts for 70% of economic activity. Consumer spending tumbled at an annual rate of 7.6% in the first quarter — its steepest decline since 1980. Business investment sank 8.6%, with investment in equipment falling 15.2%.
As the economy slides into what looks like a severe recession, the Trump administration continues to promote the notion that a recovery will arrive quickly and robustly once the health crisis has been solved — what some call a V-shaped recovery.
But economists suggest that many Americans could remain too fearful to travel, shop at stores or visit restaurants or movie theaters anywhere near as much as they used to. In addition, local and state officials may continue to limit, for health reasons, how many people may congregate in such places at any one time, thereby making it difficult for many businesses to survive. It’s why some economists say the damage from the downturn could persist far longer than some may assume.
The administration takes a rosier view. Speaking to reporters Wednesday, President Donald Trump called the economic downturn “a transitional period” that would lead to stronger growth as soon as summer and the stage for a “tremendous year” in 2021.
“I think the fourth quarter is going to be fantastic,” Trump said, referring to the October-December period this year.
The president is basing his re-election campaign largely on the argument that he built a powerful economy over the past three years and can do so again after the health crisis has been resolved.
Faucher agreed that “assuming restrictions on movement are gradually lifted over the next few months, economic growth should rebound later this year.” But he cautioned, “risks are to the downside.”
“If consumers and workers remain housebound into the third quarter or if the pandemic fades and then re-emerges,” Faucher warned, “the recession could last throughout 2020.”
For now, tens of millions of U.S. businesses and laid-off or furloughed workers are still hoping for a relatively swift and solid rebound. Among them is Edward Morris, the president of P/A Industries Inc., a small manufacturer in Bloomfield, Connecticut, with 45 workers that makes machines for metal forming companies. Morris said so far he’s been able to keep all of his workers employed, though he fears what will happen when his order backlog runs out in a few weeks.
“Starting last week, orders dropped off a cliff,” he said.
Morris said he’s applied for a loan from the Small Business Administration but is concerned about what will happen to his workers once that money runs out.
Andrew Kashian, owner of Story Time Chess, a small company in New York City that sells chess sets that can be used to teach young children to play, is among the companies that have actually seen sales jump during the shutdown.
“We are selling anywhere from 100 to 300 chess sets a day through our website,” Kashian said.
He attributes the surge in demand to desperate parents seeking ways to entertain children who are out of school.
“They want to find an activity that is actually productive,” Kashian said.