Photo by Boris23 (Creative Commons)

Let’s Head Back To Where We’ve Never Been Before:

The Economy is in for a Wild Ride

With multiple vaccines almost within reach, many are confident we will soon be able to put the Covid-19 era in the rearview mirror and return to a normal life. For the overall economy, this is generally thought to be when unemployment and gross domestic product return to pre-Covid levels. That is, getting us back to the levels of that bygone era of December 2019.

Unfortunately, even though we will undoubtedly trim the unemployment rate and regain our pre-Covid GDP level, the economic landscape will change by the time we do. As the protagonist George Webber found out in Thomas Wolfe’s You Can’t Go Home Again it won’t be the same world we will go back to.

Of course, in every disaster, the world is forever changed for those most directly involved, but in Covid-19’s case, it’s going to be this way for many, perhaps even most, worldwide. To get a better sense of the easy part of the hill we in the U.S. have to climb let’s look at Figures 1 and 2. These graphs are from the Federal Reserve Economic Database, FRED. To put what we are facing in perspective the graphs go back to 2007 capturing the Great Recession, which until the Covid-Crisis was the worst recession since the Great Depression. The shaded areas of the figures indicate the two recessions — The Great Recession on the left and the Covid-Crisis on the far right. As can be seen in Figure 1 unemployment rose from about 4.5 percent prior to the Great Recession to 10 percent at its height taking about 3 years to max out. However, during the Covid-Crisis unemployment soared from just below 4 percent to 13 percent almost overnight. A similar pattern emerged for GDP, just not as pronounced.

Figure 1. Quarterly Unemployment: First Quarter 2007 to Third Quarter 2020.

Figure 2. Gross Domestic Product: First Quarter 2007 to Third Quarter 2020.

As Jerome Powell put it at a recent European Central Bank’s Forum on Central Banking, “We’re recovering, but to a different economy” and he doubled down more recently when he said, “We’re not going back to the same economy, we’re going back to a different economy.” While it is doubtful that Mr. Powell knows exactly how the economy will change, the signs of change are all around us. However, at this point we don’t know which will take hold and spread, reshaping the economy in the process.

By the way, Mr. Powell’s latter statement was delivered to the Bay Area Council. Almost as an examination mark, both meetings were held virtually, avoiding transportation, lodging and the other trappings that go along with an in-person meeting. Is this a foreboding of the trials service sectors will generally face over the long term? Technology stepped in to fill the breach, but where does that leave airlines, other transportation services, hotels, etc., and, more importantly, where does that leave the workers who formerly provided all those services? And will firms like Uber and Airbnb accelerate their assault on these industries in an attempt to fill the gap?

Another change that may take hold is the work-from-home movement that was accelerated by necessity during the pandemic. Will firms find that employees working from home yield more profit? After all, a significant expense for employers is office space. A modest scheme of working two days a week in the office and three days at home, for example, could possibly have significant implications. Laptops and shared desks would reduce the need for as much office space by up to half. But will it work? The pandemic is forcing us to find out. If it does, the consequences will be widespread. First, we will immediately have too much office space in major downtowns. In those same downtowns, we will also have too many restaurants, too many parking spaces, and too much public transportation. Going even further afield we can speculate how such a change will impact urban and suburban housing patterns. The truly interesting thing is that things yet to be realized as changing may yield equally as significant impacts, making Powell’s statement an understatement. An implication of this is the impact on service-sector employees. Fewer, perhaps far fewer, will be needed in certain areas and more in other areas. It is possible we are at the beginning of a significant shift of what service-sector employees do in the future.

Of course, new jobs are continually coming available, but the shift from yesterday’s employment world to tomorrow’s isn’t instantaneous, and likely will be painful for many of the impacted workers. Federal Reserve Bank leaders are preparing for this. In March the Fed lowered interest rates to near zero and currently plans on keeping them there until 2023. But will that be enough?

Not likely, but meanwhile, energetic entrepreneurs are seeking ways to take advantage of and shape the new economy that is unfolding. To the extent they are successful, employment markets will change with some industries receding while others rise to the top. This raises the possibility of a K-shaped recovery. In such a recovery some fortunate individuals Zoom to the top in a fairytale world while others such as workers at theaters and locally-owned restaurants recede into the background. While it may seem nice to think that struggling businesses can hold on until the economy bounces back, such a thought is quixotic. Not only are more aggressive business leaders preparing for the future, but consumers and employers are also becoming more accustomed to the new economic frontier. As a result employees, out of necessity, will migrate to the firms of the new economy. Powell is right we can’t go back. The world has moved on, leaving us to figure out the destination.



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Gary Wells

Gary Wells

Retired economist and newbie news satirist predominantly using raw beginners “haiku” that do little justice to this elegant Japanese poetry form.