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Why a recovery isn't coming till 2021

Rick Newman
Senior Columnist

When we asked Yahoo Finance readers earlier this month what questions they have about the coronavirus recession, two came up repeatedly: Why are stocks going up when the economic news is so bad? And when will this mess be over?

Nobody can interpret the stock market with 100% accuracy, but there’s some logic behind the surge in stocks since mid-March. Markets began to reckon with the coronavirus pandemic in late February, with the S&P 500 index plunging 34% from Feb. 19 through March 23. That nosedive came as investors figured out that a sharp recession was coming, with millions of unemployed and massive losses in industries such as travel and retail.

Investors got that right, and the upturn in stocks since late March reflects investors anticipating a recovery. The Federal Reserve has provided unprecedented amounts of monetary stimulus and pledged to do more, if needed, bolstering investor confidence. Congress has pitched in with $3.6 trillion in fiscal stimulus. Encouraging news on coronavirus vaccines has goosed stocks some more. Investors could be getting ahead of themselves and stocks could slide all over again, but for now, they think the worst is behind and if it’s not, they trust the Fed to keep stimulating.

There’s a big difference, however, between having the worst behind you and getting back to normal. During the last recession, most of the layoffs were done by the end of 2009. But employment didn’t return to prior highs until five years later, in 2014. If some of the 37 million jobs lost during the last two months turn out to be temporary furloughs, a recovery could come faster than last time. But this is likely to be a grueling climb back that takes a lot longer than anybody wants.

Signs directed at Texas Gov. Greg Abbott hang on a pub behind workers preparing another pub that they hope to reopen soon in Austin, Texas, Monday, May 18, 2020. Texas continues to go through phases as the state reopens after closing many non-essential businesses to help battle the spread of COVID-19. (AP Photo/Eric Gay)

Fed Chair Jerome Powell said on May 17 that a jobs recovery “could stretch through the end of next year.” President Trump obviously hopes it happens a lot faster than that, since he’s up for reelection in less than six months. “I disagree that it’s going to take all the way through the end of 2021,” White House economic adviser Kevin Hassett said on May 18, rebutting the Fed chair. Hassett predicts “a very strong third quarter, a very strong fourth quarter and probably a great next year.”

The longer recovery timeline is probably the smarter bet. It will be impossible for industries such as retail, travel, and restaurants to get back to normal before there’s a vaccine that allows people to gather in crowds without fear of coronavirus infection. There could be breakthroughs, but it still seems likely to be a year at the very least before a safe vaccine is widely available.

Without a vaccine, the economy can limp back to health slowly, with economic data improving enough for cheerleaders to claim “strong” improvements. But improving numbers don’t always mean consumers feel better, as President Obama learned in 2014, when he overstated the health of the economy and voters rewarded his Democratic party with a “shellacking” in the 2014 midterm elections.

Keeping ‘one foot in the bunker’

Forecasting firm Moody’s Analytics thinks employment is close to bottoming out now, with some recovery coming later this year. The firm sees total employment rebounding from 132 million now to about 142 million by the end of the year. But that would still be a loss of 10 million jobs since the virus arrived, for an unemployment rate of 9%. Trump and his supporters would be able to claim jobs are coming back, but many people would still be worse off.

“There had been a hope that the economy would be fully up and running by [the end of July], and almost everyone would be back to work,” Moody’s Analytics chief economist Mark Zandi wrote on May 17.  “This is not realistic. Even though most businesses will be permitted to reopen by mid-summer, too many will have failed by then, and others will be dealing with weaker sales and higher costs. Uncertainty regarding the virus will also cause many people to keep one foot in the bunker and not spend like they typically would.”

There are over 1.5 million coronavirus cases in the U.S. (Graphic: David Foster/Yahoo Finance)

Even as businesses slowly reopen in many states, damage from the coronavirus shutdowns compounds. Researchers from the University of Chicago estimate that 42% of the job losses during the last two months will be permanent, which aligns with the Moody’s Analytics estimate of a 9% unemployment rate to start 2021. The biggest ongoing shock will be a sharp drop in consumer spending, which accounts for 70% of U.S. economic output.

Research firm Oxford Economics estimates that consumer spending could broadly recover by the fourth quarter of 2020, but still be 7% to 10% below pre-virus levels—and not get fully back to normal till late 2021. “Pent-up demand” sometimes generates a surge in spending when a crisis is over, as newly confident shoppers rush to make purchases they’ve been putting off. Oxford doesn’t see that happening this year, because consumers will remain cautious about going out until they’re confident the virus is gone. That might not happen until there’s a vaccine.

Congress might pass another stimulus bill by mid-summer, putting some more money into the economy and juicing spending a little. But that won’t substitute for real demand from consumers confident about the future and willing to spend. There’s also a risk the virus resurges next fall or winter, forcing new rounds of business closures just as consumers are regaining confidence. That’s a worst-case scenario that could push a full recovery into 2022 or later. A slow and steady recovery would probably be better than a fast and reckless one.

Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. Confidential tip line: rickjnewman@yahoo.comEncrypted communication available. Click here to get Rick’s stories by email.

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