Pent-up consumer demand from the coronavirus shutdown will create a partial bounceback in economic activity and spending in the coming weeks as the country reopens, economists predict.
“People trying to do things they’ve been putting off like dental care, elective medical procedures, and haircuts are likely to see a spike in demand,” said Eric Zwick, a finance professor at the University of Chicago.
Zwick cautioned the economic snapback “is going to be partial” due to the virus and states only reopening slowly.
According to the latest data from the Commerce Department, personal spending has cratered, decreasing by $1.89 trillion, or 13.6%, from March to April.
The good news, though, is that, unlike other economic recessions, personal savings have skyrocketed by more than a thousand dollars per capita in the past couple months. One in every three dollars was saved in April, calculated in terms of personal savings as a percentage of disposable personal income.
The increase in savings is primarily due to the government’s pandemic fiscal response measures, such as the $1,200 relief checks given to individuals and the boost to unemployment insurance, which raises benefits to nearly $1,000 a week for many jobless workers. Both measures were enacted as part of March’s $2.3 trillion CARES Act.
The large reservoir of savings could cause a spike in spending in the coming weeks as the economy reopens.
“If you have a business or service where face to face interaction is key, there’s potential for bounceback,” said Jared Bernstein, a former economic adviser for Vice President Joe Biden. “Manufacturers really took a hit due to the shut down so we could see some action there, too, now.”
The bounceback will benefit industries and sectors most impacted by the shutdown, Bernstein said. Sectors, such as “restaurants, airplanes, hotels, and pretty much everything that happens in Nevada,” will likely see growth, he said, instead of grocery stores or companies like Amazon, which have already prospered during the pandemic so far.
Zwick said he expected to see a 30% leap in spending, or a 1.5% jump, in gross domestic product in the next month or so.
Stock markets also soared last week as enthusiasm built about the reopening of the country and the development of a coronavirus vaccine.
The S&P 500 and the Dow Jones stock markets each went up approximately 36% from their March lows by the end of May, only 10-15% off from their pre-pandemic peak.
Bernstein, a fellow at the left-of-center Center on Budget and Policy Priorities, also said, however, that the recovery will “not be like a light switch, more like a dimmer switch.” The recovery will continue to be largely influenced by the containment of the virus and forthcoming government policies, he said.
Some economists warned that although there would be some growth in the coming weeks and economic indicators will likely look great, this is more due to a contrast with the low economic activity of the past month than any significant return to normalcy going forward.
“The bounceback to normal conditions will be slower and more tortured than expected due to the virus and state responses and finances, but there will be better growth in June and July than there was in the spring,” said Kimberly Clausing, an economics professor at Reed College.
Ben Page, a senior fellow at the Urban-Brookings Tax Policy Center, added that “quarter three will be substantially better than this quarter. Within two-three months, we’ll see unemployment go down quite a bit, GDP will go up quite a bit, but things will still be pretty bad.”
“The economy is so low right now that just to get back to Great Recession levels would be a huge leap. We have a long way to come back fully,” Page said.
Page said that the recovery depends, in part, on Congress and legislation. He said that if unemployment benefits expire at the end of July, as is currently expected, this could temper the economic bounceback and spending. Page also said that state and local governments could be a big drag on the recovery due to state budget deficits and cuts in their spending from tax revenues decreasing significantly.
Another key facet to keep in mind during all economic recoveries, Clausing said, is the psychological component.
“Irrational exuberance during good times or fear during bad times has huge impact on the economy,” said Clausing.
She said consumption and spending was hugely tied to people’s psychological state and the degree of fear that exists within society due to the virus and other factors. Government leaders and those that shape economic and health policy have more influence over people’s mindsets than anything else right now, Clausing said.
“In that sense, the Fed and Congress have done well between the [economic relief bills] and the loan facilities,” said Clausing. “Imagine a world without unemployment aid and loans, the economy would have contracted a lot faster.”
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