Economy’s prognosis? Depends on whom you ask

Some say quickly, others say it may take a while

Some experts insist it can be jolted back to life; others say there’s no “on-off switch.”

Can the economy really come roaring back from the coronavirus recession as soon as this summer, as President Donald Trump has promised?

Some economists say the answer is yes. An economy that was in good shape before the steep and sudden free-fall triggered by the outbreak just as quickly can be jolted back to life, reclaiming nearly all its former luster.

In fact, that’s largely what the massive $2.2 trillion stimulus package signed into law by Trump on Friday is intended to do: Hold the nation’s $21 trillion economy together with a kind of duct tape for a few months by providing spending money to laid-off workers and teetering businesses.

But many economists say the comeback is likely to be far more halting. Growth could pick up strongly this summer but still fall well short of its former pace, with the recession’s aftereffects lingering well into next year as consumers remain skittish about venturing out to restaurants and other gathering spots. Some of the damage could even be lasting, leaving a smaller economy than would have been the case without the pandemic.

“It’s not an on-off switch,” says Jonathan Millar, deputy chief US economist at Barclays.

“I don’t think there’s any chance we get back to where we were anytime in the near future,” says Mark Zandi, chief economist of Moody’s Analytics.

The virus has shut down 30% to 40% of America’s economy, with nonessential businesses such as restaurants, stores and movie theaters shuttered by law or by choice and the travel and hotel industry at a near standstill. In the week ending March 21, a record 3.3 million Americans filed initial unemployment insurance claims, reflecting a staggering number of layoffs.

Under a likely scenario, top health officials believe, the outbreak could peak in May or June, allowing businesses across the country to gradually reopen by summer.

But a later peak or a virus that returns in the fall could worsen the economic damage.

It could be a swift rebound

In the best-case scenario, Senior Economist Jacob Oubina of RBC Capital

“I don’t think there’s any chance we get back to where we were in the near future.”

Mark Zandi chief economist of Moody’s Analytics

Market says there’s no reason an economy placed in a coma for a couple of months to contain the spread of the virus can’t be looking like its old self once the threat has eased.

“The bounce-back can be very strong,” he says.

Until then, he believes, the stimulus can hold the economy in a sort of suspended animation. Owners of businesses with fewer than 500 employees who apply are virtually assured of receiving loans guaranteed by the Small Business Administration to pay wages and operating costs. The loan amount covering eight weeks of such expenses will be forgiven as long as the business holds on to its employees or hires back any who have been laid off.

The idea: Maintain company ties with employees and avoid a disruptive game of musical chairs in which workers are seeking jobs and businesses are hunting for new staffers just as the economy bubbles back to life.

Meanwhile, workers who lose their jobs, including contractors, are eligible for 39 weeks of state unemployment benefits that will be supplemented by $600 weekly from the federal government for four months. That means many restaurant, retail and hotel workers will be earning $1,000 a week, more than their regular paychecks in many cases, Oubina says. And to further juice spending, most Americans, even those still working, will receive a one-time $1,200 check from the government.

And keep this in mind – the economy was on solid footing before the outbreak, Oubina says. During the financial crisis and Great Recession of 2007-09, millions of Americans had lost their homes and many were burdened by historically high debt. Banks pushed to near bankruptcy by their risky real estate loans were hesitant to lend despite government aid.

“We have none of that right now,” Oubina says. He predicts the economy will contract by an annual rate of 10% in the second quarter but then surge by 12% in the third quarter and advance a stillhealthy 3% the final three months of the year and in 2021.

A slower climb may be more likely

Other economists say the rebound won’t be nearly as neat and simple. Many Americans will likely be leery of flying and going to restaurants, movie theaters and hotels even if government and health officials give a qualified allclear signal by summer. Thirty percent of Americans surveyed say it will take at least four months after the virus spread flattens for them to go out to dinner again, while 44% say it will take that long for them to go to the movies, according to a Harris Poll survey conducted over the weekend.

“I’m not jumping back into the fray that quickly,” says Dagny McDonald, 53, a TV news producer who lives in Charlotte, North Carolina. “Maybe we should be a little more careful … I’m definitely on pause.”

In China, which is about six weeks ahead of the U.S. in the coronavirus timeline, factories, electricity demand and other parts of the economy are returning to normal but consumer spending is still constrained.

The stock market’s huge sell-off, which has clobbered workers’ 401(k) plans and wealth, is also likely to make Americans warier of spending, Zandi says.

The travel and leisure industry, which Moody’s says makes up about 10% of gross domestic product, could take even longer than other sectors to recover. Fifty-seven percent of respondents in the Harris survey say it will take four months or longer for them to take a plane flight; 54% say it will take that long for them to stay at a hotel.

Will loans arrive fast enough?

And while small businesses are can draw from the $350 billion in SBA loans, it’s not clear how quickly the government can integrate complex systems with the nation’s banks and release the money, says Ami Kassar, CEO of MultiFunding, a small business loan adviser. Treasury Secretary Steven Mnuchin says the loans will be available starting Friday.

Zandi reckons hundreds of thousands of the nation’s 30 million small businesses will shut down because they don’t know how to apply for a loan or won’t get it in time.

Baby boomers shut it down

Also, about 41% of small firms are owned by baby boomers who are close to retirement, according to Guidant Financial. Many will simply close sooner than they planned rather than go through the hassle of seeking a loan, says Jessica Fialkovich, president of a western branch of Transworld Business Advisors, a broker for small business mergers.

Larger companies are also at risk despite the stimulus measure’s $500 billion bailout to airlines and other industries. The share of large firms with negative cash flow is likely to increase by 23% after the coronavirus crisis, Goldman Sachs estimates.

At the end of this year, Zandi estimates the economy will still be 1.8% smaller than it was at the end of 2019. Millar figures the economy will be 3.6% below its peak in 2021.

Remote work catches on, hurting construction

Some of the aftereffects could lead to lasting changes that further crimp the economy over the longer term.

Some firms are also likely to replace corporate meetings and events with video apps such as Teams and Zoom, Zandi says.

John Bibbo, president of Event Source and Panache Events, had to lay off all but 12 of his 160 or so employees around the country and he’s counting on an SBA loan to keep him afloat.

But he worries about the possibility of a new reality of fewer events. “It’s just going to be different,” he says. “It’s a big setback.”