At the start of the year, the American economy was the largest the world had ever seen. With a net value of more than $21 trillion, the country had the lowest unemployment since 1969, had experienced ten years of growth at an average of 2%, and was the world’s largest manufacturer of crude oil, beef, corn, & military hardware. It led the world in charitable giving and research funding, and had world-beating industries in, among others, aerospace, media, technology, agriculture, automobile production, metallurgy, and aviation.
Today, much has changed in the business mood in America. The COVID-death toll has passed 120,000, while a piecemeal, economic lockdown that began in March now stretches into its fourth month. Today, the outlook for the American economy is far from rosy.
As the BBC reported in early June, the financial impact of the pandemic on America will last almost a decade. The report stating that “The Congressional Budget Office (CBO) forecasts the outbreak will cut US economic output by 3% between this year and 2030, a loss of $7.9tn (£6.3tn).”
The US Labor Department confirming that in May, 21 million people (13.3% of the population) was unemployed. A figure that stood at just 4.4% in March.
“The United States economy is in a medically induced coma,” said Jason Furman, an economist and professor at Harvard Kennedy School in an interview with CNBC. “We’ve never done this before. So, the question is: Can we revive the patient when we want to and need to?”
Can the US Economy Recover from its COVID-Induced Coma?
At present, there seems very little that US lawmakers can do to change the way the economy is heading.
They have already passed laws to spend roughly $3.3 trillion in stimulus, however according to Phillip Swagel, the CBO director, while this, “Recent legislation will, in CBO’s assessment, partially mitigate the deterioration in economic conditions. Business closures and social distancing measures are expected to curtail consumer spending, while the recent drop in energy prices is projected to severely reduce US investment in the energy sector.”
While it is logical that as soon as the lockdown ends, people returning to work will begin spending again, there are fears that things will not click back together so easily.
This may in large part be due to the disparate effect the coronavirus has had on different parts of American society.
Not only are lower-income workers more likely to die from COVID due to their work-related higher exposure rate and therefore increased chance of infection, but they are also more likely to have lost work due to the lockdown.
While white-collar employees are able to continue their office work from home, blue-collar employees have often been sent home from their jobs in restaurants, bars, factories, and warehouses.
As the New York Times reports from a recent survey by the US Federal Reserve, “Fully 39 percent of former workers living in a household earning $40,000 or less lost work, compared with 13 percent in those making more than $100,000.”
Additionally, the poorest people in society are less financially prepared to withstand a loss of income. The report stating that, “Many Americans went into the nationwide lockdown with limited savings, despite gains from a record-long economic expansion. At the end of 2019, three in 10 adults said they could not cover three months’ worth of expenses with savings or borrowing in the case of a job loss, ‘indicating that they were not prepared for the current financial challenges,’ the Fed report said.”
While it may be self-evident that poorer people have less money saved, the situation may be exacerbated in America with a smaller safety net for the less well-off, lack of free healthcare for all, and a lower level of financial support for working people during the pandemic.
As the CNBC report explains, “… the U.S. lags behind many European countries, which have set up social safety systems and initiatives, such as nationalizing payrolls, offering robust national paid sick leave and supporting national health-care systems.”
Joseph Stiglitz, a Nobel Prize-winning economist and professor at Columbia University, also believes that the US Federal government isn’t sufficiently supporting individual states. “We aren’t helping the states enough,” he says. “We’re not even helping the states to meet the extra cost of the virus.”
This is in addition to a lack of aid to states for their future budget shortfalls. The lockdown will reduce state tax incomes considerably, leading to a likely cut in state funding for education, health and welfare programs, and other basic services.
Whether such measures will be taken in the future, even under a different administration, remains to be seen. That in turn, depends on how the economy will perform over the coming months. But, this too is a mystery.
“Typically, our recessions have been induced because of an issue in the financial market, oil prices, monetary policy — it’s usually induced from some sector in the economy,” says Cecilia Rouse, an economist and the dean of the Woodrow Wilson School of Public and International Affairs at Princeton University. “This is from a public health scare and a public health crisis, and so I think we just honestly don’t know.”
Furman agrees, believing that predictions on the weather may be more accurate than analysis on the American finances. “Economists are not at all confident,” he says.
Instead, they have been turning to two economic models that historically show how America financially recovers from recessions.
The first is modelled on events that happen after a natural disaster; when mass flooding, hurricanes, or earthquakes have hit. In this situation, economic activity is temporarily suspended, before people quickly return to work as normal.
The other model is based on events after a financial crisis, such as crashes in the 2008 mortgage market and the 1929 stock market. Here recovery generally takes much longer, with estimates of a return to normal after five to 10 years.
What economists are struggling with today, is if the current economic lockdown is a natural disaster that will instantly snap back to 2019 levels, or a financial crisis that will take years to heal.
For now, it is evident that the country is struggling, while most of Asia has already reopened, and restrictions are being lifted all across Europe.
It is a situation that is making America an exporting outcast, much as happened to China when the coronavirus outbreak began. One such example reported by the Washington Post states that China has, “… halted imports from an Arkansas meatpacking plant where more than 220 employees tested positive for the coronavirus.”
A problem further exacerbated by fears of a second wave. The Post adding how, “White House trade adviser Peter Navarro said Sunday that the Trump administration is preparing for a possible second wave, but he rejected the suggestion that a second wave has already taken hold.”
For now, while the first wave of infection is still at the heart of the American economy, it is difficult to see a clear picture. The result is a US economy that is stepping into the unknown. An unprecedented situation that has left economists guessing.
Like all predictions on the economy, they cannot foresee the unexpected. How long will the US-China trade war continue? Will Trump win re-election? How hard will any second or third wave of coronavirus hit?
These questions remain to be answered and mean that the true cost of COVID on the American economy can only truly be written in history books.