We've gone on holiday by mistake. And we're going to have to stay here for a while.
The big picture: During normal, scheduled holidays — the period between Christmas and New Year's, for instance, or all of August in France — GDP plunges to well below normal levels, no one much minds, and then economic activity bounces happily back again.
The best hope for some countries hit by the novel coronavirus, like Denmark or New Zealand, is that a shutdown might work a bit like that. People stay home for a number of weeks, the pandemic is brought under control, and then life can revert to something approaching the status quo ante.
- That's not going to happen here. Just last week, 3.3 million workers lost their jobs and filed for unemployment. There's no switch that can be flipped to magic them back into their old jobs.
- Much worse than that, hundreds of thousands of Americans are going to die of COVID-19, millions more could find themselves with debilitating and permanent lung damage, and an unknowable number will suffer or die as a result of a health care system so overburdened that it can no longer effectively treat other injuries and diseases.
The optimistic scenario is one in which we stay isolated from one another for as long as it takes to equip the U.S. with the resources necessary to fight this plague: masks, tests, contact tracing protocols, open ICU beds, ventilators, maybe even effective therapeutics.
- There will still be economic activity. The internet has made it possible for a broad range of white-collar jobs to be done from home, and the list of essential workers — from police officers to grocery store clerks — is very long. On top of that, nonessential industries from carmakers to shirtmakers are making themselves essential by pivoting to producing ventilators and masks, and other companies are hiring aggressively.
- JPMorgan estimates that GDP will be about 10% below normal in the second quarter, which means an annualized drop of 25%.
- Then there can be a recovery, with GDP growing at a 6% pace in the second half of 2020 and unemployment falling from a peak of 8.5%.
What they're saying: “If we get the virus spread under control fairly quickly, then economic activity can resume," the Federal Reserve chairman, Jerome Powell, told NBC this morning. "The virus is going to dictate the timetable here.”
The pessimistic scenario is much worse. NYU economist (and my ex-boss) Nouriel Roubini is warning of "a new Great Depression, worse than the original," while Jim Bullard, the president of the St. Louis Federal Reserve, sees unemployment rising to an unprecedented 30% in just the next couple of months.
- Context: In the Great Depression, unemployment started at 3.3% in 1929, and rose to a peak of 24.9% four years later, in 1933.
The bottom line: A strong economy requires confidence. None of us are as confident today as we were a month ago, and it's impossible to see that confidence returning so long as the pandemic rages. The economic imperative is therefore to buy time — which means all of us living under effective quarantine.