WASHINGTON: The economic news is about to get very bad. This can be expected when, for non-economic reasons, the majority of businesses are forced to close. But we have never seen numbers this bad. We have also never seen a near depression come on so quickly.
The unemployment rate will soar, likely into double digits. The drop in GDP will also be in double digits. And Americans will grow very uneasy as they cope with the frightening news about the effects of the coronavirus. This will likely last throughout April at a minimum.
Economic Recovery will start quickly
But, after that, things will change dramatically. The government is about to send trillions of dollars to every American and nearly every business. Consumers get their money in about two to three weeks. In addition, the unemployed will have received their benefit checks by then.
For a family of four, Americans will see an extra $3,400 simply given to them, whether they became unemployed or not. In addition, for those unemployed, benefits have been increased both in the amount per week and the duration of time to collect.
By the end of April, consumers will be ready, willing and able to start spending.
The government will also conditionally give money to businesses. There are billion-dollar programs for big business. For small businesses, the Small Business Administration will give businesses enough money to cover almost all of their expenses for a few months.
The condition is that businesses use the money to pay their expenses. That is they must keep their labor employed and pay their bills with the money. That means by the last week in April small businesses will bring back their employees and re-start their businesses.
Economic recovery will begin to ramp up in May.
Assuming it takes about a week for business to ramp up, by May many businesses will be up and running once again. There will also be new businesses opening. Consumers will be ready to leave their homes and spend this extra money that they have.
The difficult variable is how long and how intense the current COVID-19 problem will be.
One, perhaps optimistic view, is that the acceleration of new cases peaks in mid-April. Then the rate drops relatively quickly so that by the end of the month economic conditions could begin to change. The 45-day stay home period will end, for at least part, if not all, of the country.
Except for the areas of high concentration of the virus, the country could re-open.
Businesses will be ready to reopen because the government paid them to not shut down. Consumers will have money to spend because the government just sent thousands of dollars to each family. That should mean the economy will turn around very quickly.
Helping expansion even further, the government dropped interest to record lows.
And they vastly increased the money supply. That means borrowing, especially for big-ticket items will be very inexpensive and funds very plentiful. That will help the housing and automobile markets recover very quickly.
We will likely see double-digit growth rates maybe as early as the third quarter. That means actions taken by the government will have been timed nearly perfectly. The government did exactly what they are supposed to do. That is, they prevented disaster – physically and economically.
Their actions will shorten the recession and keep it from diving too deep. Government action will jump-start the economy to get us back where we were prior to the COVID-19 problem.
They did everything right, except….
The 800-pound gorilla. A $4 trillion deficit.
Prior to the recently passed stimulus package, the federal government’s yearly budget deficit would have been about $1 trillion. Government just spent an additional $2.2 billion while tax revenue is likely to drop by about $500 billion, because of the unemployed workers and the shuttered businesses.
That means, assuming no additional spending bills are passed, the deficit will be almost $4 trillion this year. On top of the $23 trillion that the country is already in debt, an additional $4 trillion is a very serious problem; a problem that we will shortly have to confront.
Let’s hope, after the COVID-19 problem is behind us, the government can come up with the right economic policy to fix the annual deficit and the total public debt problem. Otherwise, our children will be saddled with a very big problem.
So far this year, government economic policy is appropriate, but what about the deficit and the debt?