Commentary: One thing taught to every young economist is that forecasting outside the sample is dangerous and that such forecasts are often little better than guesses. The problem with COVID-19 is that it is outside the sample. We have no historical precedent for the current situation. So, we are flying blind as we seek to develop policies.
Our lack of understanding of COVID-19 is reflected in the wide variety of predictions. Various economists have predicted recessions that are “V”, a “U” or even a “W”, by which is meant a sharp decline followed by a quick recovery, a prolonged recession, and a double dip recession timed to each wave of the disease. As it turns out, according to a recent survey of economists, the current consensus is a “swoosh”, so called because the hypothesized recovery is shaped like the Nike trademark—sharp decline followed by slow steady recovery.
The reason for this wide variety of forecasts is that the current recession is simply without precedent in the historical record. Thirty-six million new jobless claims since the lockdown; the largest one month increase in employment, resulting in the largest one-month unemployment rate on record.
Early on in the crisis, many economists used the analogy of a natural disaster. Generally, recoveries from which are rapid. But this analogy doesn’t work very well for COVID-19. Natural disasters affect relatively small areas. In the United States and most other developed countries, tried-and-true aid programs are available to help with recovery. Supply chains remain unaffected for the most part.
COVID-19 is very different. The impact is global. Massive government programs have been implemented, but there remains considerable uncertainty about their effectiveness. And COVID-19 has massively disrupted supply chains, meaning that recovery will likely be substantially delayed.
Some economists point to the demobilization after World War II as a model for the recovery. In this story, the population under lockdown is like soldiers off to war who are unavailable for domestic production. The end of lockdown is the demobilization.
This analogy also breaks down, at least for the United States. During World War II, the military buildup took place over a several years, not over the course of only a few weeks. Moreover, the economy ran red hot during World War II, while the economy today is operating a record unemployment. The ability to absorb workers is different when the unemployment rate is less than 4% compared to the current 14.7%.
Another idea is to look back a hundred years to the Spanish flu, the last major pandemic prior COVID-19. But the economy back then was fundamentally different that of today. In 1920, manufacturing, mining, and agriculture enjoyed a much larger share of employment. The IT sector was vanishingly small. And let’s face it, looking for a job in the era of LinkedIn is a different matter than when a high-tech job search was the newspaper want ads.
Yet another approach to take is to look at financial markets. In normal times, the best single, although far from prefect, predictor of the economy six months from now is the stock market and the stock market has seen a strong rebound. After falling 35%, the market has regained 30%. On the face of it, this would indicate a strong recovery later this year. The problem with this is that the Fed has engaged in an unprecedented intervention, buoying the market.
The reality is that there just is not a good model to use when trying to understand the current circumstances. This makes predicting the recovery very difficult. Uncertainty is at record levels.
Christopher A. Erickson, Ph.D., is a professor of economic at NMSU. He has taught money & banking for more than 35 years. The opinions expressed may not be shared by the regents and administration of NMSU. Chris can be reached at chrerick@nmsu.edu