June 12, 2020

Weekly line: Is America on its way to an economic recovery? Maybe not.

Daily Briefing

    What a difference a day makes.

    As recently as Wednesday, many Wall Street observers were cheering the recent, unexpected drop in the U.S. unemployment rate and huge stock market gains, which lent hope to many that America's economy was rebounding after dramatic losses amid the new coronavirus pandemic.

    How Covid-19 will impact the financial outlook for the health care industry

    But just when some investors were starting to celebrate their gains, stock market volatility returned with a vengeance on Thursday: The S&P 500 dropped nearly 6%, its worst decline in months, amid renewed worry about the spread of Covid-19. And experts more broadly are warning that many factors could obstruct the country's road to recovery.

    Here's what you need to know about this week's volatility, and what it suggests for the economy's future amid Covid-19.

    Jobs report, stock market gains had created hope of a quick economic recovery

    Perhaps the high point of recent economic optimism came last Friday, when data from the U.S. Bureau of Labor Statistics showed that U.S. employers added 2.5 million jobs last month—the most jobs added in a single month on record since 1948. The data also unexpectedly showed the U.S. unemployment rate had decreased from a record high of 14.7% in April to 13.3% in May. 

    The health care industry appeared to be a particular bright spot, with preliminary data showing the industry created 312,400 jobs last month. Dentists' offices, physicians' offices, and offices of health practitioners reported gains in May—although hospitals, nursing and residential care facilities, residential mental health facilities, and community care facilities for the elderly reported further job losses.

    On Monday, buoyed by the jobs report and its aftermath, the S&P 500 index cleared a psychologically important milestone, closing higher than it had opened at the beginning of 2020 (although still below its pre-shutdown peak in February).

    Some on Wall Street were nearly ebullient. Lindsey Piegza, an economist at the financial firm Stifel Nicolaus & Co, told the Wall Street Journal's Josh Mitchell that the jobs data shows the country "is definitely [going] in the right direction and suggests the U.S. economy may be faring better than some of those worst-case scenarios."

    Edward Yardeni, president of Yardeni Research and a longtime investment executive, told CNBC's Stephanie Landsman, "The economy may very well be catching up with the stock market rather than the stock market going off on its own."

    Then came Thursday's steep sell-off. Now, the S&P 500 is once again in negative territory for 2020—giving new credence to experts who have warned the road to recovery could be a long, hard slog.

    Why some experts are skeptical of a 'bounceback' recovery

    Even amid last week's economic optimism, some experts were already pointing to reasons to doubt the recovery's strength. 

    Even the Department of Labor was saying unemployment was likely worse than the latest job report suggests. One reason, as Reuters' Lindsay Dunsmuir explains, is that so many people left the labor force because of the epidemic. Because they aren't actively seeking work, perhaps because they fear contracting the virus, they aren't counted as "unemployed"—but they're still out of jobs.

    Further, the whipsawing economy of recent months has created data integrity issues, such as employees who were furloughed but are mischaracterized as "employed." Because of these issues, the department estimated that the United States' actual unemployment rate likely was closer to 16% in May.

    Further, many Americans who have returned to work face reduced hours and pay cuts—as well as uncertainty about how long their employment will last. "People are coming back to work in jobs that are very different than they were three months ago," Robert Scott, a senior economist at the Economic Policy Institute, told the Washington Post's Tony Romm and Jacob Bogage. "They're very risky and there's a lot of uncertainty about what's to come," Scott said.

    And Michelle Meyer, head of U.S. economics at Bank of America, told the New York Times' Ben Casselman, "The economy is still being very much buffered by stimulus," referring to the trillions of dollars the Federal Reserve and federal government have pumped into the economy and markets over the past few months. "When that starts to wane, we will learn a lot more about the underlying health of the recovery."

    Federal Reserve leaders on Wednesday predicted that the U.S. economy will see a slow recovery, with the unemployment rate falling only to 9.3% by the end of this year and 6.5% by the end of next year—considerably higher than the record low of 3.5% that the country recorded last September. Federal Reserve Chair Jerome Powell on Wednesday said, "Unemployment remains historically high," and "[m]y assumption is there will be a significant chunk … well into the millions of people, who don't get to go back to their old job … and there may not be a job in that industry for them for some time."

    The biggest economic unknown: Will Covid-19 surge again?

    Perhaps the biggest threat to recovery is the possibility that the United States will experience a second wave of the new coronavirus—and some data indicates the country might already be on its way to a second spike. 

    The Organization for Economic Cooperation and Development (OECD) in a report issued Wednesday predicted that a resurgence of new coronavirus infections and corresponding lockdowns could cause the U.S. economy to shrink by 8.5% this year and constrain gross domestic product (GDP) growth in 2021 to just 1.9%. In comparison, OECD estimated that, if a second wave and corresponding lockdowns are avoided, the U.S. economy will decline by 7.3% this year and see a more robust recovery of 4.1% in 2021.

    Separately, the Congressional Budget Office (CBO) last week estimated the epidemic could reduce the country's GDP by about $7.9 trillion over the next decade. CBO Director Phillip Swagel explained that the country's economic recovery will be hampered by the need to continue social distancing as the new coronavirus continues to spread in America.

    Other factors that could derail the country's economic recovery include whether patients feel comfortable seeking non-urgent care from health care providers, whether schools and child care facilities reopen, and whether the federal government continues providing support to small businesses and workers unemployed because of the new coronavirus, experts say.

    One surprising indicator of the economic recovery: Dentists' offices?

    So how will we know when America's economy really is recovering? The Times's Sarah Kliff suggests dentists' offices could serve as a leading indicator. 

    Kilff explains that the dental industry has experienced "an exaggerated version of the pandemic's economic impact, experiencing both a steeper decline and a faster recovery than other sectors."

    For instance, she notes that about 50% of all dental workers in the country lost their jobs as states closed down businesses in March and April to curb the new coronavirus' spread. But as states began reopening businesses in late April and throughout May, dentists' offices led the way in jobs gained. After all, as Kliff wrote, "If you need your teeth cleaned or a cavity filled, the dentist is the only option."

    Betsey Stevenson, an economics professor at the University of Michigan, told Kliff, "I'm obsessed with dentists because, if the only thing we're doing is putting the economy on pause, and then going back to normal, all of them should be coming back. We're not really recovered until all the dentists are back to work."

    Stevenson's theory doesn't bode particularly well for the current state of America's economy. Although the dental industry has recovered many jobs, it still has 289,000 fewer workers than before the pandemic took hold, Kliff notes. Stevenson told Kilff, "The fact that dentistry employment is down 30% tells us that there is income loss, and there is fear."

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