The COVID recession isn't going to leave permanent scars on the US economy
- Growth pessimists are worried that the COVID-19 recession is going to lead to a prolonged recovery and permanent scars on the US economy, much like the financial crisis and Great Recession.
- But there are reasons to believe that the economy will bounce back faster after COVID and there will be no permanent scars.
- For one, the unemployment surge due to COVID is vastly different than after the financial crisis and there are reasons to believe the job market could bounce back.
- Second, new businesses are still popping up — unlike during the Great Recession.
- Third, the housing market is still strong. That means people will need to spending on big ticket items like washing machines or refrigerators — helping to fuel the economy.
- Neil Dutta is head of economics at Renaissance Macro Research.
- This is an opinion column. The thoughts expressed are those of the author.
- Visit Business Insider's homepage for more stories.
After having been wrong about the speed and scale of the economic recovery since April, growth pessimists are dusting off the playbook from the Great Recession and once again warning about terrible long-term effects from the current COVID recession.
According to these pessimists, much like the recovery that followed the 2008 crash, the economic catastrophe that remains in the wake of the pandemic will lead to substantial scarring, lower potential growth, hysteresis, and loads of permanently unemployed workers who will see their skills atrophy amidst a slow recovery. Sorry, but I just disagree. Here is why.
It will be different — and better — this time
First, it is true that the ranks of the permanently unemployed — as opposed to temporary furloughs or unemployment — have swelled. Since February, permanent job losers have climbed by 2.464 million, or a bit under half the increase during the period around the Great Recession.
However, it is also obvious that permanent unemployment is a lagging indicator of the economy Indeed, over the last few decades, it looks like changes in permanent unemployment lag the growth in the economy by about one quarter and the faster the economic growth, the more rapid the eventual decline in permanent job loss.
Put another way, it'll take a bit of time for the improving economy to show up in the permanently unemployed numbers.
Eyeballing our nearby figure, our assumption is that permanent unemployment begins falling in earnest by early next year. In the end, structural challenges can be solved by cyclical growth and growth has been consistently surpassing consensus estimates.
Second, the industry distribution of permanent job losers does not look all that different from the distribution of job losers more generally. Given that the job losses are mostly concentrated in lower value added service industries, this points to a quicker rebound for those currently out of work.
By our calculations, roughly one-fifth of the permanent job losers were employed in the leisure and hospitality sector, the hardest hit industry during the pandemic. By contrast, in the last recession, less than 10% of permanent job losers were from this sector. During the last recession, construction and manufacturing accounted for about 30% of the permanent job loss. They count for less than 20% now.
We're less worried about skills atrophy – structural scarring – in low valued added sectors of the economy like leisure & hospitality. While this is a very visible industry, it is not especially productive. In other words, skills atrophy, structural scars, were much more prevalent when job losses cast a wide net (as in 2008). It's one thing to bring back manufacturing, construction, and white collar service professionals in financial services. These are relatively high value added sectors in industries with high barriers to entry. That's not as salient an issue when we are largely talking about retail trade and leisure & hospitality.
There has been much chatter of permanent business closures. A widely cited report from Yelp, the popular site that publishes crowd sourced reviews about businesses, showed that "60% of business closures due to the pandemic are now permanent" reinforcing the idea that the wounds from the COVID crisis will take time to heal. Of course, there is a selection bias when looking at data like this – it likely skews to restaurants.
Other – more robust – data, based on Employer Identification Number (EIN) applications, show that entrepreneurship is alive and well.
According to this weekly data from the Census, business applications with planned wages – those applications that indicate a planned date for paying wages – is running well above year-ago levels. Through the first week of December, the cumulative sum of business applications with planned wages is UP about 15% (about 200,000) against the same period last year. Compare that to 2009, when this same measure was DOWN nearly 20% (about -100,000).
Moreover, there is quite a bit of empirical research showing that housing collateral is important to starting a business. Those entrepreneurs with more collateral tend to create larger firms and more value added. This was one reason why business formation was so sluggish following the last recession.
Home price declines led to tight credit, less collateral against which prospective entrepreneurs could borrow, thus keeping new business formations low. Home prices are climbing today with some evidence that borrowers are tapping home equity. In short, the increase in home values has relaxed the ability of prospective small business owners to get the credit they need to finance their businesses.
Finally, there is one last reason I am confident that permanent scarring or structural low growth in the economy will be avoided – again, it is about the housing market.
The rapid rebound in single-family home sales implies that rates of homeownership are climbing. What do we know about homeowners? They spend. According to the Consumer Expenditure Survey, homeowners spend 1.6 times more than renters on average per year. This includes goods like household appliances (homeowners spend on their homes) and cars, but also the conspicuous forms of consumption – like entertainment, hotel lodging and restaurants – that are thought to be most at risk of permanent scarring.
In short, as challenging as the pandemic and the economy may seem at the moment, there are reasons to think that much of the permanent scarring growth pessimists are worried about will be avoided. It may look bad now, but there's reasons to believe that the US economy can come out of this crisis without terrible lasting damage.
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