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Columbia Business Monthly

Economy Could Face Long, Uncertain Recovery

By David Dykes

An economic rebound is in the cards, many economists and others say.

There is renewed hope we are bouncing back from recession and the U.S. economy will recover from the shock of Covid-19.

In South Carolina, employment continued to rise in July, and the unemployment rate ticked lower.

But Federal Reserve Chairman Jerome Powell warned in a television interview on CBS News’s “60 Minutes” program in May that economic recovery may take a while, stretching perhaps through the end of next year.

You don’t need to look far for evidence.

You can see the dismay on the faces of S.C. restaurant workers, small business owners and those cut loose in corporate layoffs.

In our state’s cities, towns and rural areas, people are struggling to keep their businesses open, pay bills and support their families.

Powell cautioned in his television interview that longer and deeper recessions tend to leave behind damage to people’s careers and that weighs on the economy going forward.

He added the same could be said about businesses. If small and medium-sized businesses that are so important to this country have to go through a wave of avoidable insolvencies, “You’ve lost something there that’s more important than just a few businesses,” Powell said.

The Wall Street Journal reported last month that banks, a gauge for the broader economy, have signaled they anticipate a longer, deeper recession than they first expected in the spring.

Though much of the economy has held up relatively well, the banks say government stimulus and other temporary reprieves have likely delayed the pain, not overcome it, the newspaper reported. Many lenders are bracing for a wave of defaults, it said.

Nearly two-thirds of the National Association for Business Economics members who participated in the August 2020 NABE Economic Policy Survey believe the U.S. economy continues to be in a recession that began last February, said NABE President Constance Hunter, also chief economist at KPMG.

Many of the respondents – almost half – expect the inflation-adjusted gross domestic product to remain below its fourth-quarter 2019 level until the second half of 2022 or later, Hunter said.

“And 80 percent of panelists indicate there is at least a one-in-four chance of a ‘double-dip’ recession,” she said. “The panel is split in its view on Congress’s fiscal response to the recession, with 40 percent calling the response insufficient, 37 percent indicating the response is adequate, and 11 percent saying it is excessive.”

Wells Fargo Securities economists said late last month a revised look at GDP suggested the second quarter might not have been as bad as first estimated. A bounce in Q3 personal consumption expenditures is looking better than expected, though fading confidence and uncertainty about the virus and fiscal policy suggest the strength could quickly disappear, the economists said.

While it’s valid to be concerned, there are signs of good news, according to Efraim Benmelech and Carola Frydman, both professors at Northwestern University’s Kellogg School of Management.

In an article published on VOX, the Centre for Economic Policy Research’s policy portal, they write that comparing the impact of Covid-19 to the 1918 influenza epidemic doesn’t portend disaster.

“While the Spanish flu also had some economic consequences, they were mostly modest and temporary,” they wrote.

The Spanish flu, they said, “left almost no discernible mark on the aggregate U.S. economy.”

The authors wrote that the Spanish flu infected about 500 million people worldwide and claimed around 50 million lives—including about 675,000 Americans, or about 0.67 percent of the country’s population.

The U.S. economy eventually did go into a recession in 1921, but by then the decline in output had all to do with a collapse in commodity prices when post-war European production finally recovered, they wrote.

So why is the current crisis having such a large impact on the economy, while the Spanish flu did not?

One possible explanation lies in the social distancing measures that the U.S. and other nations have directed in order to flatten the curve and slow the spread of the virus, the authors said.

They said that while many jobs can now be done remotely from home, many cannot. Social distancing also cuts the demand for many goods and services. As a result, some sectors in the economy have come to a halt.

Many economists don’t doubt that trend will reverse itself.

For now, the optimism won’t ease the economic pain and frustration of scores of businesses across the state. But the outlook might be better than we think.

According to the state Department of Commerce, South Carolina Leading Index (SCLI) metrics were broadly improved in July. Unemployment claims were 21.1 percent lower than in June. The number of issued housing permits increased 14.2 percent month-over-month and valuation for the permits rose 10.1 percent. Average weekly manufacturing hours fell 0.5 percent.

In July, the number of building permits issued in South Carolina for new residential construction rose 14.2 percent to 4,137. That figure was up 33.8 percent from a year ago.

Valuation for the permits rose 10.1 percent month-over-month and was 33.4 percent higher than a year earlier. Total closings were up 10.1 percent compared to June, while the median sales price was up 3 percent.

Foreclosure activity fell 75.3 percent from July 2019. Total closings rose in all of the top six MSAs, with Florence reporting the largest gain at 21 percent. The median sales price rose in all but the Greenville MSA, which was flat month-over-month.

“If we compare the number of employed South Carolinians in April (2,089,889) to July (2,242,832), it shows that 152,943 South Carolinians have rejoined the workforce,” said Dan Ellzey, executive director of the South Carolina Department of Employment and Workforce. “If we compare the number of people with jobs in March (2,334,652) to July’s (2,242,832), it shows that 91,820 individuals will need to find work in order to get back to pre-pandemic employment numbers.

“Overall, I believe our state should be pleased with the recovery-driven direction of our economy. We are encouraged by the steady improvements.”