Loren Yager: The economy will recover by the election, just not this election

The recent Bureau of Labor Statistics showing a surprising number of workers returning to their jobs raise hope that the “V-shaped” recovery has begun and that the economy only suffered a temporary setback as a result of COVID-19. Unfortunately, both the continuing effects of the health crisis and the damage already done by the severe drop in economic activity mean that the nation has only begun what is likely to be a long and irregular recovery.

One way to gauge the extent of this drop in economic activity is by comparing it to the growth in the economy over the years of the Trump administration. During these three years, GDP expanded by 7.2%, while the drop in the first half of 2020 is expected to be about 15%. Similarly, the growth in employment during Trump’s first three years was 4.7%, while the drop in employment in April alone was 14%.

Based on those numbers, Trump will be competing with Herbert Hoover for the worst economic record for any single presidential term since we have been keeping statistics. All other presidents since Hoover had positive job growth during each of their four-year terms, so nobody else is even close.

The more difficult question is how quickly the recovery will occur. Although this recession was caused by a health issue, it quickly became an economic issue as individuals and businesses halted all but essential activities. In order to have a recovery, it is necessary for individuals and businesses to believe it is safe for them to resume normal activities. However, even if those conditions can be created, many of the key players are now in a much weaker financial position and so will not bounce back to their prior levels of economic activity.

Consumers account for about two-thirds of U.S. economic activity, but because a large number of workers lost jobs in the last few months, consumers will not be able to resume their prior level of spending at restaurants and retail stores. And in a kind of vicious cycle, many businesses will be unable to reopen or resume full operations without those customers, so some of those temporary layoffs will become permanent.

Business investment is also a key component of the economy, but fewer businesses will see the need to invest in new plants and equipment given the uncertain prospects. The federal government stepped in with various tools to support businesses and families, but it is unclear how long those efforts will continue. This is especially true if policymakers interpret the recent jump in employment as evidence that further support is no longer needed — rather than as evidence that federal spending can boost the economy.

State and local governments do not have the option of deficit spending, and so will be forced to make sharp cuts in expenditures to match their decreased revenues. Utah is slightly better off than other states as it has a rainy-day fund, but lawmakers are still considering scenarios of 2%, 5% and 10% cuts to the budget.

As to how long it will take to recover, it is useful — but not encouraging — to look at the recovery from the “great” recession that began in 2008. In that case, it took 3 ½ years to regain the 4% decrease in GDP, and over eight years to claw back the 6% of jobs lost. The current decreases in GDP and employment are considerably higher than those of the last recession, so we need to be thinking about a long-term recovery.

We also have the opportunity to learn the lessons from the last recession, one of those is that people who are out of work for a long period of time lose skills and may never rejoin the labor force, with some succumbing to deaths of despair. Another is that not all sectors will return to their previous levels, and so policymakers should consider ways to assist those workers to shift to areas of potential growth.

The good news is that growth could resume more quickly that it did during the last recession — albeit from a much lower level. As in the most recent employment report, there may be times when growth exceeds the modest levels we observed after the 2008 recession, particularly in the initial stages of reopening and if there are important medical advances such as systematic testing, improved treatments and, most of all, a vaccine. However, even if things go well, policymakers and families have to be realistic, as a full recovery is likely to be measured in presidential election cycles rather than weeks, months, or even years.

Loren Yager, Park City, formerly served as the chief economist of the Government Accountability Office, the investigative arm of Congress.