Lee McPheters, research professor of economics in the W. P. Carey School of Business at Arizona State University and director of the school’s JPMorgan Chase Economic Outlook Center, offered his analysis of the of the economy last week.
He said that while the current economic free fall is unprecedented, recovery could potentially be quick.
Q. Have you ever seen anything like this pandemic?
A. No. That’s despite the fact that the common flu has tended to have increasingly greater fatalities in recent years.
We have built that into our common understanding of, “This is life in the 21st century and there’s flu, but life and the economy go on.”
Here, the higher fatality rate and the panic response of consumers has really changed everything. So, in addition to the economic problems is the overlay of panic on a national scale and apparently on a global scale, in most countries.
Q: So how do economists account for something like this?
A: After the severe recession of 2008, economists adopted the term “black swan,” referring to events that are rare, unpredictable and have wide impact. The financial crisis was a black swan event.
One of the features of a black swan event is that typically, as you start working back through the history, all the analysis suggests we should have seen this coming.
In hindsight, we should have had much better and wider investment in public health.
Q: So, is it too soon to predict what will happen with the economy?
A: We don’t have very many indicators that have a high level of frequency. The stock market is a daily indicator and that’s why it has so much attention.
But the stock market is disconnected from the real economy, which is jobs and output and production.
One indicator that economists focus on is initial claims for unemployment insurance.
Arizona’s labor force is about 3.5 million people. So 1 percent is 35,000. So, if 35,000 file for unemployment, the unemployment rate goes up by 1 percent. That might continue for several weeks.
Arizona has been running at about 4.5 percent unemployment and I expect that to double.
Q: What about other segments of the Arizona economy?
A: The big picture is to look at the drivers of the Arizona economy and one of the drivers is population growth. A big portion of our population growth is made up of people moving here from other states.
Well, people aren’t moving right now. There has been pent-up demand for housing, but I think that with in-migration grinding to a complete halt, it will have an effect on construction.
What I think we’ll see possibly is smaller businesses failing, which means commercial space available in more of the strip malls and smaller square footage offices and retail spaces because it will be hard for them to start back up.
That’s why there’s a tremendous emphasis on trying to stop small businesses from failing because they employ a large percentage of people working in this country.
Q: The new federal aid plan that’s expected to be approved provides for a $1,200 payment to many Americans. Will that help?
A: This has been done before. It was done in 2001 and in 2008 and economists writing in economic journals, which are not widely read, show that in both cases, only about 20 percent of that stimulus money was spent on consumer goods and services.
About 50 percent was spent paying off bills. About 30 percent held onto the money because they thought things would get even worse than they were.
So, the effect of mailing people a thousand dollars may not be that a thousand dollars gets into the spending stream.
We can’t say if that will be the case now.
Q: And what about all those empty store shelves?
A: You’re getting into the world of psychology there. People feel they need to do something to try to control circumstances and they believe they can do this by buying toilet paper.
There is no reason to believe there is a shortage, from my understanding. The problem is in the stocking and, to some extent, the distribution. There’s no reason to think there will be physical damage to production.
Panic buying in and of itself is somewhat of a black swan. It was totally unexpected by grocery stores and retail outlets but I guess in hindsight, they should have thought that like in a hurricane, people will empty the shelves.
Q: What could recovery look like?
A: If we see that, during that second and third quarter, the economy loses jobs, once the turnaround comes, there will probably be a rapid rehiring of all the people laid off.
It’s what economists call a V-shaped recession, a sharp dropping down and a strong comeback.
For the 2008 recession, it took Arizona about seven to eight years to come back. Here, I would expect that we will see a comeback probably in the early part of 2021, based on history and what we saw in previous sharp downturns.
I looked at some numbers for the 1918 flu, and when the recovery got going, it was only a couple of years to get back to the prior level of employment.
But all bets are off. We just don’t know.
In the long run, we still won’t be able to incorporate this sort of thing. But the hope is, as we did with the financial crisis, after we get out of this, we’ll say, “What could we as a country do better to prepare for this sort of thing?”