Nov 25th 2020

A Tale of Two Economies 

 

NEW HAVEN – Suddenly, there is a credible case for a vaccine-led economic recovery. Modern science has delivered what must certainly be one of the greatest miracles of my long lifetime. Just as COVID-19 dragged the world economy into the sharpest and deepest recession on record, an equally powerful symmetry on the upside now seems possible.

If only it were that easy. With COVID-19 still raging – and rates of infection, hospitalization, and death now spiraling out of control (again) – the near-term risks to economic activity have tipped decidedly to the downside in the United States and Europe. The combination of pandemic fatigue and the politicization of public health practices has come into play at precisely the moment when the long anticipated second wave of COVID-19 is at hand.

Unfortunately, this fits the script of the dreaded double-dip recession that I warned of recently. The bottom-line bears repeating: Apparent economic recoveries in the US have given way to relapses in eight of the 11 business cycles since World War II. The relapses reflect two conditions: lingering vulnerability from the recession, itself, and the likelihood of aftershocks. Unfortunately, both conditions have now been satisfied.

Vulnerability is hardly debatable. Notwithstanding the record 33% annualized snapback in real GDP growth in the third quarter of this year, the US economy was still 3.5% below its previous peak in the fourth quarter of 2019. With the exception of the 4% peak-to-trough decline during the 2008-09 global financial crisis, the current 3.5% gap is as large as that recorded in the depths of every other post-WWII US recession.

Consequently, it is ludicrous to speak of a US economy that is already in recovery. The second quarter snapback was nothing more than the proverbial dead cat bounce – a mechanistic post-lockdown rebound after the steepest decline on record. That is very different than the organic, cumulative recovery of an economy truly on the mend. The US remains in a deep hole.  

Just ask American consumers, who, at 68% of GDP, have long accounted for the dominant share of US aggregate demand. After plunging by an unprecedented 18% from January to April, total consumer spending has since recouped about 85% of that loss (in real terms). But the devil is in the details.

The rebound has been concentrated in goods consumption – big-ticket durables like cars, furniture, and appliances, plus soft-good nondurables like food, clothing, fuel, and pharmaceuticals that have more than made up for what was lost during the lockdown-induced plunge. In September, goods consumption in real terms was 7.6% above its pre-pandemic January 2020 high. The bounceback benefited significantly from a surge in online buying by stay-at-home consumers, with e-commerce going from 11.3% of total retail sales in the fourth quarter of 2019 to 16.1% in the second quarter of 2020.

But services consumption, which makes up over 61% of total US consumer spending, is a different matter altogether. Services accounted for fully 72% of the collapse in total consumer spending from January to April. While services have since partly bounced back, as of September, they had recouped just 64% of the lockdown-induced losses earlier this year.

With COVID-19 still raging, vulnerable American consumers remain understandably reluctant to re-engage in the personal interaction required of face-to-face services activities such as restaurant dining, in-person retail shopping, travel, hotel stays, and leisure and recreation activities. These services collectively account for almost 20% of total household services outlays.

The understandable fear of personal interactions in the midst of a pandemic brings us to the second ingredient of the double-dip: aftershocks. With the current exponential rise in COVID-19 cases, lockdowns are back – not as severe as in March and April but still aimed at a partial curtailment of person-to-person activity heading into the all-important holiday season. Precisely at the moment when the economic calendar typically expects an enormous surge of activity, the odds of a major seasonally adjusted disappointment are rising.

This poses serious risks to the still-battered US labor market. Yes, the overall jobless rate has come down sharply from 14.7% in April to 6.9% in October, but it remains essentially double the pre-COVID low (3.5%). With weekly claims for unemployment insurance only just starting to creep up in early November as new curfews and other lockdown-like measures are put into place, and a dysfunctional US Congress failing to agree on another relief package, the risk of renewed weakness in overall employment is growing.

The news on vaccines is truly extraordinary. While the logistics of production and distribution are daunting, to say the least, there is good reason to be hopeful that the end of the COVID-19 pandemic may now be in sight. But the impact on the economy will not be instantaneous, with vaccination unlikely to bring about so-called herd immunity until mid-2021 at the earliest.

So, what happens between now and then? For a still vulnerable US economy now in the grips of predictable aftershocks, the case for a relapse, or a double-dip, before mid-2021 is all the more compelling.

To paraphrase Charles Dickens, this is the best of times and the worst of times. As financial markets celebrate the coming vaccine-led boom, the confluence of epidemiological and political aftershocks has pushed us back into a quagmire of heightened economic vulnerability. In Dickensian terms, to reach a “spring of hope,” we first must endure a “winter of despair.”


Stephen S. Roach is a faculty member at Yale University and the author of Unbalanced: The Codependency of America and China. 

Copyright: Project Syndicate, 2020.
www.project-syndicate.org 

 

This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.
 

 

Browse articles by author

More Current Affairs

The Crisis of American Leadership 
by Chris Patten
Aug 20th 2023
EXTRACT: "Since the end of World War II, the United Nations has been the cornerstone of the international rules-based order. While numerous other international agreements address issues such as chemical weapons, biological warfare, and regional stability, the UN has been entrusted with the overarching role of maintaining global peace and stability. What made it effective, at least for a while, was the support of the world’s liberal democracies and, crucially, the unwavering commitment of both Democratic and Republican administrations in the United States." ---- "That all changed with the Bush administration’s decision to invade Iraq, a sovereign country, in the face of fierce international opposition and without the UN Security Council’s approval. In doing so, the US severely damaged its own credibility and undermined the global rules-based system,... "Many of America’s current domestic political divisions grew out of the Iraq War. Whereas presidents like Franklin Roosevelt, Harry Truman, and Dwight Eisenhower demonstrated that effective leaders can make the world a safer and better place, even in the face of great adversity, Bush’s presidency showed that the opposite is equally true."
Understanding why burning the Qur’an isn’t illegal in Sweden means looking at the country’s long-held commitment to freedom of expression
by Mårten Schultz
Aug 20th 2023
EXTRACTS: "a period of parliamentary history between 1719 and 1772 called 'the age of liberty'. This marked the end of autocratic monarchy and the beginning of an era of parliamentary power " ---- "This was a period of large-scale legislative projects and freedom of speech became central to the idea of freedom from tyranny. The most important piece of legislation was the Freedom of the Press Act of 1766, a law that aimed to protect freedom of information as a means of promoting democracy. It has been amended since but its tenets remain the same. " ---- "Describing Muslims, to allude to the situation of the Qur’an burnings, as criminals would be criminal. But to burn the Qur’an is in itself not, according to the current formulation of the law, an attack on Muslims. It is rather seen as an attack on the religion of Islam. Such attacks are not illegal because the aim of the attack is not directed against a protected group of people but against a belief – an idea. That is not illegal."
The Real Cost of De-Dollarization 
by Benn Steil
Aug 18th 2023
EXTRACTS: "But if the dollar should lose its privileged place, what could replace it? At present, the euro, which accounts for 20% of global central-bank reserves, is the only currency that could realistically serve as a substitute. Its appeal, however, is undermined by the fragmentation of Europe’s national sovereign-debt markets, as well as lingering doubts about the European Union’s long-term viability in the wake of the UK’s departure.'" ---- "The Chinese renminbi, which accounts for less than 3% of global reserves, is not a serious threat to dollar hegemony. "
AI and the Productivity Imperative
by Michael Spence
Aug 12th 2023
EXTRACT: "Around the world, supply is struggling to keep up with demand. Inflation remains stubbornly high, despite aggressive interest-rate hikes. The global workforce is aging rapidly. Labor shortages are ubiquitous and persistent. These are just some of the forces behind the productivity challenge facing the global economy. And it has become increasingly clear that we must harness artificial intelligence to address that challenge."
For the Love of Trump 
by Ian Buruma
Aug 2nd 2023
EXTRACTS: "What explains the tenacity of Trump’s support? The force of his arguments is unlikely to be the key, because he makes few coherent arguments." ---- "The Trumpist bubble is deeply mired in pessimism. Some 89% of the GOP think the US is in steep decline, ...." ---- "There are several reasons for popular anxiety. Many American industrial workers feel left behind in a global economy where cheaper labor is sought overseas." --- "Trump has been a master at manipulating these conspiratorial anxieties," ---- "What is perhaps most important is that Trump, despite his success in stacking the Supreme Court with religious radicals, has not captured most of the elites, as Hitler did. "
Ukraine war: Crimean bridge attack is another blow to Putin’s strongman image
by Stefan Wolff
Jul 19th 2023
EXTRACTS: "Little wonder then that Crimea has been heavily militarised since Russia’s illegal annexation of the peninsula in March 2014 – or that Russian troops there have increasingly been threatened by different anti-Putin partisan groups. These include both Russian volunteers and indigenous Crimean Tatars who have become more active since the start of the Ukrainian counteroffensive."
Russia's Fractured State 
by Nina L. Khrushcheva
Jul 19th 2023
EXTRACT: "Prigozhin’s fighters would not have been able to travel almost a thousand kilometers (621 miles) within Russian territory in less than a day without help from members of Putin’s inner circle or the military. Rumors are swirling that the billionaire brothers Yuri and Mikhail Kovalchuk may have played a role. The Kovalchuks, close associates of Putin, reportedly share Prigozhin’s belief that Russia has not been forceful enough in the war or in its broader confrontation with the West. Another possible collaborator is General Sergei Surovikin. Like Prigozhin, Surovikin has reportedly advocated a far more brutal war effort than Defense Minister Sergei Shoigu seems willing to conduct. Since the mutiny, he has not been seen in public, and is said to be “resting.” "
The Kremlin's Mobster Code
by Dina Khapaeva
Jul 19th 2023
EXTRACTS:" While Western experts continue to view Russia as a modern state, they overlook the fact that Putin’s cronies, who represent the mingling of the security services – particularly the FSB, the successor to the Soviet-era KGB – and organized crime, control most state functions as their private domains." .... "The existence of multiple private armies will make these power games more destabilizing. As a commentator on RIA Novosti, Russia’s official news agency, put it after documenting the private armies of several oil companies: “[W]e are on the verge of a major increase in corporate and other paramilitary structures, as well as major changes in the very approach to the use of military force.” Against this backdrop, the Russian army has become another gang vying for power and property. But as the Kremlin’s grip on power slips, Russia’s generals will likely organize a putsch against Putin and his KGB/FSB cronies – the army’s historical rival."
The Zaporizhzhia nuclear power plant is a ‘dirty bomb’ waiting to happen – a nuclear expert explains
by Tilman Ruff
Jul 16th 2023
EXTRACTS: "The fuel inside nuclear reactors needs continuous, active cooling for many months after a reactor shutdown" ..... "The world saw in dramatic fashion in Fukushima, Japan, in 2011 what can happen when continuous, active cooling of nuclear reactors is disrupted. More than 70% of the total radioactivity at the Fukushima power plant was in the spent fuel ponds" .... "In his classic 1981 book Nuclear Radiation in Warfare, Nobel Peace Prize-winning physicist Joseph Rotblat documented how 'in a pressurised water reactor, the meltdown of the core could occur within less than one minute after the loss of coolant'. The radioactivity released from damaged spent fuel ponds could be even greater than from a meltdown at the reactor itself, he wrote. His study makes clear that a military attack on a reactor or spent fuel pond could release more radioactivity – and longer-lasting radioactivity – than even a large (megaton range) nuclear weapon."
Heightened Risk from a Weakened Russia 
by Joschka Fischer
Jul 6th 2023
EXTRACT: "The closer we get to the endgame, the greater the risk that the Kremlin will resort to some irrational act like ordering the use of a nuclear weapon. Prigozhin’s revolt offers a preview of the chaos that awaits. Almost anything is conceivable now, from the disintegration of the Russian Federation to the rise of another ultra-nationalist regime with neo-czarist dreams of imperial restoration. Like Putin’s Russia, this one would remain locked in the past, far removed from any prospect of social, political, or economic modernization. It would pose a permanent threat to Europe’s eastern flank, and to global stability more broadly. We will have to arm ourselves against it, and our grandchildren and great-grandchildren will most likely have to do the same."
Twenty-Four Hours That Shook the Kremlin 
by Nina L. Khrushcheva
Jun 27th 2023
EXTRACT: "So, who might seize the throne? Two obvious possibilities are Nikolai Patrushev, the secretary of Russia’s Security Council, and his son Dmitry, the minister of agriculture. Another is Prime Minister Mikhail Mishustin, who deliberately appeared on television hard at work during the crisis, while Putin reportedly flew to safety in Valdai, far from the Kremlin. Then there is Dyumin, as well as Moscow’s Mayor Sergei Sobyanin, who controls his own powerful armed force."
Has Putin Lost Russia? 
by Wacław Radziwinowicz
Jun 25th 2023
EXTRACT: "......because Prigozhin and his men enjoy the supportof many Russians. For them, Prigozhin is a hero, not a traitor, because he is one of the only public figures who dares to speak the truth about the Kremlin’s incompetent management of the war. And they also see in him a fatherly commander standing up for the soldiers whose lives are being thrown away needlessly by Putin’s clumsy, corrupt generals. People who think this way may well make up a very large part of Russian society. Whether Prigozhin ultimately is imprisoned, executed, or victorious, he will remain an icon for them."
Microbiome: certain gut microbes may warn of Alzheimer’s disease long before the first symptoms begin
by Catherine Purse
Jun 25th 2023
EXTRACT: "While it might be tempting to conclude that the gut microbes identified as being associated with signs of preclinical Alzheimer’s are also contributing to developing the disease, the study does not provide any evidence of a cause-and-effect relationship. However, if a connection can be established, it opens up an exciting possibility that future treatments for Alzheimer’s might target the microbes in our gut."
America's Mythical Fiscal Conservatives 
by Jeffrey Frankel
Jun 18th 2023
EXTRACT: "When it comes to sustainability, however, US fiscal policy receives a low score. Amid the short-term fluctuations, it is often easy to lose sight of the long-term trajectory. Public debt, as a share of GDP, peaked at the end of World War II and then gradually declined until the Reagan tax cuts of the 1980s, which led to record deficits. Since then, the debt-to-GDP ratio has steadily risen, almost reaching its 1946 record in 2020. Only during the period 1996-2000, under President Bill Clinton, did this trend temporarily reverse."
The US role in the global financial system is changing – here’s how it could affect the world’s economy
by Steve Schifferes
Jun 14th 2023
EXTRACT: "It is by no means clear that the latest banking crisis has run its course. There are concerns about the so-called shadow banking system, largely unregulated financial institutions that now make up half of all global financial assets. For example, in the US many people invest in money market funds, which pay higher interest than banks, but provide no deposit insurance."
Can the ECB Escape Its Own Trap? 
by Otmar Issing
Jun 9th 2023
EXTRACT: "Given the scale of the ECB’s bond holdings, however, its approach to quantitative tightening (QT) seems downright homeopathic. At the current rate, bringing the asset-purchase program to zero will take roughly 15 years (and this does not even account for the fact that the ECB continues to reinvest all maturing assets purchased under the Pandemic Emergency Purchase Program). "
The Poverty of AI Pessimism 
by Jim O'Neill
Jun 9th 2023
EXTRACT: "Hardly a week goes by without various pioneers in artificial intelligence issuing dire warnings about the technology that they introduced to the world." ---- " I have my doubts. Since the start of my professional life in the 1980s (and of course for much longer), technological progress has repeatedly been held up as a major threat to jobs in key industries such as automobile manufacturing. Yet...."
RERUN FROM OCT 1918: An AI Wake-Up Call From Ancient Greece
by Adrienne Mayor
May 31st 2023
EXTRACT: "In discussions about the implications of artificial intelligence (AI), someone almost always evokes the ancient Greek myth of Pandora’s box. In the modern fairytale version of the story, Pandora is depicted as a tragically curious young woman who opens a sealed urn and inadvertently releases eternal misery on humankind. Like the genie that has escaped the bottle, the horse that has fled the barn, and the train that has left the station, the myth has become a cliché. And yet the actual story of Pandora is far more apropos to debates about AI and machine learning than many realize. What it shows is that it is better to listen to “Prometheans” who are concerned about humanity’s future than “Epimetheans” who are easily dazzled by the prospect of short-term gains. One of the oldest Greek myths, the story of Pandora was first recorded more than 2,500 years ago, in the time of Homer. In the original telling, Pandora was not some innocent girl who succumbed to the temptation to open a forbidden jar. Rather, as the poet Hesiod tells us, Pandora was “made, not born.” Having been commissioned by all-powerful Zeus and designed to his cruel specifications by Hephaestus, the god of invention, Pandora was a lifelike android created to look like a bewitching maiden. Her purpose was to entrap mortals as a manifestation of kalos kakon: “evil hidden in beauty.”
AI, Democracy, and the Global Order
by Manuel Muñiz and Samir Saran
May 31st 2023
EXTRACT: "Specifically, many believe that the arrival of artificial general intelligence (AGI) – an AI that can teach itself to perform any cognitive task that humans can do – will pose an existential threat to humanity. A carelessly designed AGI (or one governed by unknown “black box” processes) could carry out its tasks in ways that compromise fundamental elements of our humanity. After that, what it means to be human could come to be mediated by AGI."
he Myth of Western Decline 
by Chris Patten
May 29th 2023
EXTRACT: "In his 2018 book Destined For War, political scientist Graham Allison observes that the US and China are headed toward what he called the “Thucydides’ Trap,” a reference to the ancient Greek historian’s account of Sparta’s efforts to suppress the rise of Athens, which ultimately culminated in the Peloponnesian War. A better analogy, however, is the message sent by the Athenians to the inhabitants of the besieged island of Melos before executing the men and enslaving the women and children: “The strong do what they can and the weak suffer what they must." ---- Allowing China and other authoritarian countries to shape the rules would result in a world order based solely on this “realist” principle. It is a nightmare scenario that the G7 countries and other liberal democracies must strive to prevent. ---- China’s assertions about the decline of the West reveal an underlying anxiety. After all, if liberal democracy is failing, why do Chinese officials consistently express their fear of it? The fact that leaders of the Communist Party of China have instructed rank-and-file members to engage in an “intense struggle” against liberal-democratic values indicates that they view open societies as an existential threat."