summary
  • Recovery Will Be Graded By Curves
  • U.S. Housing Finance Faces Renewed Challenges
  • Brazil on the Brink

I loved high school geometry. Shapes had intrigued me since I was very little, and the notion that you could express their properties mathematically appealed to my quantitative nature. I also enjoyed the logic in the Euclidean system of proofs, which build from simple truths to more complicated ones.

In geometry, the shortest distance between two points is a straight line. In economics, there are no straight lines: everything is a curve. The curves are difficult to draw, and they shift frequently. Thousands of curves describe an economy, and these have to be added and reconciled to find equilibrium. Truth in economics is not easily proven.

As we look ahead to a post-pandemic equilibrium, four curves will describe the arc of economic recovery. Movement along these frontiers will determine how fast we arrive at a new normal.

The first curve describes the progress of the pandemic itself. At the outset of an outbreak, cases grow exponentially; preventative measures slow this growth rate and “bend” the contagion curve. This calculus has been particularly important with COVID-19, given constraints within health care systems around the world.

Weekly Economic Commentary - 05/15/20 - Chart 1

Once the medical statistics improve, the second curve will be traced by public health policy. How soon will officials allow more freedom of movement, and what lingering restrictions will they require to ensure adequate safety? The last thing that anyone wants is a relapse, which would require the reinstatement and/or reinforcement of closure orders. Such a retreat (which we have already seen in several Asian countries) would be damaging both commercially and psychologically.

Societies do not have to wait until new cases fall to zero before reopening. But the risk of infection has to be brought under firm control. That risk informs decisions by economic actors that will determine the rate of commercial recovery.

A number of countries (and regions within countries) have begun the process of reopening. Each provides data points that can be used by others to calibrate the recovery process. We’re all anxious to restore normalcy in our economy and in our own lives. But citizens will have to accept that ultimate freedom will not be possible without near-term limitations.

“A new wave of infections would be devastating, economically and psychologically.”

The third curve describes return-to-work patterns in the private sector that will emerge once the public sector has provided some clearance. Each company’s decision to resume operations is a complicated one that depends on answers to a number of questions, including:

  • Will there be sufficient demand, or traffic, to justify reopening? And if there is, will it be profitable?
  • Are supply chains sufficiently repaired so that material can get in and out of plants?
  • Will physical changes to the workplace be needed to comply with distancing guidelines?
  • What other necessary steps will make customers comfortable enough to come back?
  • Are employees ready to return? Do health worries or family constraints make that prospect difficult?
  • What legal and reputational risks might arise if the business is seen as a nexus of new contagion?

While standards will certainly emerge for all to follow, each business must make its own decision. As one chief executive noted recently, “if you think shutting the economy down was hard, reopening it will be even harder.”

Weekly Economic Commentary - 05/15/20 - Chart

The final curve describes consumer behavior. Individuals will have to decide whether they are comfortable resuming their routines. We’ve all been coached to be cautious, and so it may be a while before we dine out, take mass transit, attend a performance, stay in a hotel or fly somewhere. Damage done to household finances during the pandemic may limit what we can afford.

When you lay the four curves end to end, you have a trajectory that is more gradual than sudden. Complicating matters further is that curves can look different in different places, which presents challenging logistics for firms that rely on international or interstate commerce. Absent a vaccine (which will not likely be available anytime soon), residual risks on several levels will continue to limit economic activity.

This outlook has important implications for policy. Many programs implemented immediately after the start of the pandemic were crafted as short-term bridges; with the spans now needing to be lengthened and reinforced, legislatures around the world will have to consider extending and enhancing support programs. This will not be an inexpensive proposition.

“A slower recovery will require additional policy support.”