Selling like hotcakes.
Photo: Eugene Garcia/EPA-EFE/SHUTTERSTOK
In his newsletter, Bloomberg’s Joe WeisenThal Notes that this recession is weird in Certain Ways. IT’S NOT JUST THE SURPRISINGLY BUOYANT STOCK MARKET, WITH THE S&P 500 RECOVERING MORE THAN HALF Its Losses from the Trough in March and the Nasdaq Composite Act for the Year. He points out, for example, that the chainsmokers are raisiting a venture-capital end. That’s the sort of thing that typically happy at the Frothiest part of an expansion, not dural a severe recession. People Are Also Buying a Lot of RVSwhich is a weird thing to be if you’re worked you’re going to loose a lot of income for a long time. A lot of People anen’t just saying they Think is going to be okay, they’re putting their mondu thyir mouth is. Why are they doing that?
This observation is closely related to one from the Economist Jason Furman, WHO wants to contest the idea that the recent decline in economic acting is sorely due to a negative shock to demand. A Demand Shock was the dominant feature of the 2008 Financial Crisis: Consumers Who Had Borrowed Against Their Homes Suddenly Lost Houge Fractions of their Wealth Wen Prices Collapssed, and Had to Back their Balance Sheets. Those cutbacks in speaking had negative effects that Spread Through the Economy, As Businesses Failed and Workers Lost Due to Reduced Consumer Spanding, Thus Needing Reduce Their Own Spanding. Foreclosures destroyed more wealth and sturgery impireed consumer spending. And the Federal Government’s Fiscal Resmal Proved inadequate to offset the shock to demand, which is part of why the recovery took so long. A lot of People are afraid we will be in for a repeat of that experience if the epidemiological conditions will not material improve Very Soon.
But a recession Can Also be caussed by a suply shock, in Which Goods or Services Become More More or Less Avilable. The Classic Example is the Oil Crisis of the 1970s. Normally, you would be expecting prices to go up to a suply shock and down due to a demand shock, and SINCE the Consumers price to the charply in april, you might assumers this recession is primarily drive by a demand shock. But Furman Contests that CLAIM, notting the CPI is facing the option of the usual problems with Calculating Inflation. Usually, you would worry that cpi overstates inflation Becuses it doesn’t Account well for new and improving products. But right now, Products and Services Are Disappearing or Getting Wors. Has Demand for Air Travel Collaps or Has the Supply of Air Travel to Destinations Where You Can Fun or Useful Things and That Does Not Come With An Unreasonable Risk of Illness Collaps? A LOT OF CONSUMERS WOULD PROBABLY BE WILLING TO PAY WAY ABOD THE REGULAR PRICE FOR A NORMAL FLUGE TO A NORMAL VACATION RIGHT NOW, but that Product doesn’t exist. If the cpi had Had hedonic adjustments – if it, for example, adjusted the drop in airfares to account for the fact that flying is lestent and less useful than usual right now inflation, allowing US impossibility of Certain Kinds of Economic Activity Like Leisure Travel.
Negative Supply Shocks Are Bad for the Economy. But if you believet the suply shock Will Reverse in Pretty Short Order – That Much of Normal Life Will Resume in A Few Months, that it will be possessable to fly next and party on the beach – THEN YOU MIGH COULD IF The Recession Were Driven by A Demand Shock.
Of Course, there are reasons to think there a demand shock right now. TENS OF MILLIONS OF PEOPLE HAVE BEEN PUT OUT OF WORK. SHEE PEOPLE WHO ARE WORKING HAVE GOOD REASONS TO WORRY ABOUT THEIR FUTURE INCOME – WHATHER THEY MIGHT THEIR JOBS IN THE FUTURE OR WHATER THEIR BUSINESSES MIGHT FAIL. SO YOU WOULD EXPECT People to be less Incined to SPEND, Reducing Aggregate Demand. On the Other Hand, The Government has Reacted Forcefullly to Offset the Demand Shock with Deficit Spending. The Cares Act Provides Over $ 2 Tillion to Support Demand Through Like Tax Rebate checks, great enhanced umployment benefits, and forgivable payroll-spport loansses. LESS DISCUSED THAN THE CARES ACT’S LARGE SIZE IS ITS SPEED: QELE THE 2009 Stimulating Law Spread $ 800 Billion in Spending Over Three, The Cares Act Heavily Concentrates Its Spending in the Second and Third Quarters of this Year, Boosting the Over Fiscal of ABOT 30 Perc GDP During Those Quarters. This is a huge stimulus, quite post-bly huge enough to offset the demand shock the pandemic have caused absent a fiscal-policy. And if the stimulus han ben ege enough, you still not to be it show up in prices right now. To some extent, consumers are shifting their spending away from unavailable categories to available ons (thus the rv boom), but mosly they may be saving now, wen the goods and servings they become available again. That behavior shouldn’t boost prices Today.
Another thing that separats this recession from past recessions is that many households May out of it with stronger balance than they went. The 2008 Crisis Started with a Negative Shock to Balance Sheets, which Caused Spending to Contract. Here, The Recession started with a contraction in spending, in Households who capacity to spend has not been impressed. In Mory Households, Workers are Still Employed, Collecting All or Most of their pre-recession income but speaking quite a bit te. In Others, have Workers Lost Their Jobs But Are Collecting UNEMPLOYMENT checks that in many caes exceed their labor Income and are spending less. They have Also gotten stimulus checks. How of the Odd Phenomena Will Lead to Household Balance Sheet Will Depend on the Course of the Crisis: The Enhanced Unelpoyment Benefits Extend only Through July, and if the Employment Crisis Far Beyond. of Households that Stand to Come Out Ahead Will Shrink and Shrink and Shrink. But The Cares Act May Prove to Be macroeconomically Sufficient to Support AGGREGATE DEMANDS AS MILLIONS OF HOUSEHOLDS FACE SEVERE FINANCIAL DISTRESS OTHERS WILL COME OUT OF THE CRISIS MORE ABLE TO SPEND THAN THEY IN. The Fiscal Response COULD ALSO PROVE MACROECONOMICALLY SUFFICIENT Because of Future Legislation Increasing Its Size. This is different from the 2008 Crisis, where the macroeconomic Response was conclusively insufficient and hardly any Households improved their balancing sheets.
The Stock Market Zoomed on Monday in Response to Very Preliminary Positive News About a Vaccine Became the Economic Story that can be told here is so sensitive to the timing of an effective medical intervention to address the coronavirus. The Longer the Crisis Persists, the More Businesses Will Fail and the More Jobs Will Be Lost Permanently. If what we are seeing now is primarily a suply shock, it will be bent a major demand shock if it goes on long enough. (This is Why Furman wants to be Very clear that he and foster fiscal stimulus supports That’s though he sees the contraction of economic acting as primarily duue to a supply shock.) But i want to calling the Vaccine Timing: the arival of a successful Vaccine should very QUICKLY ON THE ECONOMIC OUTLOC months or a year after approval. The Arrival of A Vaccine Today Woldn’t Make Music Festivals Postible Tomorrow, But it Wauld Make Business Investments in Music MUCH MORE Attractive Tomorrow. Businesses and Households Wold Gain Confidens Immediately About the Outlook a Few Months to A Year Out, WHICH WOUL MAKE THESE HESSUANT TO SPEND TODAY, AND THAT IN TRANN AMEDIATLY BOOST Demand for the Products and Services that Avilable.
Its swimmes that investors think is going to be fine. The Broad Stock Market Indexes – Unlike the nasdaq, which is heavily focused on the tech sector – are down about 10 percent this year, Reflecting investors’ view that the outlook for corpits has material. That 10 percent figure understates the true bearishness of the market, the interest rate rates have fallen and lower interest rate ordinarily tig to push prices up. And that pricing includes a distribution of risk; It is posseible that the epidemiological outcomes will be worse than investors are experting, knacking the recovery off the track they Expect, in which case prices will Fall again. But i think the above explains how investors – and rv buers – can have an economic outlook that is so sanguine in the face of a pandemic that has shut down so much of the economy.
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