Shutdowns Threaten Recession by Curbing Job Growth, Recovery

Recently released jobs numbers indicate the sharp V-shaped recovery which started in May has flattened significantly. While annualized growth in GDP hit an astounding 33% in the third quarter of this year, the recent wave of government forced shutdowns has resulted in slow job growth, which indicates a slowing economy. Is another recession on the horizon?

After the deep, but very short–lived government induced recession in March and April, the economy rebounded quickly, adding 11 million jobs back to the economy in just four months from May to August. But then job growth began to slow, indicated economic growth was slowing.

The consensus view is that fourth-quarter GDP will show an annualized growth rate of 2% to 4%, although many economists believe the figure could be much lower, perhaps even negative. These economists also say that the first quarter of 2021 could also show negative growth, meaning the economy has slid into another recession.

That position is consistent with the view that the recovery is not V-shaped but rather W shaped, meaning we did grow out of the first recession, but then slid into a second recession and then a second recovery.

This view is supported by the decreasing number of new jobs added monthly and the increase in the weekly numbers for initial jobless claims.

In May 2.6 million jobs were added. Then 4.8 million jobs were added in June. Now see only 245,000 jobs added in November. That indicates the economy is growing much more slowly. Although October saw 638,000 new jobs, the weak November number and the possibly negative December number indicates a slowing economy.

The current weakness in the economy is solely the result of government-imposed shutdowns in the service sector. The Trump Administration’s position is to not set a national policy but allow the governors of each state to set their own policy.

That view says that there are different COVID-19 virus problems in New York than there are in Nebraska, so it makes sense for the governors to set the policy. Some governors including those in New York, New Jersey, Pennsylvania, Illinois, California, Michigan, Washington and Oregon have imposed very tough shutdown policies.

These states account for more than a third of national GDP, so total shutdowns of much of the service sector will drag down the entire economy. Admittedly, though, the governors have a difficult choice to make.

The choice options all result in losses. If the state remains open, the number of COVID cases will increase and so will the number of fatalities., but the economy will continue to grow rapidly. If the state decides to close, the number of COVID cases will be smaller, but tens of thousands of mostly small businesses will be forced to close permanently. That leads to more anxiety, more depression, more alcohol and drug abuse and other health issues for millions of Americans.

Since the decision has options that are all “no-win” the next best thing to do is to choose an option that minimizes losses. Many states, like Florida, have decided the least losses will result from keeping the economy open.

At this point, there are only two choices to avoid the slowing economy. Either the economy opens and we deal with the increased number of COVID cases, or the government passes a second stimulus package which keeps the economy growing in spite of any shutdowns.

A couple of months ago, it seemed a second stimulus package would not happen since the House of Representatives and the Senate were so far apart regarding the overall size of the stimulus. However, since the number of COVID cases has skyrocketed, the economic hardship has worsened and the threat of recession is now much greater. It now appears that the differences between the chambers can be resolved.

That means there is some hope that a second stimulus will be passed within the next week. Depending on how quickly the funds can get into the hands of consumers and business, a weak first quarter of 2021 can be avoided.

It is critical that next year’s economic policy focus on growth. The incoming administration, based on past performance and campaign promises made, tends to put curing perceived social injustices at a higher priority than economic growth. At this time that decision will be very counterproductive.