The Recovery Will Look Like a Nike Swoosh

UCLA Anderson senior economist David Shulman started his presentation at the UCLA Anderson Forecast June 2020 Economic Outlook with a nursery rhyme: “It will take time for all of the kings horses and all of the kings men to put the economy back together again.” The economy, according to Shulman, has had a great fall and many parts of it are broken.

“Our view is that this is not going to be a V-shaped recovery. It is going to take time to get back to where the economy was in the fourth quarter of 2019 in terms of GDP and unemployment,” said Shulman in the virtual event. “The economy has had a very big fall, and a lot of things in the economy have been broken. Even if we got a vaccine, the recovery will not happen right away.”

Instead, the economic recovery will look more like a Nike swoosh, with a deep fall followed by a slow and steady recovery. According to Shulman, this pattern will include a start-and-stop pandemic, a vaccine available in 2021, but that takes time to deliver to the population and an economy that shifts from a focus on efficiency to a focus on resilience. In addition, Shulman predicts another stimulus package in July to expand the support programs in the CARES Act. Stimulus programs have increased the deficient to $3 trillion for the year, and an additional stimulus program will likely add an additional $1 trillion to the deficit.

For its part, the Federal Reserve has done everything in its power to support the economy through the crisis. “The Fed has gone all out. It has expanded its balance sheet by $3 trillion in the space of 3 months. This is unprecedented,” said Shulman. “The increase $3 trillion is equal to the Fed balance sheet in all of 2012. So, the Fed is taking all kinds of credit risk and is going where no Fed has gone before. We suspect that the Fed balance sheet will total $10 trillion by the end of the year.”

Shulman expects the Fed rate will remain at zero for the length of his forecast period, through 2022. “The Fed may adopt a yield curve maintenance program, which is what they did to finance World War II. From 1939 to 1951, the Federal Reserve pegged the interest rate on long-term treasuries,” he added. He predicts that the 10-Year Treasury, however, will increase through the recovery period. “We have the economy growing at 4% to 5% in 2022, so we don’t think it will be possible to sustain a 1% 10-Year Treasury. That will go higher unless the Fed does a maintenance program,” he said.

Finally, housing it outperforming initial estimates. “We thought housing starts would drop down to 600,000, but it is going to end up around 900,000,” said Shulman. “Housing is doing much better than we thought, and most of the activity is in the suburbs.”