Today’s Pain Is Excruciating, But You Can Expect the The COVID-19 Recovery To Be Just As Brutal

The U.S. economy is not mortally wounded, but it will likely need a decade or more to return to good health… and that assumes no new economic disasters.

That’s because the coronavirus’ attack is so severe that it is set to cause trillions of dollars of lasting economic damage.

The virus’ wrath is already being felt by tens of millions of Americans.

Between March 15 and April 4, about 17 million people filed initial claims for unemployment insurance benefits. That seems like a staggering number, but it’s getting worse.

As Barron’s reported, based on the historical relationship between the number of Americans receiving unemployment benefits and the level of the joblessness, the unemployment rate was probably around 13% by the end of March. But, by mid-April it was likely closing in on 20%. And, that would be comparable to the Great Depression.

Now here’s how to quantify the damage.

When economists look at historic trends they have repeatedly found that laid-off workers eventually lose about two and a half years of income over the rest of their professional lives.

That happens via a combination of lower wages and lower employment.

Again, going back to Barron’s, it posits that “if the number of unemployed Americans ends up rising by 30 million people from February levels, for example – which would be consistent with a peak unemployment rate of about 22% – then that would end up costing the economy the equivalent of 75 million work-years over the next two decades.”

That would be equivalent to as much as $4 trillion in today’s dollars, or a little more than 18% of U.S. gross domestic product.

Of course, unlike tax cuts, this is where the real trickle-down economy will emerge.

Because it can be assumed that people will spend more money  maintaining stockpiles of toilet paper and canned food, hand sanitizer, and face masks. Just as it can also be assumed that people will spend less on goods, such as appliances, and services, such a dining out.

Additionally, what’s likely to happen, at least in the near term, is that the virus will serve as a wake-up call that will move many people to consume less in an attempt to build up a buffer of emergency savings.

The last financial crisis pushed the average U.S. saving rate up from about 4% in 2000-06 to about 7.5% since 2012.

Less spending by American consumers will push businesses to produce less, which means lower income and employment across the economy…

And, without strong governmental intervention the long-term economic damage will get  even worse.