A V-Shaped Economic Recovery? 4 Reasons That Won’t Happen
There’s a certain mindset today that thinks that because the current economic downturn is the result of states shutting down their economies to prevent the spread of COVID-19, once those shutdowns are done away with, everything will return to normal. Unfortunately, that won’t be the case. Aside from structural issues in the economy that would have resulted in a severe recession even absent state intervention to the downside, there are four additional reasons that the vaunted V-shaped recovery won’t happen.
1. Sticky Unemployment
Employment in many industries is a lot like prices – it’s sticky. We all know how gas prices shoot up at the merest mention of instability in the Middle East. But then they take forever to fall again once those conditions behind the price increase fade away. Employment is like that too. The number of unemployed Americans increased very quickly once the shutdowns were ordered, but it’s going to take months for those Americans to get hired again, assuming they can even find jobs.
One reason for that is that hiring an employee is an expensive proposition. Each employee means extra payroll taxes, workman’s compensation taxes, unemployment insurance taxes, etc. For businesses that have been shut down for months, that may now be facing rioting and looting, and that are unsure what consumer demand will be like for the rest of the year, they’re going to want to hire back the bare minimum number of employers in order to minimize their costs going forward. Expect employment figures to trend upward only slightly, and for job creation to be even slower than it was post-2008.
2. Wave of Small Business Closures
Small businesses have always been the engine of the US economy, providing the most opportunities for economic growth, and employing the greatest number of people. But the estimates for how badly the economic shutdowns have harmed small businesses are mind-boggling.
Many analysts foresee between 25% and 35% of restaurants not opening back up once restrictions are fully lifted. And at least 100,000 small businesses may have shut their doors forever. That means that millions of Americans won’t have jobs to go back to. Those unemployed will weigh on the economy.
The fact that so many small businesses are going out of business will also have significant impacts on the US economy. Those businesses are tenants, customers, and producers, and their lack of both consumption and production will reverberate throughout the economy and put a damper on economic growth in the future.
3. Collapse of the Corporate Debt Bubble
Larger corporations aren’t immune from the effects of the economic shutdowns either. Just because they have larger war chests and a greater ability to draw on debt markets doesn’t mean that they’re not going to be impacted.
The aftermath of the 2008 financial crisis saw a massive explosion in corporate debt, with corporate debt levels rising over 50%, to over $10 trillion. Much of that debt was of very low quality, and as a result debt markets have been flooded with trillions of dollars of near-junk quality corporate debt. We’ve been warning about the threat of corporate debt downgrades for a while, and now the chickens are coming home to roost.
There have already been numerous “fallen angels” this year, such as Kraft-Heinz, Ford, and Macy’s. Between debt downgrades and bankruptcy filings, the corporate landscape in this country could look very different in the coming years. With major airlines, car companies, and industrial giants at risk of collapse, that too will weigh heavily on the economy and slow down any recovery.
4. Cratering Consumer Demand
The US economy is driven by consumer consumption, with about 70% of economic output the result of consumer demand. With over 40 million Americans out of work and significantly reduced production from those companies that are still in business, consumer demand is set to slide.
The government attempted to boost demand artificially through its stimulus spending, but those one-time payments provided only a temporary boost to consumer spending. With so many Americans wondering where their next paycheck is coming from, when it is going to come, and already living paycheck to paycheck before this mess occurred, the outlook for the future isn’t very rosy.
A Look Back at History
The best historical parallel we have to what is happening today is the Great Depression. During the Great Depression, gross domestic product (GDP) fell by 30%. Unemployment was over 20%. Today, the best estimates for second quarter GDP contraction are over 50%. Unemployment is officially around 15%, but could end up rocketing higher if states don’t open quickly enough.
We’re in the middle of an economic crisis that hasn’t been seen since our grandparents were alive, and we had better hope that the recovery from this isn’t the same as the recovery from the Depression. The Great Depression saw years of economic malaise, and even a “depression within a depression” in 1937-38. With the outbreak of war, the economy retooled to support the military, and it wasn’t until 1954 that stock markets returned to their 1929 highs.
Can investors today afford to spend years or even decades waiting for their investments to recover? We haven’t even reached the critical stage of the economic meltdown, when stock markets finally tune in to reality and plummet precipitously. When they do, many investors are going to realize that their trust in markets was misplaced.
Investors who want to get ahead of the curve need to start thinking about protecting their assets by investing in gold, which has tremendous ability to protect investment portfolios against a coming crash. During the Great Depression, many investors couldn’t protect themselves with gold because the government banned gold ownership before revaluing gold versus the dollar. Investors today aren’t hamstrung in that way, and can take advantage of the ability to own gold to protect their investments.
Investors today aren’t limited in their choices of gold investment options either. With newer innovations such as a gold IRA, investors can enjoy the same tax advantages as any other tax-advantaged retirement account while still benefiting from owning physical gold coins and bars. If you’re looking to protect your investment gains from sure loss in a weakening economy, it’s time to start thinking about a gold IRA today.