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America’s Uncertain Recovery

Summary:
Predicting the speed and strength of the United States' recovery from the current recession is extremely difficult. But what is clear is that policymakers must boost incentives to work in normal times when jobs are plentiful, while strengthening the safety net for when they are not and for those who are unable to work. STANFORD – Like most of the world, the United States is attempting to overcome both the COVID-19 pandemic and a deep recession caused by the resulting government-ordered shutdown. At annual rates, the US economy shrank by 5% in the first quarter of 2020, and in the second quarter just ending, it could contract by 40% – the steepest decline since the Great Depression. The Main

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Predicting the speed and strength of the United States' recovery from the current recession is extremely difficult. But what is clear is that policymakers must boost incentives to work in normal times when jobs are plentiful, while strengthening the safety net for when they are not and for those who are unable to work.

STANFORD – Like most of the world, the United States is attempting to overcome both the COVID-19 pandemic and a deep recession caused by the resulting government-ordered shutdown. At annual rates, the US economy shrank by 5% in the first quarter of 2020, and in the second quarter just ending, it could contract by 40% – the steepest decline since the Great Depression.

Moreover, tens of millions of workers have lost their jobs, causing the unemployment rate to soar to a post-Great Depression high of 14.7% in April. And although 70% of those laid off say they expect to be recalled to their jobs, not all will be, because many firms will fold, relocate, or reorganize.

True, the initial reopening of the economy has led to a sharp rebound that is projected to continue in the third quarter. Employment rose by 2.5 million in May, while high-frequency data from credit cards and mobility tracking for May and June show sizable bounce backs from April lows, with activity in a few sectors approaching or even exceeding year-earlier levels.

But the rebound varies by sector and region. Although Big Tech, home-improvement suppliers, and retail sales of alcoholic beverages have flourished, travel and leisure have collapsed and will take much longer to recover. And restaurants with drive-through service have fared much better than those able to serve only indoors.

Most forecasters therefore predict that the early “V-shaped” recovery will slow over the next few quarters, and instead come to resemble the Nike swoosh. But this plausible baseline forecast is subject to greater than normal uncertainty.

For starters, the shutdown of non-essential businesses in response to the pandemic led to a demand-side shock as well. So far, trillions of dollars in business grants and loans, cash payments to households, and unemployment insurance with federal bonus payments (enabling two-thirds of eligible workers to receive benefits that exceed their lost earnings) have provided a cushion to help the economy recover. The US Federal Reserve has pledged to keep its target interest rate...

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