The National Bureau of Economic Research on Monday confirmed what everyone already knew: The US is in a recession. But there is some good news too: the employment situation improved a bit in May, with the unemployment rate falling to 13.3%, from 14.7% in April:
There's a bit of controversy about the true unemployment level -- counting workers who are still getting paid but not actually showing up for work, the unemployment rate was actually 19.7% in April and 16.3% in May. Many of those workers are probably on temporary paid leave during the pandemic; this is just what the Paycheck Protection Program was designed to encourage. But this ambiguity doesn't matter very much because counting these temporarily idled workers as unemployed substantially increases the size of the May improvement.
This rapid switch from economic deterioration to recovery -- even as Covid-19 cases continue to pile up -- has raised spirits across the country. In the last recession, employment continued to deteriorate for more than a year after the 2008 collapse of Lehman Brothers; now, things seem to be on the upswing only a few months after the virus hit. There's at least the glimmer of hope that the coronavirus recession will turn out to be like the Spanish Flu of a century before -- a ferocious onslaught followed by a quick rebound. Top macroeconomists such as Ben Bernanke and Paul Krugman have suggested that a rapid V-shaped recovery is a possibility.
But optimists should be cautious; May's uptick might be just a dead-cat bounce. State reopenings are restoring some jobs, but fear of the virus will likely persist until treatments or a vaccine are available. That means reopenings will only partially restore business activity.
Job gains may slow down when workers on temporarily leave all return; those who worked for businesses that have now gone bankrupt will not be able to get their old jobs back. Jed Kolko, an economist at job search site Indeed, estimates that permanent unemployment is still rising. This is particularly troubling because people who are out of work for a long time can lose their skills, connections and work ethic, making it harder for them to find new jobs later.
So the economy may experience a V-shaped bounce, but it could be an incomplete one; unemployment might fall more but still remain unacceptably high, then begin a slow descent more characteristic of a U-shaped recession.
The question is how long that recovery will take. The typical culprit in slow recoveries -- a financial crisis -- seems unlikely to happen, thanks to swift and decisive action by the Federal Reserve. But there are other factors that might prolong the economic pain over several years.
One of these factors is human psychology -- what economists call animal spirits. The unprecedented speed and depth of the economic devastation from coronavirus might create pessimism among American businesspeople, consumers and investors that lingers for years. Irrational fear of pandemics might long outlast this particular disease simply because coronavirus looms so large in recent experience.
A second long-term drag on the economy could come from structural adjustment. The pandemic has pushed people from brick-and-mortar businesses to online shopping; from working in offices to working remotely; and from consuming entertainment outside to consuming at home. Those demand shifts might never fully reverse themselves. If so, it means many retailers, restaurants and commercial property owners will shrink or go out of business. Vendors of online and digital goods will boom, but it will take some time for resources to shift from the old to the new.
Structural adjustment will also happen on an international scale, as supply chains and patterns of import demand shift. That could hit US exporters, as well as companies that are dependent on foreign producers.
And the pain of structural changes might be worsened by what economists call local externalities. If 50% of the storefronts on a street are shuttered, it makes that street a less attractive place to eat, drink or shop. That can reduce foot traffic, causing other businesses in the area to fold. Some neighborhoods and cities may never recover from coronavirus, especially when the impact of recent anti-police brutality protests is added in.
Finally, the recession could be prolonged by policy mistakes. There are already are reports that Congressional Republicans plan to go slow on additional relief measures, or even block them. That could force cash-strapped states to make deep, damaging budget cuts, or leave many unemployed workers suddenly unable to pay rent. Letting up on relief measures while unemployment is still higher than at any time since the Great Depression would be a grave mistake.
So even with a partial bounce-back and no financial crisis, there are reasons that this downturn might drag on into the mid-2020s. Policy makers should not become complacent just because of one good month.
Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
Disclaimer: This article first appeared on Bloomberg.com, and is published by special syndication arrangement.