More Thoughts on the Post-Pandemic Economy: Think 1970s Stagflation

April 14, 2020

I wrote a piece last week giving some quick thoughts on the post-pandemic economy. I have a few more items to toss in the mix.

As I said in the last piece, I think many people will have money to spend and be anxious to spend it. For most people who kept their jobs, the $1,200 check from the government will be a pure bonus. Also, many of the unemployed will be kept whole or even come out somewhat ahead with the $600 supplement to regular benefits. (Remember, the median weekly wage for full-time workers is just $933, and many of those getting benefits were not working full-time prior to the crisis.)

Most people were not spending money on anything other than necessities during the crisis. Not only were people not going to stores, restaurants, and movies, they were also not buying cars and houses, both of which saw sharp drops in sales in March and are certain to see sharper falls in April.

This means that when we unwind the lockdowns, most likely sometime in May (I’m referring to the politics, not passing judgment as a public health expert) we will have a lot of people looking to make up for having gone two months or more without spending much money. An advantage of car and house sales is that they can generally be done in ways that are consistent with social distancing. Realtors and car dealers don’t have to come into direct contact with their clients and presumably can make do without a ceremonial handshake to seal a deal.

A surge in car sales and house sales will likely send factory demand booming, as auto manufacturers will soon see bloated inventories run down. House sales guarantee a big demand for appliances, like refrigerators and washing machines. Whether U.S. manufacturers are positioned to meet this demand (it will require maintaining safe working conditions in their factories) is an open question, but if they can’t meet the demand, it will lead to a surge in imports, when new supply sources can be found.

The potential backlogs here are likely to mean that sellers will have considerable pricing power, at least for a period of time. Other businesses are also likely to see capacity constraints, accompanied by higher costs. For example, stores will likely need to limit the number of people who enter and have someone at the door doing at least minimal testing (e.g. taking temperatures at the door and asking about contacts), in order to provide some assurance of safety. The capacity constraints will be worse insofar as many businesses do not reopen.

Insofar as restaurants are able to reopen, they will also need to do some checking and likely steer people to outdoor seating and/or have customers much more widely spaced than normal. In the same vein, airlines are likely to fly with limited capacity, for example, Delta is not selling middle seats.

To me, this looks like a story where we see substantial price hikes in many parts of the economy, as businesses adjust to a world where the pandemic is somewhat under control, but far from completely contained. The growth figures for the third quarter are likely to show a sharp rebound from a second-quarter plunge, but still leave us well-below pre-crisis levels of output. This will still leave us with a serious slump and high unemployment, but a real problem with inflation.

We can work through this period if the Fed allows the economy the time to adjust to new circumstances, but there is no guarantee it will be so accommodating. I should add that it easy to envision a far worse scenario if Congress does not approve additional funds for the small business loan program and does not approve enough money for state and local governments to avoid major austerity measures. We should know whether they have come through in these areas in a week or so.




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