UVA Darden Economists Survey US Economic Landscape After Unprecedented Spring

By Dave Hendrick

When University of Virginia Darden School of Business Professor Alan Beckenstein and lecturer Nick Sargen offered their annual economic forecast in January, the coronavirus pandemic had just begun to roil global markets.

At the time, both had concerns about the underlying strength of a U.S. economy that was well past a decade into a bull market despite lackluster corporate earnings, exploding deficits and rising income inequality. However, no one foresaw the degree to which large portions of the economy were about to shut down.

Offering an updated forecast during a Darden webinar in early June, Beckenstein and Sargen surveyed the strange economic landscape, in which unemployment has skyrocketed and a host of economic markers were suddenly historically grim — and yet U.S. equity markets had largely recovered from their early spring swoon. The economists offered their forecast as protests for racial justice began to percolate throughout the country, and Beckenstein noted that the near-term economic ramifications of newly energized movements to redress racial inequality are not yet clear.

While the economic consequences of shutting down large parts of the economy to slow the spread of COVID-19 were predictable, the shape of the recovery remains an open question, Sargen said.

“It was pretty apparent once we had the shutdown, we were going to be in a recession, and the real question is, ‘How bad is it going to be and how long is it going to be?’” said Sargen.

One differentiator from previous recessions in the current environment has been the evaporation of much of the service sector, which heretofore had been the “steady Eddie” of the economy, Sargen said. While the sector has rebounded from its depths as markets across the U.S. reopen, he said it seems increasingly apparent that a “V-shaped” recovery is not in the cards, particularly as the very cause of the initial economic turmoil remains unpredictable and uncontained.

What to Make of Buoyant Equity Markets?

Sargen said the case for the strong stock market rebound appears to be that policymakers, particularly the Federal Reserve following learned lessons from the global financial crisis in 2008, are aiming to do whatever it takes to ensure healthy functioning markets, and as such there appears to be a floor under equities at this point.

Sargen said he doesn’t believe that’s a compelling enough reason to bet on continued appreciation, given the relatively weak state of corporate fundamentals immediately prior to the pandemic and projections of continued weakness in corporate profits.

“The reason I don’t believe this rally is you have to tell me that the stock market thinks we should be at record value, when profits will have been stagnant for three years,” Sargen said. “The market has gone too far, too fast in my view.”

Beckenstein, who bemoaned many of the weak fundamentals in the economy in January, said the country was now further mired in a “low interest rate trap” and rates would likely be kept “artificially” low for 10 years or more.

The “hole” dug by tax cuts in a full employment economy is now a “Grand Canyon,” Beckenstein said, and few seem to be suggesting policies to help the country dig out of the hole and return to what he described as “the more appropriate policy of promoting long-term growth, more equality and eventual fiscal responsibility.”

Absent that, Beckenstein said leaders need to “establish an absolute commitment to best practices” with “clear expectations” for institutions opening in the face of coronavirus.

“The uncertainty is toxic for our economic recovery,” said Beckenstein. “The key is reducing uncertainty and perceived risk. And for heaven’s sake, don’t say we stay open no matter what happens with the virus.”

Beckenstein and Sargen said one potential secondary impact of the pandemic could be changes to health care in the U.S., as the pandemic revealed widespread disparities in the country’s social safety net.

“Health care is going to be an overriding issue in the election, and I think the time has come for more comprehensive health care reform,” said Sargen.

About the University of Virginia Darden School of Business

The University of Virginia Darden School of Business delivers the world’s best business education experience to prepare entrepreneurial, global and responsible leaders through its MBA, Ph.D., MSBA and Executive Education programs. Darden’s top-ranked faculty is renowned for teaching excellence and advances practical business knowledge through research. Darden was established in 1955 at the University of Virginia, a top public university founded by Thomas Jefferson in 1819 in Charlottesville, Virginia.


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