Longbrake Letter

November 2020

CRASH! BOUNCE! FADE! SLOG! What a crazy year. It began benignly with record low unemployment and the promise of improving economic activity. Then the pandemic struck with a vengeance and within a matter of days, stock prices fell 34% and unemployment soared to 15%. CRASH! Policymakers responded with alacrity to stabilize financial markets and provide trillions of dollars of income support to individuals and businesses. It worked! Negative feedbacks, which deepen recessions, did not occur and economic activity rebounded much faster than expected. BOUNCE! Today the virus is on its worst rampage yet. We know a vaccine is coming, but herd immunity is still months away. The recovery is stalling. FADE! Even when the pandemic has been conquered, it will take years for the economy to adapt to the damage it caused to the fabric of society and the changes it spawned and accelerated. SLOG! Better days are coming. Read more in: the Longbrake Letter.

October 2020

Will Congress’ inability to pass additional stimulus legislation derail the recovery? Probably not, says Maryland Smith’s Bill Longbrake. Congress will eventually pass legislation – but probably not until early 2021 – and the stimulus package then is likely to be larger. But while a significant economic setback is unlikely, a return to full employment will still take a long time, even with more stimulus and with COVID-19 vaccines. This unusual pandemic-driven recession has “ripped the fabric of the economy” and set in motion enormous consequences that will be hard to repair quickly. However, Longbrake sees reason to be hopeful. Rather than more polarization and potential civil unrest in the aftermath of the presidential election, just maybe the bulk of the American electorate is ready to stand up, to take charge and to work together to solve problems. Read more in: the Longbrake Letter.

September 2020

Economic recovery slowed a bit over the past month. Failure of Congress to pass additional stimulus legislation adds uncertainty to the outlook. While politics paralyze Congress, the Federal Reserve has revamped its monetary policy framework to target “average 2% inflation” over the cycle. This change is small but financial markets expect it will have extremely significant impacts. The new policy framework is untested and potentially fraught with risks that could outweigh purported benefits. In this month’s letter, Bill Longbrake discusses the benefits and risks posed by the Fed’s revamped monetary policy and implications for America’s social and political fabric. Over time monetary policy consequences coupled with demographic changes in America’s electorate could put America’s democracy in jeopardy, as some commentators are fretting about. Read more in: the Longbrake Letter.

August 2020

The resurgence in U.S. COVID-19 cases in June and July, and pauses and rollbacks in reopening put an exclamation mark to the economic recovery proceeding in “fits and starts!” The failure of Congress to enact Phase 4 fiscal stimulus legislation to extend essential economic support for workers and businesses, which expired in June and July, added to uncertainty. Will Congress act in September or will presidential election politics interfere? Will consumers retrench? But the stock market just hit an all-time high and the housing market is on fire. Much more pain is ahead for many … but not for everyone. Read more »

July 2020

Although economic recovery is underway here and around the world, the pandemic has not been tamed. The resurgence in U.S. COVID-19 cases, which has precipitated pauses and rollbacks in reopening, put an exclamation mark to the economic recovery proceeding in “fits and starts”! Much more pain is ahead. History tells us and knowledgeable analysts opine that recovery will proceed slowly and years will pass before the U.S. and global economies return to full employment. To avert an even rockier recovery, Congress needs to pass new legislation when it reconvenes on July 20 to support distressed households and businesses. Read more »

June 2020

The U.S. recession, which officially began in February, probably ended in April or May. Technically, that means we are in recovery. But for many, it sure doesn’t feel that way. Millions of Americans are unemployed or worrying that they'll become unemployed when Payment Protection Program funds and enhanced unemployment benefits run out. Employment and retail sales improved more than expected in May, but they aren’t even close to where they were in January, before the recession hit like a sledgehammer. In the words of Neil Irwin, “The fabric of the economy has been ripped.” The economic hole is horrific and it will take a long time and copious amounts of fiscal and monetary policy stimulus to dig out of it. Two huge risks remain – new, catastrophic waves of the virus could occur; and fiscal and monetary policy support could prove inadequate. Either would slow recovery and extend pain for many. In this month’s letter, Maryland Smith's Bill Longbrake also discusses the difference between traditional macroeconomic policy tools and modern monetary theory (MMT). Read more »

May 2020

Will reopening of the economy proceed smoothly or is there worse to come? No one really knows the answer. Such is the uncertainty of the times. As the number of new cases decreases, people are hopeful that life soon can return to the old normal. Yet, amidst this hope is deep anxiety about what may lie ahead. Despite expert counsel to the contrary, the risk of reopening might not be great. But without adequate safeguards in place, reopening could lead to catastrophe. In his latest letter, Maryland Smith's Bill Longbrake says experience has taught him to think about and plan responses to many possible outcomes, particularly those with potentially ugly consequences. He describes nine potential “tail risks,” any one of which could have significant economic, social and political consequences. Read more »

April 2020

In April, we began to come to terms with the lethality of the coronavirus pandemic. Cases and deaths skyrocketed. The choice was clear. To contain the spread of the virus, it was necessary to shut down economic activity. Instantaneously synchronous severe recessions engulfed all global economies. Unemployment in the United States jumped from a multi-decade low to a near Great Depression high in a matter of weeks. There is neither a vaccine nor an effective drug therapy. Development of effective treatments will take many months. Thus, reopening the economy requires robust testing, contact tracing and quarantining. And even those responses will take weeks to prepare. Reopening the economy too soon will result in a resurgence in infections, as has occurred in Japan, Taiwan and Singapore. Recovery will be slow and painful. Read more »

March 2020

The recession has arrived. The question now is: How severe will it be? For months, Maryland Smith's Bill Longbrake has noted the many risks that have been building steadily for the U.S. and global economies. Now, in a few short weeks, the Covid-19 pandemic are throwing the U.S. and global economies into recession. Once economic activity is disrupted on a massive scale, the direct consequences of reduced consumer spending on travel, leisure and other activities involving human contact will trigger contagion, infecting other parts of the economy. Crashing stock prices create fear and crush sentiment leading to a “wait and see” response that only serves to deepen the downturn in economic activity. Policymakers are scrambling to restore confidence and provide assistance. Will it be enough to stop the rapidly evolving downward spiral? Read more »

February 2020

Will the coronavirus Covid-19 sink the global economy? In short, no. But there will be damage, particularly in China. And, there is uncertainty about the potential severity of the epidemic and therefore so the possibility of a much worse outcome cannot be ruled out. In the February Longbrake Letter, Maryland Smith's Bill Longbrake summarizes economic analysis evaluating both the “most likely” and “worst case” scenarios. In the meantime, the U.S. economy continues to perform well. With the exception of business CEOs (perhaps the canary in the coal mine?), confidence and optimism remain at extremely high levels and stock prices progressively made several new daily highs during February. Read more »

January 2020

2019 started out badly, with stocks falling nearly 20%, and ended extremely well with stocks rising nearly 30%. Driving this dramatic turnaround was a monetary policy U-turn. Instead of raising interest rates during the year, the Federal Reserve cut rates 75 basis points and resumed significant expansion of its balance sheet. GDP growth was a little weaker than forecast, but still above potential. Inflation was a little weaker. The trade war with China escalated dramatically, slowing global growth and pushing the U.S. manufacturing sector into recession. But as 2019 came to a close, China and the U.S. buried the trade war hatchet. All-in-all, 2019 seemed like a good year. But was it? Cheap and abundant money can cover over festering problems. We may look back on 2019 and conclude that it was a year of short-term gain that paved the way for long-run pain. Read more »

In this month’s letter, Bill Longbrake summarizes forecasts for a slew of economic indicators for the U.S. and global economies for 2020. Significant risks which plagued the U.S. and global economies in 2019 have subsided, and optimism is running high that global growth will be stronger. In the U.S., momentum is slowing but forecasters expect growth will be near or slightly better than long-term potential. That's good news. But significant risks, described here in detail, are brewing and will eventually boil over, perhaps in 2020. Read more »

Robert H. Smith School of Business
Map of Robert H. Smith School of Business
University of Maryland
Robert H. Smith School of Business
Van Munching Hall
College Park MD 20742