ST. PAUL — It has been said that economists love to forecast recessions. Paul Samuelson, the late Nobel prize-winning economist from MIT put it succinctly in a famous quote.
“Wall Street indexes predicted nine out of the last five recessions,” said Samuelson, who passed away in 2009.
But it is unlikely that anyone predicted the suddenness and the depth of the recession gripping the region and the nation as a result of the coronavirus pandemic. And consumer spending, which drove the historic economic growth we saw prior to March 2020, is the cause of and potential solution to the problem, said Minnesota’s state economist, Laura Kalambokidis.
In an interview with Forum News Service on Monday, June 1, Kalambokidis said that the current recession is unique in the speed with which it hit, and the fact that some sectors of the retail economy — home improvement, for example — are thriving while others — bars, restaurants, hair salons and travel — have been devastated.
“One of the unique things about this recession is that some of it is due to the opportunity to spend being gone. You can’t travel. You can’t eat out at a restaurant,” she said. “Those are largely services, so I think it is possible that consumers are substituting goods for the services that they don’t have an opportunity to buy. They’re spending on groceries, but not on prepared restaurant food. I can’t travel, but I can paint the guest bedroom. We’re all sitting here in our homes, looking at the things we’d like to change.”
Sales tax receipts from the Minnesota Department of Revenue confirm that people have not been imagining larger crowds at the cash register of home improvement retailers. In April 2020, there was $50.7 million in sales tax collected from home improvement centers, paint and wallpaper stores, hardware stores, and other building material stores in Minnesota. This compares to $38.7 million for the same period a year ago, and $34.1 million in April 2018. Some hardware store retailers say they have been adding workers as fast as they can hire and train them.
By contrast, with bars and hair salons closed and restaurants limited to takeout only for more than two months, there is a growing list of Minnesota businesses that have closed permanently, and service industry workers have seen mass furloughs or more permanent displacement.
“It’s definitely unusual. It’s really an extraordinary way for a recession to start. There are these differences across businesses, even retail businesses, and there are differences across the labor market,” said Dr. Kalambokidis. “The recession is hitting everyone. Everyone is being affected by the pandemic and the recession, but they are not being affected equally.”
Kalambokidis, who has been in this position since 2013, is also the head of economic analysis at Minnesota Management and Budget, and teaches economics and public sector finance at the University of Minnesota. In late February, MMB announced a $1.5 billion surplus for the state. Just five weeks later, with stay at home orders in place, unemployment exploding and thousands of Minnesota businesses shut down, Kalambokidis told legislators to anticipate a “tsunami” of lost revenue.
As rapidly as this recession began, after a historically long period of economic expansion driven by consumer spending, the road to recovery may be longer this time as well, Kalambokidis indicated. Normally confidence in the economy is a big factor in restarting consumer spending, which accounts for roughly two-thirds of the nation’s real gross domestic product.
There are other factors at play in this time of coronavirus. As currently unemployed people get back to work and try to recover what income they have lost during the pandemic, it also remains to be seen what continued fear of an outbreak will mean for retail.
“People can have the money to spend and still say I’m too worried about what the next month and year may hold, so I’m going to be cautious,” Kalambokidis said. “What’s extraordinary about this circumstance is it’s also about people feeling safe enough to go out and engage in the kind of spending activities that they did pre-pandemic. There’s a lot of psychology and sociology at play here in how consumers help bring the economy back.”