7 minute read
FOR THE CYCLE
Just how did the pandemic affect broader economic patterns?
BY STEPHEN ELLIOTT
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OVID-19 threw a wrench in most economic outlook predictions. Pretty much overnight, hundreds of thousands of Americans were suddenly out of work, and years of economic gains since the Great Recession evaporated.
Now, more and more people are getting back to work, trillions of stimulus and relief dollars have been pumped into the economy and experts are beginning to reassess where we stand and what the next five to 10 years could look like.
The Post spoke about this with three of those experts: restructuring veteran Steve Curnutte of Tortola Advisors, University of Tennessee Boyd Center for Business and Economic Research Associate Director Don Bruce and investment strategist David Waddell of Waddell & Associates. On the primary question of where we stand in the typical economic cycle, the answers were varied though generally positive.
First of all, Bruce says, “There’s no such thing as a typical economic cycle.” And anyway, he adds, there’s no question that the pandemic “rewrote the book on economic cycles.”
In the months before COVID-19 reached the United States, Waddell feared a looming minor recession, though obviously not one of the scale and abruptness ushered in by the pandemic. Now, though, he is optimistic.
“I wish people would dance,” he says. “I wish they’d be happy. The economy is at record highs, corporate earnings are at record highs, stock prices are at record highs and household net worth is at record highs. This is the time to be happy.”
With that rosiness comes a fear for some: inflation.
“Middle Tennessee was hot before the pandemic, and is likely to get hot again, even with strong headwinds,” Curnutte says. “The headwinds I worry about are inflation and the unintended consequences of tax policy changes.”
Bruce and Waddell accept that there is some risk of inflation but neither is terribly concerned about the chances of it being extreme or that it will matter all that much in the long run. Bruce points to years of slow wage growth in tempering his fears of runaway inflation. Waddell, meanwhile, looks to history, noting that the American economy has thrived in times when inflation was above the level some experts are now warning it could reach.
“Inflation is something we’re not used to, but in the past, just because you had a little inflation didn’t mean the world fell apart,” he says.
The trillions of government dollars invested into the economy — in the form of stimulus checks, the Paycheck Protection Program for small businesses and other forms of spending — had its desired effect, for the most part, the three experts agree. The spending put off a feared tidal wave of commercial bankruptcies and kept many businesses afloat.
“There was disruption, certainly in the service industries, but it wasn’t the buffet that bankruptcy attorneys would look for in a traditional recession,” Waddell says.
Sure, they say, the spending could have simply whitewashed underlying pre-COVID issues for some businesses that could still fail in the coming months and years but for the most part, the three agree, the spending helped healthy businesses survive forced shutdowns and months of slow times.
“The surge of business bankruptcies that seemed imminent last spring never materialized,” Curnutte says. “In many cases, the ‘fix’ worked. Businesses and their banks will sort through normalization in the coming years. But in others, the ‘fix’ was more like a ‘cover-up’ for businesses or loans that were weak-kneed before the pandemic, or in the path of long existing economic disruption in the first place — think the corrosive trend on brick-and-mortar retail that pre-existed the pandemic, for example. I expect those businesses’ problems that were ‘covered up’ to soon be uncovered with some pain over the coming 18 months.”
Another feared decimation — of commercial real estate as workers and companies realized they could function from home — does not appear to be materializing, at least according to Curnutte.
“I don’t think there is a commercial real estate Armageddon — but rather a commercial real estate adaptation,” he says. “Easy to see that office usage will look different, but especially in Nashville, won’t collapse. Industrial spaces around town are in high demand. Retail vacancies will force a repurposing and retrofits.”
As for what to expect moving forward, the three have a generally positive read on the economic situation but acknowledge that there are concerns to address. Many people are still jobless, for various reasons, and some businesses have closed forever, many in the hard-hit service industry. Bruce notes that many higher-income positions were unaffected other than a pivot to work-fromhome, while lower-income positions — disproportionately held by minority workers — took a more widespread hit.
“It’s not a random sample of the population,” Bruce says. “It forced us to have some kind of national reckoning, and we’re still in the process of dealing with that.”
Overall, though, Bruce says the economy should continue to improve. We’ve become more productive and efficient because COVID-19 in some cases forced us to be, he says, and that will only add fuel to the fire moving forward.
“I don’t think of February 2020 as the peak for the American economy,” Bruce says. “I think we will eventually be back to that level in terms of GDP, in terms of employment, in terms of everything we care about in the macroeconomy. I don’t think that happens very soon but I think it’s certainly within the forecast horizon.”
Still, he admits that predicting anything related to COVID-19 is difficult because there are few if any analogous situations with which to compare the present.
“Your ability to forecast anything is entirely a function of having similar events in history and we just don’t for this, not with really good data,” Bruce says. “We’ve been working on this for months. As each month passes, we get tighter and tighter. At the aggregate level, things are looking really good right now.”
All that optimism does not mean there aren’t people still out of work or that other economic problems don’t need addressing. But for now, Waddell urges people to relax.
“If you’re going to be happy, do it now,” he says. “I’ll tell you when the recession is going to come and you should start to be unhappy, but that’s not now. People need to cut loose.”
DAVID WADDELL
Loan demand lags
When COVID-19 hit the U.S. economy, borrowers and lenders of all stripes were forced to sit down and come up with a combination of payment deferrals, extra collateral commitments, PPP stopgap loans and other accommodations to work through the shock of the pandemic’s effects. More than a year later, that cocktail of cooperation appears to have largely been a success. FirstBank parent FB Financial, for instance, had to charge off a mere 5 basis points of its loans in the first quarter and finished the period with just 0.77 percent of its assets classified as nonperforming. The books of many other banks also are about as clean as their stewards could have wished for a year ago.
But while traditional bad-loan metrics aren’t flashing red, one could argue demand for future loans is flickering orange and suggesting relatively slower growth ahead.
“If you just look at the loan demand in our footprint, it’s still very low,” Pinnacle Financial Partners CEO Terry Turner told analysts and investors in April. “We expect it’ll pick up later in the year but it’ll be muted by all the liquidity in the system.”
Some of the sluggish demand — the FDIC says total U.S. bank lending fell 0.4 percent in Q1 — is because many organizations and individuals took advantage of the extra cash coming to them to pay down or altogether pay off their debts. At FirstBank, CEO Chris Holmes pointed out recently that a February that had him “a little concerned” about loan growth was followed by a “really strong” March and then a weaker April. The back end of the second quarter, he added, again looked to be stronger.
In short, there doesn’t yet appear to be sustained momentum to turn a recovery into a true boom. But come fall — presumably a season featuring fully reopened schools, far more repopulated offices and properly revived leisure and hospitality companies — Turner, Holmes, their peers and the rest of us should have a decent idea if 2022 will produce that next leg of growth.
