At a Glance
- CME Group’s Chief Economist addresses what our new economic reality means for employment, oil prices and shopping at the grocery store
Econ Essentials, a program created in partnership with CME Group and Discovery Education, is designed to help high school students learn about core economic principles. In recognition of Financial Literacy Month, CME Group Chief Economist Blu Putnam participated in a Q&A with Discovery Education as part of #EconExplorationDay, an initiative aimed at helping students understand the economics of the world around them.
The economic fallout from COVID-19 may continue for months. Lockdowns aimed at curbing the virus’ spread have upended daily routines, closed businesses and sent millions of Americans to file jobless claims. The virus has also led to empty store shelves for some household staples and lower prices for oil, among other disruptions.
No one has witnessed anything quite like the environment the pandemic has created. Bear markets and recessions come and go; this is different. That said, the creation of and recovery from those events can usually be compared to similar downturns of the past.
So what do we make of a difficult economic situation new to everyone? How do we adapt our lives to the new reality? And how do we know what the recovery will be like? Blu addressed these and other questions for students around the economics of the pandemic. Their discussion follows.
Has anything like this happened to the economy before?
From a pandemic perspective, the Spanish Flu hit the global economy very hard in 1918 just as WWI was ending. This pandemic lasted through 1919 and was devasting. In terms of the loss of jobs, even in deep recessions, such as 2008-2009 or 1980-1982, the US only saw the unemployment rate rise to 10%. In 2020, the unemployment rate could reach much higher, closer to levels last seen during the Great Depression.
How has the economy been impacted by people staying home?
To help control the spread of the virus, governments have issued stay at home orders and other lockdown measures across the globe. As a result, the economy has grinded to a halt, with non-essential businesses shutting down and consumers staying home except for trips like going to the grocery store. With business closures and cutbacks hitting restaurants, hotels, airlines and other businesses extremely hard, jobless claims have sky-rocketed.
The stores are usually fully stocked with household staples like toilet paper and milk. Why is it so hard to find essentials now?
As the pandemic crisis began impacting daily lives and people prepared to stay home, consumers rushed out to stock up on essential items and emptied shelves across stores. Supply chains, or the process by which the products you see on shelves are produced, transported and delivered, have been hit by problems in sourcing and shipping some goods, while companies are struggling to figure out how to meet the sudden spikes in demand, resulting in some shortages or delays in delivery.
What is causing the record low prices in oil right now?
Oil prices have been disrupted by both supply increases and demand decreases. Demand for oil has sharply declined as factories have closed and travel and transportation has been reduced due to the pandemic. Simultaneously, oil production was increased by Saudi Arabia as it started a price war with Russia. Recently, Russia, Saudi Arabia and the United States coordinated a plan to decrease oil production to try and stabilize oil prices. When oil comes out of the ground, one must either use it or store it. With demand remaining seriously depressed, storage facilities are filling up, keeping downward pressure on prices despite the announced cuts.
What will happen to the economy when people start going back to their normal routines?
People are unlikely to go back to their normal routines and some behaviors will have been permanently changed. Demand from consumers is not a switch one turns off and then back on. Consumers have been hurt financially and many will try to increase their savings rates to rebuild their finances. Companies are cash-strapped. Even with aggressive spending plans from the U.S. Government, companies will wait until they see how demand returns before going full speed ahead.
Could social distancing and stay-at home measures change economic behaviors permanently?
The behaviors of individuals and companies have been forced to adjust during the pandemic and chances are not everything will return to the way it was before. Seeing success with employees working from home, many businesses or individual people may choose to continue with these policies. This could also impact business travel as people have seen what can be accomplished with virtual technologies.
How do fiscal policies support the economy?
Fiscal policy efforts, like the $2 trillion economic support package, are aimed at helping consumers and businesses get to the other side of the crisis. These initiatives include things like providing income to workers with paycheck replacement, expanding unemployment insurance programs and making loans to companies to keep them in business.
How does monetary policy support the economy?
Monetary policy, implemented by the Federal Reserve, drives the ability for banks to lend money to consumers at lower rates, which helps stimulate the demand side of the economy. Think lower interest rates for mortgages and business loans. It also works to keep financial markets running smoothly so there is not a banking system failure, as there was in the financial crisis that led to the Great Recession in 2008.