About this Episode

In this episode, host Nathan Hunt interviews Beth Ann Bovino, S&P Global Ratings' Chief U.S. Economist, the current state of the U.S. economy during the coronavirus pandemic and the role that infrastructure spending may play in an eventual recovery.

The Essential Podcast from S&P Global is dedicated to sharing essential intelligence with those working in and affected by financial markets. Host Nathan Hunt focuses on those issues of immediate importance to global financial markets – macroeconomic trends, the credit cycle, climate risk, energy transition, and global trade – in interviews with subject matter experts from around the world.

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Show Notes

Read the research discussed in this episode:

• Amid the coronavirus pandemic, the U.S. has fallen into recession. But the U.S. economy may have a second chance. COVID-19 has created an urgency to invest in much-needed infrastructure. Six months from now, we may look back on the pandemic as an event like Super Storm Sandy, which called attention to the need for investing in infrastructure to prevent damage from climate change. Read S&P Global Ratings Chief U.S. Economist Beth Ann Bovino's latest infrastructure report

• With over 90% of the population under "stay-at-home" guidelines, up from three-fifths in late March, U.S. economic activity has effectively stopped. S&P Global Ratings now forecasts U.S. GDP will contract 5.2% in 2020—substantially worse than the March forecast for a 1.3% decline. Read S&P Global Ratings Chief U.S. Economist Beth Ann Bovino's report on the U.S. downturn

• Countries’ measures to stem the spread of coronavirus have escalated amid increasing confirmed cases globally to more than 3.6 million. These efforts, together with business and consumer behavioral changes, are having wider and deeper effects on economies than previously estimated. Access S&P Global's digest on the economic and credit market implications of the COVID-19 pandemic, updated daily with research and reports that examine the effects the pandemic are having on the global economy and financial markets.

Transcript

Nathan Hunt: This is The Essential Podcast from S&P Global. My name is Nathan Hunt.

Over 26 million Americans have filed for unemployment benefits in the past four weeks. By the time you were listening to this podcast, those shocking numbers, like all the shocking numbers that have proceeded them will already be out of date. Without a blueprint and without historical models to rely on, Americans are forced to confront the question: What is the road to recovery? I'm joined today by Beth Ann Bovino, U.S. Chief Economist at S&P Global Ratings and the person with the unenviable task of projecting a path forward for the U.S. economy.

Beth Ann, thank you for joining me today.

Beth Ann Bovino: Glad I could be here.

Nathan Hunt: Let's start with an easy question. When will this end, and everything will just go back to normal?

Beth Ann Bovino: Unfortunately, things won’t be going back to normal anytime soon, but fortunately, growth will return in some form in another. This has been a sudden stop recession. Over 90% of Americans are now following some form of quarantine.

I'm at home right now. And what does that mean? Almost immediately, economic activity screeched to a halt. It crushed U.S. businesses, particularly those sectors that are closely tied to social distancing measures like travel and leisure businesses. The world also shut down earlier. Disruptions from trade and supply chains hurt U.S. production in sales, and so what did that mean? That pretty much put us in a tailspin. What can we expect going forward? Well, honestly, a lot of it depends on two things. One: the path of COVID-19 and the policy response. Right now, based on outside information, we assume that in the United States, COVID-19 will be contained sometime in May and the recovery will start in the second half of the year, but unfortunately, it's not like turning on the light bulb on at all. The U.S. is just too big. We expect it to be a slow rollout to open the recovery, and that means we expect a slow recovery as well.

Nathan Hunt: Beth Ann, you released a new set of projections recently for the U.S. economy at a top line. What is your revised prediction for GDP growth for 2020?

Beth Ann Bovino: With far more people quarantined across the world, we're expecting a 5.2% drop in economic activity for 2020.

That means we expect a close to 12% drop from peak to trough in this COVID-19 recession. That is three times the last economic activity in the great recession in just one-third the time. We're expecting that the U.S. will probably lose around 30 million jobs in the sudden stop recession. With the unemployment rate likely peaking in the high teens.

It's hard to even fathom me saying these numbers, but I am. All those lost workers also mean lost productivity. Productivity in the United States that had already been very slow and here after COVID-19, we're expecting productivity growth to be a meager 0.5% in 2020, one-half the productivity rate that we had expected in December.

Nathan Hunt: This is not the first forecast you've released for this year. Why have revisions has been necessary?

Beth Ann Bovino: You can blame that on COVID-19 as well. Earlier on, when we did our first U.S. economic updates, the COVID-19 was not on U.S. shores. We knew that it was hurting supply chains with trade disruptions, and then it landed on U.S. shores, and then spread. Earlier on, it was just three-fifths of the U.S. workforce was following quarantine rules. Now, with almost a 100%, I could say over 90% approaching 100% at some point, of U.S. people staying at home and businesses completely shuttered, we had to revise downward. This is a truly historical moment. There are no models to follow. I'm an economist. You have to be ready to revise your thinking and just move as quickly as possible. We rely on a lot of non-traditional economic numbers to be able to keep up with COVID-19 and even that is hard.

Nathan Hunt: I keep hearing the phrase used: The risks are all on the downside. What does that mean in this context?

Beth Ann Bovino: It depends on a lot of factors that we're looking at. COVID-19 it's passed the policy measures that need to contain it. Will they be successful? It's all highly uncertain. We expect the virus to be contained sometime in May, but what if it mutates? Or, what if the United States opened up too soon, resulting in a second wave? Just when the U.S. is facing a flu epidemic, we cannot expect a credible vaccine to be available for another 12 to maybe even 18 months. So until then, COVID-19 will dictate the terms.

Nathan Hunt: How could we make this better somehow?

Beth Ann Bovino: Well, before we get into how to make it better, I do want to give, I guess a shout out to the Federal Reserve and the U.S. government. They did really step up to the plate very quickly. They put out a significant amount of stimulus to provide a cushion for the economy.

The Fed brought interest rates back down to zero. They started quantitative easing and they opened up many new and old facilities for the U.S. financial markets to stabilize. The U.S. government also went into significant amounts of stimulus providing a, I guess we're on our fourth package now, and that indeed has really helped, I believe, stabilize somewhat the U.S. economy.

However, I believe that more needs to be done. We're still expecting about 30 million people to be out of work once COVID-19 runs its course. And given no revenues are out there to keep many businesses afloat, there was a real worry that those workers may not have a job to return to. So in my mind, it seems an ideal time to launch an infrastructure project.

Right now, interest rates are incredibly low. Commodity prices are down, and our many people out of work. We see that infrastructure spending could create much needed jobs over the near term. And assuming that project was prudent, that productivity boost would create more jobs in the future.

Nathan Hunt: Beth Ann, we've heard this story before, that infrastructure spending can help. Why now, particularly?

Beth Ann Bovino: You don't have to be an economist to know how much pain the U.S. economy is in. Everyone knows somebody who's lost their job or a shopping center that is closed. We did an analysis to look at what would be the impact of an infrastructure package on the U.S. economy over the next 10 years.

We estimated something that was discussed earlier on. We looked at a $2 trillion infrastructure investment over a 10 year period, and what we found is that if that did go into place, that could add as much as $5.7 trillion to the U.S. economy by 2029. That investment could create those needed jobs.

We call it creating about 2.3 million jobs by 2024. And many of those jobs are middle class jobs, and if it was done prudently, that public capital boost would enhance the productivity of private capital - raising its rate of return and encouraging more investment. Indeed, in our analysis, we would see that productivity boost would in the end, add a net 713,000 more jobs by 2029, then if the project was not done at all. I should also add that people's wallets will be a lot fatter. We saw that personal income would be $2,400 bigger than without infrastructure.

Nathan Hunt: American infrastructure used to be a source of pride. I think of Eisenhower and the interstate highway system. What is the current state of our infrastructure?

Beth Ann Bovino: Indeed, I mean the network of highways that crisscrossed the country were instrumental in getting products cheaply and safely across the U.S. And you can also add the Golden Spike that completed the first transcontinental railroad or public works projects by Roosevelt's New Deal. All of these in a sense were major achievements.

We called that the grease that kept the U.S. economy chugging along, and indeed, it made the U.S. faster and ultimately more competitive in a global marketplace. But unfortunately, while the U.S. continued to evolve economically, this former point of pride had fallen to what we believe was massive disrepair.

Actually, you don't even have to go with what we think. I look at what others are saying. The American Society of Civil Engineers has been giving the U.S. infrastructure a D+. That's for the last seven years. The quality of U.S. infrastructure has also fallen in the ranking against its peers according to the World Economic Forum, which leaves the U.S. at a competitive disadvantage relative to its major trading partners. That to me is a very big worry.

Nathan Hunt: What impact does aging infrastructure have on economic performance?

Beth Ann Bovino: Infrastructure contributes to both higher productivity growth and also to living standards. Public capital can even enhance the productivity of private capital, raising its rate of return and encouraging more investment.

But the issue here and what the worry has been, was that infrastructure platforms, if they're not maintained or replaced over time, they lose strength and become inefficient. The U.S. is a perfect case in point. Growth and capital stock used to build and maintain U.S. infrastructure after World War II had averaged over 4% in real terms, likely helping generate those productivity gains that we saw that averaged over 2% in that period.

But since then, infrastructure investment as a percentage of GDP has slipped to around 1%. And unfortunately, not surprisingly, productivity has also fallen.

Nathan Hunt: Where and how much do you think we should be spending on infrastructure to set us up for an eventual recovery?

Beth Ann Bovino: Where and how much? There's so many places where it could go and to how much, there are so many needs.

We did do an analysis. We looked at a scenario based on a $2 trillion investment package and infrastructure that was based on earlier negotiations by the White House and Congress. So something along those lines could be feasible. In terms of where it's spent, there are many options to choose from, unfortunately. Public health infrastructure as a case in point. That has been described as the nerve center of public health system, but it has been depleted over the years. For example, the CDC’s budget had been depleted by 10% in real terms from 2010 to 2019. There are many other examples to go by.

And indeed, if we want to talk about what the situation we're in right now, in terms of many people at home, that may be a push for improving telecommuting issues, focusing on extending broadband capabilities to regions that are ill-equipped could be a good move at this point in time. But while right now COVID-19 had created an urgency to invest in much needed public health infrastructure, and also making those communications systems a little bit tighter, six months from now it could be another Superstorm Sandy that will call attention to the need to invest in infrastructure to prevent damage from climate change or something that we don't even know of. Either way, it all comes back to infrastructure investment, which we need to tackle now.

Nathan Hunt: What impact do you project that would have on the U.S. economy?

Beth Ann Bovino: Indeed, we're looking at a big number. We talked about a $2 trillion investment in infrastructure over a 10 year period, which would add, in terms of our estimates, as much as $5.7 trillion to the U.S. by 2029. What's that saying is that public infrastructure investment could indeed crowd in private investment with every dollar spent having a multiplier effect.

If that project was wide, the multiplier from the infrastructure investment would be larger than the money spent, and that would be needed and necessary at this point in time.

Nathan Hunt: Can you explain what you mean by multiplier effect?

Beth Ann Bovino: The multiplier can be seen as, I guess you could say, either a return on investment or maybe a revenue on investment.

The multiplier for infrastructure spending, for example, had been estimated to average around 2 according to an earlier Fed study. That would mean that the multiplier will be even larger the more flex there was in the economy. So in our scenario where we have a $2 trillion investment, we saw that generating a multiplier of 2.7.

Or in other words, in terms of return on that investment, that means that for every dollar spent, the economy’s return on investment will be $2.70. That seems like a very good opportunity to take on.

Nathan Hunt: Why is infrastructure special? Wouldn't we gain exactly the same benefit from the government spending $2 trillion on say fighter jets?

Beth Ann Bovino: Fighter jets are good, but in terms of the economic value they add in terms of job creation is not as big as what we would get from infrastructure investment, if the infrastructure is done wisely. If that infrastructure investment ultimately ends up in a crowding-in of private investments.

Nathan Hunt: How soon should we get started on investing in infrastructure in order to realize these benefits? Can it wait until after the next presidential election?

Beth Ann Bovino: At this point in time, looking at where the U.S. economy is, looking at how many jobs have been lost and how many millions will be lost, I think the time is now. It’s not a partisan issue. And it seems that on Capitol Hill there seems to be, despite all the differences among party members, it does seem like there is an agreement that something must be done. So I would say the time is now to move

Nathan Hunt: Beth Ann, can I ask you to project forward under two scenarios: What is the recovery look like if we invest in infrastructure and what might the recovery look like if we don't?

Beth Ann Bovino: If we invested in infrastructure, say take an example of my scenario of the $2 trillion investments over a 10 year period. That would mean that the recovery that the U.S. would see going out 10 years would be much stronger, with more jobs created for many people in the United States. We're looking at $2 trillion investment would add up to $5.7 trillion to the U.S. economy, and it would create not just jobs today, going out several years while the projects are being done, but also jobs later on.

If indeed those projects were prudent. Meaning that the productivity gains with generate more investments later on and with that more jobs and a stronger economy going forward. Comparing it to our current baseline forecast, it would be night and day. Our current baseline for the U.S., while we do see a kind of a pickup in the economy and the second half of the year, it's not going to be enough to be able to replace what was lost from COVID-19 until sometime in 2021.

Nathan Hunt: Beth Ann, one final question. If you could address American politicians today, what would you tell them about taking up the cause of infrastructure and its role in driving the recovery?

Beth Ann Bovino: I would first thank the politicians for moving as quickly as they had in terms of getting the stimulus out to the people that needed it.

Offering a lifeline for those workers who've lost their jobs and really helping some of those industries had been squeezed so hard by the shutdown of businesses because of COVID-19, but I also want to say now's not the time to stop. The patient is still on the operating table. We can't walk away and say that our job is done.

I think, if we want to create the jobs that are necessary to bring many of those workers back to the workforce, I think one opportunity that's out there is infrastructure, and I hope you'll take a good look at it.

Nathan Hunt: Thank you for listening to The Essential Podcast from S&P Global. In the show notes, you'll find links to Beth Ann Bovino’s latest U.S. economic outlook and her article on infrastructure investing. To see all of our coverage of the markets, please visit SPGlobal.com.

The Essential Podcast is edited and produced by Molly Mintz.