NEW NORMAL The future is bright as we enter a period of spring renewal, says FGCU professor Tom Smythe.
We are on the cusp of taking our world back as a vaccine becomes widely available. As we contemplate the future, we need to remember that our post-pandemic lives will not return to a pre-March 2020 norm. We will develop a new normal that will—I believe—be better than what we were used to. However, while we all are looking forward to this new normal, there are likely to be bumps in the road, both in our personal lives and the broader economy. I foresee three areas where “bumps” are likely to occur in the economy.
The U.S. banking system is far better positioned for economic upheaval than in the past. New regulations were designed with a pandemic-like event in mind, and to this point, we haven’t heard about problems at banks. However, issues in the industry are likely to lag the resurgence of the real economy. This is because the government will begin to remove many of the financial backstops that it provided. While mortgage and student loan forbearance has been a lifeline to individuals, at some point, those
and other debts have to be repaid. To the extent people are still unemployed or underemployed, banks may start to see higher default rates.
While banks are better prepared for such a situation, the problem would come when we need banks to help restart the economy. I’m not suggesting there will be large-scale defaults, only that there is a possibility the negative outcomes typically experienced in the early stages of economic uncertainty have not occurred yet (because of the government support that was provided). This will be further complicated by the low-interest rate environment that will persist through 2021. While low rates are great for borrowers, they limit a bank’s ability to make a profit. While some may cheer that idea, the reality is banks need to make money to lend it. With rates near zero, banks are discouraged from lending, again at the exact time we need them to. Of course, if default rates do rise, banks may experience a double whammy.
A second bump will take place in the job market. Unfortunately, those looking for work will likely experience frustration. Some will be rehired in the same jobs they were in pre-pandemic, but for those in industries from hospitality to retail, the path is less clear. While hospitality, retail and leisure and entertainment are obvious industries that will be fundamentally different, others will go through a significant transition as we adapt to the new normal; however, it will take time for industries to figure out what the new business normal looks like. It’s not that jobs won’t be available, but people who were in retail may need to retool to be in—you name the industry. The key is to recognize that this transition will not be immediate.
Lastly, the herculean effort by central banks helped mitigate the economic impact of what I believe to be the most significant human event in the last 100 years. We will argue for decades about whether the intervention was enough or too much, but there is no question that the efforts have allowed markets to continue to function. At issue is that the Fed turned on a monetary spigot with little regard for how quickly the money could be absorbed. The difficulty will be figuring out when and how to drain the excess. If we don’t drain the excess, we can drown in it. At some point, firms and individuals need to pay down debt, savers need to have an incentive to save, and we need to be able to allocate resources efficiently to their best uses. As the Fed navigates this process, there is a strong likelihood for mistakes/bumps along the way. The Fed is in uncharted territory, yet the decisions it makes over the next five years will affect the country’s economic future for decades to come.
So, the future is bright as we enter a period of spring renewal. The new normal will be exciting and lead to a robust future, but there will be problems along the way. However, these setbacks should be seen through the lens of what we have just survived … and when viewed through that lens, the bumps yet to be experienced are just that, bumps.
Tom Smythe, Ph.D., is a professor of finance in the Lutgert College of Business at Florida Gulf Coast University.
