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How A Spike In Demand For Goods And Services Might Affect The U.S. Economy

MARY LOUISE KELLY, HOST:

As states begin to reopen, businesses hope to see a big demand for their goods and their services. But will this pent-up demand be enough to offset the devastating impact the U.S. economy has suffered due to the coronavirus shutdowns? Stacey Vanek Smith from our daily economics podcast The Indicator has the story.

STACEY VANEK SMITH, BYLINE: Deb Compton could not be happier about reopening her dog grooming business at Pet Supplies Plus in Madison, Wis.

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DEB COMPTON: I am so excited. I'm like, do I still remember how? (Laughter).

VANEK SMITH: Pet Supplies' grooming services closed down in March, just as their peak season was ramping up. So, weeks later, when it was announced that dog groomers were one of the businesses that could reopen in Wisconsin, Deb says customers started calling immediately.

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COMPTON: We're slammed right now. We can't even keep up with the phone.

VANEK SMITH: This is what economists call pent-up demand. As the economy opens back up and businesses start taking customers again, businesses will see a surge in orders. And the size of that surge - how much demand comes back - is key. That will tell us how much permanent damage was done to the economy. So some demand is just lost forever. But what about going forward? Will demand come back to the level it was? Economist Jared Bernstein says, no way. And there are a few reasons for this. The big one - unemployment.

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JARED BERNSTEIN: And most forecasts have the unemployment rate peaking out something between 15- and 20%. I'd probably be on the upper end of that range sometime later this year.

VANEK SMITH: Twenty percent unemployment - that is double what the unemployment rate was at the very worst moments of the Great Recession. During the Great Depression, unemployment was at 25%. So 20% unemployment, if that happens, would be a stunning, horrible number. Deb Compton says she is really worried about this, so Deb is cutting back on her own spending.

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COMPTON: I don't want to tap into my savings because you don't know where's your next check coming and when's this opening up?

VANEK SMITH: When people like Deb are worried about the future, it is the wise and rational move to save more money and spend less. It can create an economic situation known as the paradox of thrift. This idea comes from famous economist John Maynard Keynes. The paradox is - what is good for one person is not good for the economy as a whole. When people spend less, that is really bad for businesses.

And in this case, there's this whole other factor - COVID-19. Jared Bernstein says all of that combined could push many businesses and companies over the edge.

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BERNSTEIN: I think demand on the other side of this is going to be a much heavier lift because we just won't have an economy in place that's capable of bouncing back.

VANEK SMITH: When it came to the paradox of thrift, economist John Maynard Keynes said the solution was for the government to step in and spend the money that consumers aren't spending or get money to people so they will keep spending, and we have seen the government do both of those things in the last couple months. Economist Jared Bernstein says even with all of that, the damage from COVID-19 could be devastating. And we won't really know how devastating until much later this year.

Stacey Vanek Smith, NPR News.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.