U.S. Risks Coronavirus Recession 2.0

(Bloomberg Opinion) -- As states relax shelter-in-place orders, the economy should bounce back a bit this month and next. Continued fears among consumers and businesses mean the U.S. won't be back to February's levels any time soon, but the early April collapse might mark a low as we adjust to our new pandemic normal. The bigger worry might be July, as three key pillars of economic support are set to go away. Without strong momentum building during the next couple of months or extensions of fiscal relief, we could have another downturn toward the end of the summer.

A variety of measures suggest that economic activity bottomed in the second week of April. This coincided with concern about the threat of coronavirus beginning to wane and as Americans began moving around outside their house a little. It's not hard to show a little growth relative to a period when most Americans are locked down. It bears noting how even rapid growth for several weeks is barely making a dent in the hole that exists in some industries. For example, although passenger traffic for air travel is up about 50% from the lows in mid-April that just means it's down roughly 94% year-over-year rather than 96%.

If this pattern continues throughout May and June as shutdowns are relaxed, it's a good bet that consumers, workers and businesses are all adapting to our changed way of life. What nobody knows yet is just how much lost activity will be recouped. Curbside-food pickup and delivery might offset some of lost dine-in traffic, and family road trips might be seen as safer than air travel. But large events with crowds aren't coming back any time soon, and everyone from Warren Buffett to General Electric has warned about how long it might be before demand for new airplanes comes back.

The bigger test for the economy will come at the end of June. Much of the support for this nascent recovery has come from programs put in place by the Federal Reserve, Congress, state governments and banks to provide relief for consumers, homeowners and businesses. Some of them, such as those of the Fed, will continue indefinitely. But others are scheduled to phase out soon.

The Paycheck Protection Program offered eight weeks of subsidies for wages and other expenses for small businesses, provided they retained their employees. It's unclear what will happen once the program expires in June. The economy won't be anywhere close to normal by then. Will Congress extend the program? If not, what will businesses that received PPP funds do? Presumably that would mean new layoffs; it's just a question of when and how many.

Similarly, states such as California worked out deals with banks in late March to provide 90-day grace periods to homeowners when it comes to paying their mortgages. If not extended, those too will expire at the end of June. Those grace periods are providing support not just to households struggling to pay bills, but also to the housing market by keeping borrowers who can't pay their mortgage from having to sell their homes or face foreclosure. If mortgages come due in July and borrowers can't pay, that could lead to the kind of plunge in the housing market that so far has been averted.

Finally, the enhanced unemployment benefits passed by Congress are helping millions of unemployed workers continue to pay their bills. But those are set to expire at the end of July. Although there has been talk of extending the benefits, there's also some resistance from Senate Republicans who are concerned that they hurt businesses that are ready to get back to work by giving workers an incentive to stay home. It's unclear whether those benefits will be extended or if they'll be phased out in some orderly fashion based on the progression of the virus and the strength of the labor market.

Because of all the uncertainty -- political, economic and epidemiological -- markets have understandably focused on short-term trends and headlines, which is one of the reasons stocks have rallied so much from the March lows. Support from the Fed, Congress, a flattening of the virus curve, and a slight pickup in economic activity have outweighed the surge in jobless claims or the elevated valuations of stocks based on projected earnings. But if the removal of economic life support measures in June and July quickly undoes the progress the economy makes in the second quarter, markets may have to deal with lofty valuations without any of the positive data points that have supported the rally during the past month. July may feel like a lifetime away but it will be here before we know it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.