We now have a consensus that the United States, along with the world economy, will enter into a severe recession, surpassing the 2007-2008 slumps. Forecasting when the recession will begin is notoriously difficult; however, indicators flash very negative warnings. The economic downturn should persist for at least months. Stated differently, the recovery will take a U shape, not a V shape.
Greg Deco, chief U.S. economist at Oxford Economics, projects that in the second quarter, our economy will decline 12 percent. Goldman Sachs wrote on Friday that the decline could be 24%. The latter are depression numbers.
The global spread of the coronavirus is accelerating. The cases of infection doubled in a week to top 310,000. Currently, some 80 million of our population are in lockdown. Confirmed cases in the United States now exceed 20,000, a tenfold increase in the past 10 days. Dr. Tom Frieden, former director of U.S. Centers for Disease Control and Prevention, believes we have unreported tens of thousands of cases. While the forecasts are inherently uncertain, Columbia University researchers forecast that some 650,000 Americans might become infected.
Trying to project the downturn remains unclear for the following reasons:
• Unknown trajectory of the pandemic
• Extreme volatility in the financial markets
• Restrictions on daily economic activity of unknown duration
• Federal, state, and local governments adjust policies daily.
Ellen Zentner, chief economist at Morgan Stanley, wrote, “Smaller companies will be hit harder than large ones because of their limited access to credit and less cash in the bank. There will be a swath of small businesses that simply won’t be able to survive this.”
In response to the financial crisis, the Federal Reserve has taken some dramatic actions. On March 15, Fed Chairman Jerome Powell in a press briefing said, “We will restore market functioning.” Our central bank cut interest rates to zero and provided $700 billion round of quantitative easing. Subsequently, the Fed announced a new facility with the authority to buy corporate papers from issuers who might have difficulty selling their paper. Moreover, the Fed will accept corporate paper as collateral from the large broker-dealers. On March 20, the Fed expanded the list of acceptable collateral required for a loan to include high-quality municipal debt. In brief, the Fed has replicated the measures instituted in 2008-2009.
Larry Kudlow, the director of the National Economic Council, said on Saturday that the Senate is negotiating a massive coronavirus stimulus package that will exceed $1.3 trillion. Kudlow and White House Director of Legislative Affairs Eric Ueland said that when the price tag for the bill includes the money the Federal Reserve will spend, it will have the total “impact” of more than $2 trillion.
More importantly, Secretary of Treasury, Steve Mnuchin said on Fox news that if needed we will pass additional economic packages in a few months.
Lawmakers are under significant pressure to quickly pass massive legislation to try to reassure the markets and offer assistance to workers, small businesses and industries that have been impacted by the spread of the coronavirus.
Experts predict that low-income and low-wage earners will bear the brunt of the economic impact of coronavirus. The immediate impact has occurred in the restaurant, travel, leisure and hospitality industries. Unfortunately, many of them do not have access to sick leave and live paycheck to paycheck.
The Bureau of Labor Statistics has estimated that only a third of the workforce in our country can work from home.
The blistering speed of the virus’ spread will challenge federal, state and local policymakers. I applaud taking drastic containment efforts at huge costs to our economy. We need to take the economic equivalent of Dunkirk, when the Allies in 1940 evacuated 338,226 soldiers from the coast of France to England, leaving almost all of their military equipment. Survival of our way of life is our only priority.
Originally published in the Sarasota Herald-Tribune
