The published data suggest moderate growth remains intact, but the rear-view mirror has rarely been so meaningless for assessing the likely path of the economic trend in the months ahead. As the coronavirus blowback spreads, the US economy is slowing, and in many sectors grinding to a halt. The result, of course, is that a recession appears inevitable, perhaps a severe one. The optimistic view is that the downturn will be short and the bounce-back will be strong. But economists are now in agreement: output will probably contract.
“The problem for the U.S. economy is a lot of cities are shutting down, and people staying home, not going out to restaurants, not going out shopping, not buying cars,” says Andrew Levin, professor of economics at Dartmouth College and a former special advisor to the Federal Reserve Board. “I don’t see how we’re going to avoid having a recession.”
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The stock market has been pricing in a recession by way of a rapid collapse in prices. The S&P 500, which closed at a record high on Feb. 19, ended Monday’s trading session (Mar. 17) at nearly 30% below the previous peak.
“This market looks like it has already priced in most of a garden variety recession,” notes Frances Donald, global chief economist at Manulife Investment Management. “It is now on top of that having to price in some probability of a credit crisis.”
Estimating how deep the economic hit could be is largely guesswork at this point. But the one thing that’s clear is the rapid shift in expectations from just a couple of weeks ago.
“Whereas 10 days ago there was some legitimate uncertainty about whether the global economy was in the process of going into recession — 10 days later, there’s no question that it is,” advises David Wilcox, former head of research and statistics at the Federal Reserve Board.
In a sign of how big a disconnect the revised outlook is vs. the recent past, the Atlanta Fed’s GDPNow model is estimating that first-quarter output for the US will rise 3.1% (as of the Mar. 6 update). Normally, such a rosy outlook would support optimism for Q2. But a chasm separates Q1 from Q2 in terms of the expected change. Even so, economic models are slow in catching up with the reality on the ground, in part because hard economic data arrives with a lag.
Consider the New York Fed’s nowcast for US GDP activity in Q2. The bank’s Mar. 13 estimate is still a modest +1.1%, which is almost certainly wrong by a hefty degree.
Exactly how big a hit, however, is subject to an unusually high degree of uncertainty. As Neil Irwin at The New York Times reminds: “No modern economy has experienced anything quite like this. We simply don’t know how the economic machine will respond to the damage that is starting to occur, nor how hard or easy it will be to turn it back on again.”
The Federal Reserve is trying to limit the damage. The central bank has cut interest rates to near-zero and has relaunched its asset-buying program to support markets and maintain liquidity in the financial system. But the scale and type of the economic blowback, arising from a health crisis rather than an economic or financial crisis, will likely mute the power of monetary policy.
Congress is working on legislation to offer fiscal support, but it’s unclear how effective this will be as the details on a stimulus continue to evolve. The House on Monday passed a coronavirus emergency bill and the Senate is set to consider the package.
Meantime, the economy continues to suffer. “We’ve hit a wall. The economy is in free-fall,” says Mark Zandi, chief economist for Moody’s Analytics. He estimates that GDP will fall at a hefty 5% annualized rate in March.
But this too shall pass. When? No one knows, although some analysts are starting to look through the blowback.
“We think we will see a nice bounce back in the third quarter,” predicts Sal Guatieri, senior economist at BMO Capital Markets.
Maybe, but at the moment Q3 seems to be a world away as the US and the world grapple with navigating through the next several months.
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