In recent weeks the moderate optimism on the US economic outlook has deteriorated—gradually at first, then suddenly. The catalyst, of course, is the coronavirus and the attempt to battle its spread—a policy that economist Paul Krugman describes as the economic equivalent of a “medically induced coma.” Whatever you call it, the blowback is severe and no one knows how it’ll play out or, more importantly, how the eventual recovery will unfold. Meantime, let’s consider some of the latest guesstimates for the Covid-19-triggered recession that’s roiling the American economy.
Let’s start by recognizing that many formerly useful econometric modeling applications have been rendered worthless in the current climate. As I noted a few weeks ago: “Thanks to the lag in economic data, which can arrive as long as two to three months after the fact, formerly robust methodologies for tracking the US macro trend have become hopelessly out of date in recent weeks.”
Since then, the updates have started confirming that the damage is deep and extensive. Yesterday’s weekly update on jobless claims revealed that an astounding 6.6 million Americans filed for new unemployment benefits last week. In the past three updates, new claims surged above 16 million. Meanwhile, US payrolls in March fell 701,000.
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Unfortunately, the economic pain has only just started. How bad will it get? Unclear, although judging by recent estimates it’s best to prepare for a contraction that’s unprecedented in modern times in terms of the speed and depth of the collapse.
JPMorgan economists, for example, expect an extraordinary 40% drop in US gross domestic product in the second quarter (annualized), accompanied by a surge in April’s jobless rate to 20%.
Pacific Investment Management Co., a fixed-income manager, is relatively upbeat by comparison, forecasting this week that US output in Q2 will drop 30% [annualized] and unemployment will rise to 20%, advises Tiffany Wilding, a North American economist at the firm.
To put the dire estimates into perspective, consider Fitch Ratings’ economic Activity Tracker, which reflects a massive 7% slide in year-over-year GDP. “A 7% decline in our US GDP Activity Tracker would mark a much more rapid and steeper decline in economic activity than registered at the height of the Global Financial Crisis,” says Maxime Darmet, director at Fitch Ratings.
With harsh economic damage no longer in doubt, the main focus is the eventual rebound. The critical questions: When will it start and how strong will it be? The future’s always unclear, of course, and the caveat is even more relevant now. Since the evolution of the coronavirus fallout is still highly unpredictable, the path of the economic rebound remains mostly guesswork.
That hasn’t stopped anyone from guessing, including Federal Reserve Chairman Jerome Powell. “There is every reason to believe that the economic rebound, when it comes, can be robust,” he says. Note the use of the word “can.”
In fact, several scenarios are possible, as McKinsey & Co. recently pointed out. Depending on assumptions for government policy, the efficacy and extent of social distancing, along with other factors, the economic path ahead can roll out in dramatically different ways.
The recent and future efforts by the government will help ease the pain and juice the rebound, but in what degree remains to be seen. “Over the last few weeks forecasters have been operating in a fog,” JP Morgan economists note. “Economic models that have been trained on post-war data face obvious limitations. In their place we have reverted to differing ways to address the outlook.”
That includes paying close attention to Covid-19 data. For example, the University of Washington’s Institute for Health Metrics is projecting (as of Apr. 8) that US deaths will peak in a few days – Apr. 12, based on the median estimate. The band of uncertainty, however, is wide and so the obvious caveats apply.
It’ll take several weeks to reliably confirm (or reject) coronavirus forecasts. Meantime, hope springs eternal.
“At the same time as we’re seeing the increase in deaths, we’re seeing a rather dramatic decrease in the need for hospitalizations,” notes Dr. Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases. “That means that what we are doing is working and therefore we need to continue to do it.”
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