The coronavirus effect on the real economy has arrived

By Edward Harrison On Mar 18, 2020

We saw a glimpse of it in the data last week for the first time, but the crushing impact of the coronavirus is now here. And the damage it is about to wreak on our economies is significant. This is likely to be a deep recession. Analysis below

Where to begin?

There are a lot of different ways I can tee this post up. But, because what I am about to write is pretty downbeat, I thought I would start with the upside, if that’s ok.

First, let’s remember that annualized GDP growth in the US was probably tracking well north of 2% in this quarter through the end of February. I wrote about how the March 6th GDPNow number was 3.1%. And so, it means the US was in a better place economically to weather a hit to its economy than many other industrialized economies.

On the back end of the coronavirus hit, we have China to look toward as an example. Scientists have traced the coronavirus pandemic back to a 17 November 2019 case of a 55-year old in Hubei province, the so-called patient zero. It wasn’t until late December that China realized that it was dealing with a new disease. And it wasn’t until 23 January 2020 that the Wuhan lockdown began. The Chinese government only extended the lockdown to all ‘non-essential companies’ and individuals in the entirety of Hubei province on 13 February 2020.

Only now, the Chinese are re-emerging from the hit. Just yesterday, Jingzhou, a city of 5 million in southern Hubei province removed public transport restrictions. But, this is because yesterday only one domestically-transmitted case of Covid-19 infection was registered in the whole of Wuhan province, for the second consecutive day. So, that gives us something to hope for.

Recession timeframe

Front to back that’s exactly 4 months. If we look at Washington state, where the coronavirus first broke in the US, the first confirmed case was on 21 January 2020. It was a 35-year old man who was living in Snohomish County who had returned to the US from Wuhan on 15 January via a flight to Seattle-Tacoma Airport (with no symptoms at that time). He was reported to urgent care on 19 January and released from hospital on 3 February.

If you take the Chinese timeline as a best case outcome, front to back would be 15 May 2020 when the US economy slowly reemerges. If you compare the lockdowns, the US is just about two months behind China. And that would also point to mid-May as the re-emergence date from the epidemic. That’s two months of excruciating economic pain, followed by recovery.

Is that a recession? Probably, yes. Look at the Chinese data; China’s industrial output contracted at the sharpest pace in 30 years in the first two months of the year. Auto sales plunged 79% in February. Exports fell 17%.

The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

– National Bureau of Economic Research

Using the NBER yardstick, what happened in China certainly counts as a recession. The US is not ever going to take the draconian measures China did. But in so doing, the scale of the infection rate will be larger and the lockdown will be longer. Recession, a deep recession, has to be a base case outcome here.

Jobs and recession

Tomorrow, we are going to get our first semi post-lockdown jobless claims number. So it will be interesting to see how many Americans qualified for unemployment benefits. My assumption is that we will see the change in the jobs picture pretty much in real time via this number. And I anticipate the number will skyrocket over the next few months.

A sampling of announcements in the last 24 hours here:

Many retail outlets, restaurants, hotels, airlines, cruise ships, gyms, theaters – they’re all closing down indefinitely.

The Trump Administration is afraid we could see 20% unemployment because of the coronavirus. Again, a deep recession has to be a base case. This article by the NY Times is a good place to start if you want a comprehensive view. They say:

Relatively few companies outside the hospitality industry have announced significant job cuts, with many saying they will continue to pay employees even while they are closed, though often for fewer hours of work than normal.

But that cushion seems unsustainable. Most small businesses do not have the financial buffer to pay workers for long if revenue dries up. And while larger public companies may have access to cash, they also have shareholders who want executives to watch the bottom line.

“It’s simple math,” said Deborah Weinswig, founder of Coresight Research, an advisory and research firm that specializes in retail and technology. “You can’t have all expenses and no revenue.”

IHS Markit, an economic forecasting firm, said Monday that it expected the unemployment rate to rise to 6 percent by mid-2021, up from 3.5 percent in February. The Economic Policy Institute, a progressive research group, estimated on Tuesday that the outbreak could eliminate three million jobs by summer.

That’s definitely a recession. And depending on circumstances, it could be a lot worse.

My take

I don’t think there’s any other conclusion one can now draw than that we are already in a recession. And likely it’s going to be a deep recession. How deep is unclear because it’s unclear how effective the social distancing and lockdown and quarantine measures will be in arresting the spread of the coronavirus.

But, it’s still early days for the US and Europe. The US is about where China was two months ago. And that means lockdown is going to last through mid-May at a minimum, likely longer. From an epidemiological standpoint, the virus mutation question is a big unknown. And the ability for Covid-19 to sustain itself in warm climates is another unknown.

We have a long challenging period ahead of us now. Yesterday, I wrote about a breakdown in the commercial paper market. And, later that day, the Fed announced a resumption of the commercial paper funding facility it developed in the Great Financial Crisis. And while this might be enough, it does give you hope that reactive policy can help avoid worst case outcomes.

Moreover, the fiscal measures are beginning too. They won’t be enough to prevent a recession. Even so, they will both cushion the economic blow, and, if administered well, accelerate the upturn on the back end of the lockdowns.

This is a trying time. But it’s not all doom and gloom. Be well and stay safe.