April 3, 2020
The employment report for March showed a much larger job loss than had been expected as payroll employment declined 701 thousand. However, the bulk of the impact lies ahead. For what it is worth, we expect payroll employment to shrink by 5 million workers in April. If we see an employment drop of that magnitude, we are almost certain to see GDP decline 20.0% or more in the second quarter. Estimates range from a decline of 10% to a drop of 35%. Whatever the second quarter GDP decline turns out to be, it will be the largest single-quarter decline on record.
Going forward the issue is how quickly the virus will show signs of slowing, how quickly the federal government can issue refund checks, and how soon businesses will be able to reopen. Based on the Chinese experience we are expecting to see early signs of improvement in the virus by mid-April and more clear-cut evidence by the end of this month. If that is the case, consumer and business confidence will rebound quickly. Many health care experts suggest that this virus will not disappear quickly or that we will see a resurgence of it later in the year. That possibility continues to scare both consumers and businesses. Nevertheless, if later this month we find that the number of active cases of the virus begins to decline, our sense is that consumer and business confidence will rebound quickly. At the same time, after having lost nearly 30% of its value, the stock market will surge and erase a significant portion of its late February and March drop. Businesses could gradually re-open.
We are just now beginning to see data for March – and it looks awful. We know that 10 million workers were laid off in the second half of March. We also know that car sales fell 32% in March to an 11.4 million pace which is the slowest pace of sales in a decade. That should pave the way for a decline in retail sales for March of perhaps 10.0%. We anticipate a further decline in payroll employment for April of 5 million workers which means that the April data for retail sales will look even worse.
But no matter what happens to the pace of economic activity in March, April, and May or the future course of the virus, it is important to remember that help is on the way. Congress recently passed a $2.0 trillion stimulus package that is designed to provide relief to businesses, workers, and state and local governments that have been negatively impacted by the virus. Every taxpayer that earned less than $75,000 last year will receive a check from the Treasury for $1,200 (or $2,400 for couples) and $500 per child. Unemployed workers will get an extra $600 per week for up to four months to make up for lost wages. Hospitals will get $100 billion to make up for losses they have incurred by delaying elective surgeries and a 20% increase in Medicare payments for treating patients with the virus. Airlines receive $29 billion in grants and an additional $29 billion in loans and loan guarantees. Businesses will get a tax credit for keeping idled workers on the payrolls during the corona virus pandemic. State and local governments, which are losing huge amounts of tax revenue because only essential business are allowed to remain open, will get $150 billion. The Defense Department gets $10.5 billion for expenses related to deploying the National Guard to help state response teams fight the corona virus. Employers get to defer the 6.2% tax on wages that is used to fund Social Security. The list goes on and on with further relief for telemedicine, the postal service, food stamps, farmers, and ranchers.
These payments will prop up the pace of economic activity quickly. It is unclear exactly when the tax refunds and other payments will be issued but the government is on an expedited schedule. It wants refund checks to go out within two weeks. Surely that will happen by month end. So while the March and April outlook appears grim, and May will probably also look bad, by June the economy should begin to turn upwards. Hopefully, by that time the virus will be showing solid evidence of having gotten under control. So, following a 20% drop in Q2 GDP we anticipate an 8.7% snap-back in third quarter GDP and 7.0% growth in the fourth quarter.
When the dust settles the National Bureau of Economic Research (NBER) will decide that the expansion ended in February 2020 and the recession began in March. But, as always, that date will not be determined until well after the fact, probably sometime towards the end of this year. The interesting part is what happens next – when does the economy once again begin to turn upwards? It is possible that with the massive amount of stimulus, that occurs by June. If that is the case, the recession will have lasted just three months or less than one-half the usual amount of time.
The enormous uncertainty about the future course of the economy will ultimately be determined by the virus and how quickly it gets under control. For now – with a lot of help from the government — the downswing appears likely to be of very short duration.
Stephen Slifer
NumberNomics
Charleston, S.C.
Hello Stephen,
I agree the numbers may show an end of the recession in a few months, but I get the feeling that it is not going to feel like we are coming out of a recession. I just don’t believe our economy can take a direct hit to the gut like this and come out better for the experience. This experience will leave us (the USA) with a lot of sticky issues to clean up.
How do you think some of these issues will impact the US economy:
• There will likely be a global recession – some countries will experience depressions,
• Globalism will lose it’s luster – move toward more protectionism and nationalism,
• Global trade will see massive changes – many trade partner shifts,
• Government, business, and private debt will change the health of many countries – there will be winners and losers. The US entered the crisis with a considerable level of total debt and has added much more through the crisis – Our debt is over $210 trillion now (yes, this number is right, it includes Federal, states, local governments, household, business, financial, and unfunded federal debt),
• The Fed is printing money faster than ever in our history. I am not sure they even know what their balance sheet looks like anymore,
• The status of the US dollar being the world’s reserve currency will be challenged. China may be the ultimate winner,
• And More…
Just like you, I want to be positive about the future, and I am for the short-term, but the long-term really concerns me. Please help me feel better.
Hi Mike,
Thanks for taking the time to make your comments. I agree that the government essentially buying its way out of a potentially deep lengthy recession does not feel nearly as good as an economy that rebounds because private sector demand is picking up and firms begin to hire.
I am not a Trump guy, but in a way I feel sorry for him — or anybody else who might have gotten caught up in this situation. If he believes the virus is not a big deal and chooses not to respond vigorously, the markets will fall apart (much like what happened when he talked about a $1.0 trillion stimulus package). The Democrats will crucify him. If he believes the China experience that only aggressive action will halt the spread of the virus he is looking at the steepest GDP decline in our history. The economy stops dead in its tracks. I don’t know what you would choose, but I guess if I were in his seat I would opt for the aggressive action. Get the virus stopped and the crisis out of the way, and worry about what is on the other side later. Sounds a bit like what happened at the end of 2008-09. Stop the bleeding, get the economy going again, and figure out the rest.
There is no question that the government will end up with a huge amount of debt, debt to GDP ratios will climb to a danger level. What had been $1.0 trillion deficits will mushroom to $3 trillion. How do we handle that? Politicians are very quick to increase spending, but never take it back once the crisis is over. My fear is that the government sector has suddenly become permanently a much bigger factor in our economy. You mention that.
What about restaurants? Do they now have to space tables farther apart and social distance? If so the economics of running a restaurant will be far more challenging. Many will not make it.
What about airlines? Are we willing to keep flying in these so-called “petri dishes”? I suspect we will, but it might take a while for us to get over the shock. Cruises? I had two cruises canceled in the past two months. Can cruise lines get over the shock and the image that is now associated with them? I am perfectly willing to go, but will others?
One thing I hope we learn is that trade is good. Exports and imports combined have been falling steadily and the global economy is suffering as a result. I am hoping that after the dust settles there will be more trade agreements.
With respect to the Fed its portfolio has climbed from $4.15 trillion in mid-February to $5.8 trillion as of Wednesday. I suppose it has done its job as the lender of last resort — for everybody. Banks, corporation, small businesses, state and local governments. I cannot blame the Fed for what it has done. In my view, it had to do it. The consequences of not doing it were too severe to even contemplate. I suppose monetary policy can be carried out in the same manner as before. However, I would hope that, over time, it can once again begin to shrink its portfolio.
What about inflation? Should the Fed deliberately try to push for higher inflation and cause nominal GDP to grow faster? Would give business some pricing power. Should be good for stock prices. Would help the government pay back some of its debt.
You raise excellent questions. I do not pretend to have answers. Let’s get the economy back on track first and we can worry about the rest of it later.
Steve
Steve, I tend to agree with Mike on this one. The U.S. will come out of this having lost even more prestige (soft power) in the world. We have done a very poor job of managing the virus impact both from a health and fiscal perspective. The stimulus plan consists trying to drown the economy in printed money and massively increasing the deficit. At least so far, we have none of the badly needed infrastructure spending. As you know, I’ve thought the U.S. economy has been overheated and overextended for a while. Many companies and the federal government had less reserves (think stock buy backs and increasing deficits) than they should have had at this point in the cycle. Additionally much of the work force doesn’t have health care and lacks deep educational skills sets. They will have a harder time obtaining good paying jobs that match the new economy. We have been running the country to maximize short term gain. The music has now stopped and we have to pay the piper. This is a time that really does require urgent action as well as intelligent long term planning. Based on the interim results for first world countries the U.S. is uniquely failing the challenge. It will be a long time for everyone to get back to where they were. It’s unfortunate but also quite predictable. 🙁