Read the March Special Edition Economic Currents in PDF.
Late last week, my colleague made a difficult decision
to cancel a trip home to see her grandparents for her
birthday. They are in their 90s and she didn’t want to
risk contagion given the growing body of evidence that
young adults can be effective carriers of COVID-19
without showing symptoms. She was later thankful given
the crowds that flooded O’Hare airport when travelers
abruptly returned home from hot zones in Europe.
Then the cascading events that we have seen play out
in countries around the world started to unwind here.
Governors declared states of emergency, universities
and school districts closed, restaurants and bars closed
- even fast food chains shifted to drive-through. Air travel
was cancelled. Cities were shut down. San Francisco has
a “shelter in place” order but compliance is spotty. The
mayor of New York said a similar order could be put in
place for the country’s largest city.
“[Americans] should be prepared that they’re going to
have to hunker down significantly more than we as a
country are doing.”
-Dr. Anthony Fauci,
The National Institutes of Health
March 15, 2020, NBC News “Meet the Press.”
The Federal Reserve made an aggressive cut in rates to
zero and offered up new ways to keep credit markets - the
oil of the markets’ machinery - from further seizing up. Fed
officials knew we were about to enter yet another stage
in the quarantine that would deal a devastating blow
to the economy. Layoffs have surged across everything
from manufacturing to the service sector. What was first
and foremost a health crisis has rapidly mutated into a
financial crisis. Cash flow for many firms disappeared
overnight and because of the sheer magnitude of the
losses, layoffs were immediate.
Sadly, financial market participants realized that the rate
cuts that supported them for so long were not enough
to cure what ails us. We need a mass infusion of what
I am now calling stop-gap measures by Congress and
the administration to prevent individuals and firms from
needlessly slipping into insolvency as the expanding
quarantines are bringing much of the economy to a
standstill. A recession is inevitable; the only question is
whether we can prevent what was first and foremost a
health crisis from mutating further into a financial crisis.
On March 16, the stock market suffered its worst one-day
drop since October 1987. (This isn’t my first rodeo.)
My colleague and I sat down - a socially appropriate
distance apart, armed with hand sanitizer and disinfectant
wipes - to work through scenarios. How many millions of
jobs will be lost? Will members of Congress act quickly
and aggressively to keep individuals and firms afloat in
what are now COVID-19-tainted waters? Could they shelve
ideological differences to defeat a common enemy, the
devastation wreaked by COVID-19?
This report provides an update on our outlook now that
the virus has spread. The global economy slipped into
recession in the first quarter. Growth in seven of the
ten largest economies is coming in flat to negative. The
contraction in China is unprecedented. The U.S. is also
slipping into recession. Some losses, such as meals not
eaten out, sporting events and shows cancelled cannot be
recouped. The only question is whether we can quarantine
effectively enough to flatten the curve on outbreaks and
avoid the devastation Italy is enduring.
A shortage of protective medical gear is further
complicating matters. Tariffs on some $5 billion in
face masks, gloves and high-tech medical equipment
from China have curbed those imports since 2018. The
president quietly rolled back those tariffs on March 10,
but we are now competing with the rest of the world for
those supplies. This is at the same time that European
countries including France and Germany have stopped all
exports of protective medical gear to deal with their own
The good news is that Washington has finally woken up
and realized the severity of the crisis. The president is
asking for a $1 trillion package to blunt the blow to the
economy and set the stage for a more robust recovery.
Congress passed a $100 billion package, including paid
sick leave, but is still mulling its options on other stimulus.
A Viral Recession
Chart 1 shows the outlook for a recession in 2020. Efforts to contain the virus have led to city-wide shutdowns
and triggered layoffs in everything from manufacturing
to the service sector, with the exception of health care.
This recession is abrupt and deep, with the worst of the
losses coming in the second quarter. Increased access
to testing and the development of antiviral drugs should
allow the economy to start to ramp up, despite a second
wave of infections in the fourth quarter. South Korea
and Singapore have shown that aggressive testing and
technology have enabled them to identify hot zones and
avoid mass closures.
There also may be a light at the end of the tunnel on
treatment. Research in France suggests that an existing
drug to treat malaria may combat symptoms of COVID19. A vaccine is expected to take longer, a year or more, to
develop and mass produce.
Chart 2 shows the jump in the unemployment rate from
a low of 3.5% in January to a high of 7.9% in the third
quarter. That marks the highest level for unemployment
since the third quarter of 2012, when we were still
struggling to emerge out of the Great Recession. Job
losses due to this recession are expected to top seven
million, just a bit shy of the eight million we lost during the
The magnitude of job losses could be even higher, given
the breadth of industries affected. Proposals to provide
small businesses with funding to bring workers back to
their payrolls, even as they remain laid off, would dampen
the drop in reported payroll employment. Another quirk
in the data is the participation rate, which could fall
precipitously, as workers shut in and locked out of work
can’t even look for work.
The silver lining is that unemployment could fall sharply
as businesses ramp up and workers are called back.
That assumes that the government provides the stop-gap
measures necessary to keep individuals and businesses
afloat during the worst of the crisis. The goal is to have
a foundation from which the economy can more easily
Consumer Spending Plummets
Everything from the need for “social distancing” - the
Centers for Disease Control and Prevention (CDC) issued
to stay six feet away from others in public and
limit social gatherings to no more than 10 people - to job
losses and the stock market rout will prompt an abrupt
drop in consumer spending. As of the writing of this report,
several cities were shutting down. The losses will be broadbased and much larger than we saw at the onset of the
global financial crisis.
Online spending and home deliveries of food can’t begin
to compensate. The hoarding of hand sanitizer, sanitizing
wipes and toilet paper will borrow from spending later in
the month, but pale compared to the drop in spending
elsewhere in the economy. Store closings have surged.
The lesson from the SARS epidemic suggests that
consumers remain skittish, even after an outbreak has
peaked. That further argues for a slow rebound in the
fourth quarter and a much stronger rebound at the start
Lower oil prices work much like lower interest rates. They
can’t do much to stimulate demand until consumers can
leave their homes and drive to work.
The housing market has been on a tear. Sales will drop
as major cities shut down and uncertainty about the
economy spikes. Job losses are expected to prompt a
jump in contract cancellations. The only silver lining is
mortgage restructuring; refinancing activity jumped
even as the crisis started to unfold. Demand was so
strong that mortgage rates spiked while the 10-year
Treasury bond dropped to record lows. Interventions by
the Federal Reserve in the mortgage-backed securities
market are helping to reverse the sharp rise in rates and
seed the ground for a much stronger rebound in the
housing market down the road. Add tight inventories and
the pent-up demand for home ownership by millennials,
and the housing market will reclaim its role as a driver of
gains out of the recession.
Losses in Business Investment Compound
Business investment appears to have contracted for
the fourth quarter in a row during the first quarter.
Disruptions to supply chains triggered by the outbreak
in China exacerbated those losses in February and early
March. The Empire State manufacturing index dropped
precipitously to its lowest level since 2009 in March. Add
plant closings - the UAW requested that the automakers
shut their plants for at least two weeks to prevent the
spread of the virus - and the uncertainty surrounding the
virus itself. The fate of Boeing’s 737 Max is also uncertain,
given the turbulence in the airline industry.
The blow from the drop in oil prices to the shale industry
will be particularly large. A sharp drop in demand and
the price war between Russia and Saudi Arabia have
pushed prices well below break-even for the industry.
Russia and Saudi Arabia would like to see less shale
production in the U.S. High debt levels and a surge in
bankruptcies prior to the crisis virtually guarantee it.
Government Spending Explodes
is asking for more than $1 trillion in
stimulus to combat the economic effects of the virus.
It is asking Congress to approve two $1000 checks per
person (with potential clawbacks for wealthy households),
a broadening of unemployment insurance, sick pay,
bailouts, tax credits, delays in tax payments, transfers to
the states, increased funding for Medicaid and a surge
in spending on tests and triage for hospitals. This is in
addition to the $50 billion in funds freed up when the
president declared the situation a “national emergency”
on March 13. We are assuming Congress will comply with
the size, if not the composition of that request.
That surge in spending cannot derail a virus-induced
recession. It can blunt the blow to GDP that we will endure
in the second and third quarters, and set the stage for a
more robust rebound in growth down the road.
Imports and Exports Fall
The trade deficit is initially expected to narrow but for
the wrong reason: Imports fall more rapidly than exports,
particularly in the first quarter. Imports from China came
to a virtual standstill in February and March. A similar
phenomenon occurred during the height of the financial
crisis when trade flows slowed as commerce between
countries ground to a halt. These shifts will exacerbate the
slowdown in trade flows triggered by trade wars.
The recession could be significantly deeper than we
are forecasting. The blow to China’s economy was much
larger than anyone imagined. Lockdowns in the U.S. are
so far much smaller and harder to enforce. But the blow to
wages and wealth is real, even with stop-gap measures.
The Fed Intervenes
The Federal Reserve stepped up with a series of actions in
recent weeks. It cut rates to zero, eliminated bank reserve
requirements and encouraged banks to waive late fees
and delay payments for borrowers in the worst affected
markets. The Fed provided collateralized loans to banks to
keep the overnight credit market from seizing up, extended
the length of loans and swap lines for foreign banks
scrambling for dollars and launched another $700 billion
round in asset purchases: $500 billion in Treasuries and
$200 billion in mortgage-backed securities to keep those
“This recession is abrupt and
deep, with the worst of the
losses coming in the second
On St. Patrick’s day, the Fed went a step further and
intervened in the commercial paper market. Firms unable
to get short-term lending were forced to make massive
layoffs during the worst of the global financial crisis in
2008. The Fed was not going to allow that to happen
Those interventions helped to counter a marked tightening
in credit conditions. However, they can’t do much to
stimulate demand until consumers can leave their
homes and congregate again. Fed Chairman Jay Powell
admitted as much in the press conference
the Fed’s historic move on rates and asset purchases
referred to as quantitative easing.
Former Fed Chairs Ben Bernanke and Janet Yellen
that the Fed seek approval from Congress to
buy corporate bonds, which are seizing up as well, and
restart the Long-Term Asset-Backed Lending
facility. The latter allowed the Fed to expand credit to households and
businesses during the height of the financial crisis in 2008-
09. Intervening in the corporate bond market is a tool that
the European Central Bank (ECB) already has utilized; the
Fed should have it as well. Bernanke and Yellen have the
benefit of hindsight; they know how much worse this crisis
could get if we can’t stabilize financial markets.
The Bond Market Screams for Stimulus
The yield on the 10-year Treasury bond dropped well below
1% in recent weeks. Real (inflation-adjusted) bond yields
moved into negative territory. Investors are essentially
saying they are willing to pay the federal government to
issue debt and bridge COVID-19-tainted waters, rather
than risk the economic losses and blow to tax revenues
that would occur if it doesn’t.
That message is finally getting through. The administration
and Congress need to make good on their promises to be
believed. Talk is cheap.
Further complicating matters is the spread of the virus.
There are now cases in all 50 states. Those numbers are
expected to surge with a rise in the availability of tests.
That will further rattle markets. The fear is that we could
face a total lockdown in economic activity, not unlike what
we are now seeing in other western economies. It is much
harder to contain a virus in a world where people have
more freedom of choice.
Companies Hemorrhage Losses
Announcements regarding COVID-19 related losses in
profits started with the shutdown of China and have
compounded since then. One would be hard pressed to
find a sector of the economy not affected by the spread of
The blow to profits in the second quarter is expected to
be particularly large. Bailouts and structured loans are
needed and could eventually stem those losses but won’t
cure the problem.
Uncertainty about the size of losses, when the outbreak will
crest, and what the economy will look like on the other side
of this crisis is fueling the downdraft in stock prices and
market volatility. The VIX, a measure of market volatility,
crossed 85 on March 16, a new record. We won’t get a
break in volatility until the veil of uncertainty about how
the economy emerges from the crisis is lifted.
Hopes are high for a crest in the outbreak in May or June,
but other outbreaks have lasted through the summer. My
kids and I came down with the swine flu in July of 2009.
This is really hard for everyone, especially those looking
at their 401(k)s and worrying about how they will support
themselves in retirement.
Amidst our effort to put this forecast together, I took a
break to call the restaurant I had booked for my mother’s
80th birthday party. The manager, Kristina, took my call.
I said I wanted to delay my mom’s party until after the
threat of infection abated. She had been taking calls
like this all day. The university in town had closed and
cancelled graduation. Wait staff had shown up with no
place to live after the dorms closed, now homeless and
unemployed. They were all in tears, while she scrambled to
figure out how to ramp up pickup and deliveries.
This wasn’t my first call like this. I had been on the phone
all weekend, talking with business owners who were
running out of cash and forced to make layoffs. Their
business seemed to vanish overnight, through no fault of
their own. I looked up and my colleague wiped a tear from
her eye. The weight of the numbers we had been staring
at all day had become a reality. I felt a pit in my stomach
as she processed it all, on a birthday she would soon be
Isolation is its own toxin. Call your family, your friends, or
say hello to the person who walks alone every day. We are
in a war to defeat a common enemy - COVID-19. We are
stronger in that battle united than alone and divided. Be
safe. Stay well.
Copyright © 2020 Diane Swonk – All rights reserved. The information provided herein is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic, financial, investment or any other decisions. This communication does not constitute an offer or solicitation, or solicitation of any offer to buy or sell any security, investment or other product. Likewise, this communication serves to provide certain opinions on current market conditions, economic policy or trends and is not a recommendation to engage in, or refrain from engaging, in a particular course of action.