The coronavirus is dealing a death blow to the longest U.S. economic expansion on record, triggering layoffs and putting intense strain on the nation’s financial system.
In a cruel paradox, the very steps that are needed to contain the outbreak — quarantines, travel restrictions and business closures — are bringing everyday business to a halt and shoving the U.S. economy into recession for the first time since 2009.
“The more rapidly you want to contain the virus, then the more severe the lockdown has to be and the more severe the disruption to economic activity is,” said Gregory Daco, chief U.S. economist at Oxford Economics. “The hope is, the more severe the lockdown, the sharper the rebound will be.”
The “Lockdown Paradox,” he calls it.
Much will depend on how swiftly and aggressively the Federal Reserve, Congress and the Trump administration deliver financial aid to tens of millions of economic victims — from hourly workers with no more income to suddenly furloughed employees to businesses with loans to pay but no customers. Solving the health crisis by shutting down the economy, though, will have to come first.
The U.S. economy has never endured anything like this. The economic shock from the 9/11 terrorist attacks, painful as it was, was short-lived. The financial crisis and the Great Recession were devastating. But they weren’t intertwined with a calamitous health crisis.
In the near term, at least, Daco foresees excruciating economic pain: He expects the American economy to shrink at a staggering 12% annual rate in the April-June quarter. That would be the most dismal quarter on record dating back to 1947. After a second-half rebound, Daco thinks the economy will post zero growth for 2020 as a whole.
Financial markets are bracing for the worst. On Wall Street, the Dow Jones Industrial Average was down more than 1,300 points in late-morning trading and has plunged more than 9,600 points or 33% since Feb. 12.
The economy has deteriorated with stunning speed. And the United States is hardly alone: The U.N.’s International Labor Organization estimates that the coronavirus outbreak could lead to nearly 25 million job losses worldwide and drain up to $3.4 trillion worth of income by year’s end.
In the United States, a wave of layoffs has just started, especially in industries most vulnerable to an economic standstill: Travel, entertainment, hotels, restaurants, retail stores — the heart of the service sector, which makes up most of the U.S. economy. Unemployment is sure to rise, perhaps sharply, in the months ahead.
“The U.S. has 2.6 million waiters and waitresses, nearly all of whom will be unemployed by Friday,” said Michael Hicks, an economist who directs Ball State University’s Center for Business and Economic Research. “The April 3 jobs report (for March) will be the single-worst monthly job report in U.S. history. The record is 1.96 million job losses in September, 1945, right after V-J Day.”
“We are already in recession,” said Robin Brooks, chief economist at the Institute of International Finance, an association of financial companies.
Brooks reckons that the U.S. gross domestic product — the broadest gauge of economic output — will fall at a 0.2% annual rate in the January-March quarter and then by 3.6% in the April-June period.
Even President Donald Trump, ever celebratory of the economy’s performance on his watch, conceded this week that the U.S. “may be” heading toward a downturn.
Statistics that will capture the economic damage from the virus and the efforts to contain it are just beginning to surface. For now, Brooks fears “all the things we don’t see: The social distancing, the quarantining and the uncertainty aren’t in the hard data yet.”
The early evidence is sobering: The Federal Reserve Bank of New York reported Monday that manufacturing activity in New York state plunged this month to the lowest level since the Great Recession year of 2009.
On Tuesday, hotel executives, whose bookings have swiftly dried up, took their worries to the White House.
“I personally lived through many crises, starting with the S&L, the 9/11 crisis, the Great Recession,” said Hilton’s CEO, Christopher Nassetta. “I’ve been doing this for 35 years. Never seen anything like it.”
Chip Rogers, president and CEO of the American Hotel & Lodging Association, noted that hotels last year were, on average, roughly 67% full.
“We’re probably under 20% nationwide and headed south,” he said. “If, by the end of the year, we get up to 35% and nothing else happens, that will be about 4 million jobs lost.”
The speed with which the virus broke out of China and traversed the globe caught forecasters off guard. Federal Reserve Chair Jerome Powell said Sunday that the Fed won’t even bother to issue its usual quarterly economic forecasts this week.
Its economic view, after all, depends on how the virus outbreak evolves, “and that’s just not something that’s knowable,” Powell acknowledged to reporters. “So actually writing down a forecast in that circumstance didn’t seem to be useful.”
On Wednesday, the economy continued to shut down. A person briefed on the matter said Detroit’s three automakers have agreed to close all their factories due to worker fears about the coronavirus. Automakers are expected to release details of the closure later Wednesday. The United Auto Workers union has been pushing for factories to close because workers are fearful of coming into contact with the virus.
The governor of Hawaii encouraged everyone to postpone vacations there for at least 30 days. Nevada’s governor ordered all casinos to close for the month. Major casinos have ceased operations on the Las Vegas Strip.
Compounding the threat, oil prices started to tumble in the face of weakening global growth. Plummeting prices, though welcome to motorists, threatened to discourage investment by U.S. energy companies that contributes to economic growth.
Trouble in the oil patch, in turn, put pressure on deeply indebted oil and gas exploration and drilling companies. This trend intensified fears over the health of the corporate bond market where companies go to borrow.
As the economic outlook darkened, financial markets began to crumble — brought down, too, by the U.S. government’s fumbling initial response to the crisis. Despite a strong rebound Tuesday, the Dow Jones Industrial Average remains down more than 8,300 points, or 28%, since Feb. 12.
Tumbling markets are more than a symptom of economic distress. They can cause it, too. Mark Zandi, chief economist at Moody’s Analytics, calculates that every $1 of wealth lost to falling stock prices reduces by nearly a nickel spending by consumers, who drive about 70% of U.S. economic activity.
After a slow start, U.S. policymakers are moving aggressively to limit the damage. The Fed on Sunday slashed its benchmark rate to nearly zero and said it would buy $700 billion in bonds to try to ease credit market disruptions and keep long-term rates low. On Tuesday, the Fed said it would take steps to ease the flow of the short-term credit that businesses use for payrolls and other everyday costs.
In a recognition of the gravity of the threat, the Trump administration is backing a roughly $850 billion emergency stimulus package, which would include sending checks directly to American households to help tide them over during the disruption.
Will it all work?
Zandi at Moody’s Analytics said the economy’s return to health depends not just on what happens to the virus and how policymakers respond. Also crucial is the mindset of ordinary consumers and business owners whose lives have been upended by the health crisis.
“How long it takes for businesses to feel confident enough to allow their employees to get back to work and travel and for tourists to get back on planes and cruise ships… whether the collective psyche holds together,” he says.
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