Will Corona Virus Cause Recession?
The Fed reduced interest rates to prevent the effects of the outbreak from spreading to sectors that were not directly affected by the corona virus .
Epidemiologists nervously trace the signs of the corona virus spreading beyond its origin in China. Economists pay attention to the same thing as economic damage occurs.
The global outbreak has caused upheaval in the stock market and disrupted supply chains throughout the world. On Tuesday (3/3), the Federal Reserve took aggressive steps to try to overcome the damage, announcing that they would cut interest rates by half a percentage point.
So far, there have been few signs of widespread economic damage, at least in the United States. Most employers do not lay off workers. Consumers are still shopping. Shops and restaurants remain open. The Fed’s move is an effort to defend it, The New York Times reported.
Economists say the corona virus outbreak could clearly cause a recession in the United States. However, for this to happen, the impact must spread outside the manufacturing sector, travel, and other sectors directly affected by this disease.
The real sign of a problem, according to Tara Sinclair, an economist at George Washington University, is when companies that have no direct connection with the corona virus begin to report a decline in business.
“The key is to pay attention to large macro numbers rather than obsessively paying attention to matters related to the corona virus and supply chain,” Sinclair told The New York Times .
“If people don’t cut their hair anymore, that’s a bad sign.”
The corona virus outbreak develops quickly, and no one can predict the economic impact with any confidence. Instead, analysts tend to think in terms of scenarios: what different situations can occur? And what risks exist even before the corona virus attacks?
CORONA VIRUS WILL DAMAGE THE ECONOMY
This outbreak has caused factories to be closed, flights closed, and events canceled. All cities in Asia and Europe are almost closed. Apple, Mastercard, United Airlines and dozens of other companies have warned that the Corona virus will damage profits.
The Organization for Economic Cooperation and Development (OECD) said on Monday (2/3), global growth could be cut in half, to 1.5 percent by 2020, if the virus continues to spread.
Laurence Boone, the group’s chief economist, warned the prediction was “not the worst case scenario”.
The United States will not be immune. Goldman Sachs estimates that at the end of the week, this outbreak will reduce economic growth by a full percentage by 2020.
The economy grows at an annual rate of only about 2 percent before the virus attacks. So if the outbreak worsens, it’s not hard to imagine that gross domestic product might plunge freely.
However, the recession is more than just a decline in gross domestic product. As most economists think, a recession involves a cycle that worsens the economy: Job cuts lead to reduced income, which leads to reduced spending, which leads to more job cuts. (Of course, that doesn’t last forever, especially if the central bank and the government intervene by force to start growth.)
“Consumer spending makes up 70 percent of the economy, you have to see it on the consumer side to bring down the US economy,” said Claudia Sahm, a former Fed official who is now director of the Center for Equitable Growth macroeconomic policy, a place for progressive thinkers.
He noted that researchers have studied how shocks spread through the economy, using methods that were originally developed to model the spread of disease.
Think about a hurricane or earthquake. Bad natural disasters can easily cause output to decline in one part of the country, because shops close, shipments are delayed, and people live in their homes or shelters. The really bad ones can even cause a decrease in GDP.
However, except for other factors, the economy must recover once the water has receded or the ground has stopped shaking. In fact, natural disasters are often accompanied by temporary increases in economic activity, as people rebuild.
In that way, disaster is different from a financial crisis, for example, which not only reduces spending and investment in the short term, but also makes people and companies less willing or unable to spend months or years.
So far, the corona virus outbreak is more like a storm than a financial crisis, but that can change quickly.
ECONOMIC CONTAGION CAN SPREAD
This is how the corona virus can cause a recession: When fear of the virus spreads, Americans stop going to restaurants, concerts and films. The airline canceled domestic flights. The sports league canceled the game. Hotels, museums and theme parks are closed.
Then, with less income and there is no certainty when the business will bounce back, the company starts firing employees. Newly unemployed workers withhold further expenses, and others, fearing they will be fired next, do the same.
That threatens demand for a wider range of products, forcing more layoffs, and prompting several companies to go bankrupt, Ben Casselman explained in his writing in The New York Times.
Imagine a little twist: Supply chain disruptions make it difficult for manufacturers to get parts, and for retailers to buy shelves. Without selling anything, they must lay off workers, start the same job loss cycle, and reduce expenses.
Common elements in both cases: After the direct effects of the corona virus spread to the job market, the impact spread to the economy. If that happens, the economy may remain slow even after the outbreak is controlled.
“The question is, is it pushing companies in such a way that they go out of business or start laying off employees,” Karen Dynan, a Harvard economist and former official at the US Treasury Department, told The New York Times .
“That’s where you can have a greater impact on the economy.”
NUMBERS WILL BEGIN TO TELL THE STORY
The impact of the corona virus will not appear in immediate economic statistics. There is almost no data available from February, when the virus began to spread widely outside China, and its effects on work and spending may not be clear until spring or summer.
Some of the indicators available so far provide a mixed picture. In a University of Michigan consumer sentiment survey, 20 percent of respondents interviewed last week cited the corona virus as a concern, and even they were relatively confident about the economy on average.
A recent survey from the Federal Reserve Bank in Kansas City and the Institute for Supply Management also found that companies are worried about the corona virus, but business activity is still increasing.
Such sentiment indicators can be the first to detect a problem. Economists will also watch weekly claims for unemployment insurance to see if layoffs are rising, and watch monthly retail sales data to see signs that consumers are delaying eating at restaurants or other expenses.
Measures of financial conditions (such as indexes from the Federal Reserve Bank of Chicago) signal whether financial institutions are reluctant to lend — other ways the plague can slow down the broader economy.
One indicator that is not recommended by economists is the stock market. Yes, stocks have just experienced the worst week since the 2008 financial crisis. Yes, evaporation (at least on paper) of around US $ 6 trillion in wealth could cause some people to reconsider buying a new car or spending a vacation, a phenomenon economists call economists “Wealth effect”.
However, the stock market is dominated by multinational companies. The decline (at least before the resurgence on Monday (2/3)) reflects concerns about what this pandemic means for Asia and Europe and the United States.
The wealth effect, though real, is not that big. Most Americans do not own shares outside of retirement accounts, so the short-term decline effect is limited.
ECONOMY HAS A BEARING (BUT ISN’T GREAT)
Before the corona virus spread, almost no forecasters predicted a recession in 2020. The unemployment rate was near its lowest level in 50 years. Benign inflation. The housing market has gained strength, and job growth has stabilized, Ben Casselman explained.
The underlying momentum can help prevent recession. Businesses that have struggled to find enough workers, may be reluctant to lay off them at the first sign of trouble. Households have relatively little debt, giving them buffer during a slowdown.
However, many companies have a large debt burden, which can make it more difficult for them to deal with the slowdown caused by the corona virus. Business investment has fallen, and President Trump’s trade war has taken its toll on the manufacturing sector. Most economists have expected growth slow enough this year to make the economy vulnerable.
“Many fortune tellers have said,” If we see a recession in the next year or two, it will come from some external shocks, “and that is exactly what we get,” Dynan told The New York Times.
Most economists still hope the United States escapes recession, even though other countries might not be that lucky. And they say, the recession caused by the corona virus may be relatively small. However, that might not be expected. Economists are notoriously bad at predicting recessions.