What the heck is going on? The world economy essentially just got a one-two punch to the face. The coronavirus is a serious health crisis that’s morphing into an economic crisis as people stay home, cancel trips and stop spending on about everything except hand sanitizer and toilet paper. On top of that, Saudi Arabia basically launched an oil price war on Sunday. The world has a glut of oil right now and the Saudis decided not to scale back production after Russia flooded the market with extra oil. So oil prices plunged 30 percent Sunday, the largest one-time drop since the 1991 Gulf War. Oil is now trading around $30 a barrel, a price most energy companies outside Saudi Arabia can’t survive on, including many in the United States.
There’s still a chance the coronavirus runs its nasty course and the world returns mostly to normal by the summer, which could trigger a global financial rebound. But experts widely expect the U.S. economy will stall to zero — or even turn briefly negative — in coming weeks. When that happens, it would not take much to fully knock it into a recession. That’s why there’s so much panic in the markets.
“We are going to take a hit. It might not be a full out recession, but we’re moving closer to that,” said economist Claudia Sahm, one of the leading experts on recessions.
The market drop right now is ugly. There are even concerns the financial market “plumbing” is breaking down, meaning banks can’t get access to all the short-term credit they would typically like. But the Federal Reserve and other regulators have a pretty good playbook from 2008 on how to fix the financial plumbing, at least in the short term.
The bigger threat: Defaults ― both personal and corporate ― are probably the biggest threat to the economy right now. That’s why so many economists across the political spectrum are urging Congress and President Trump to quickly find ways to help the workers and businesses hardest hit by the coronavirus. (White House advisers are planning to present Trump a range of ideas on Monday.)
There was already concern that airlines, hotels, cruise lines and other companies in the tourism business were getting hammered. Photos of nearly empty airplanes are easy to find on social media. There have been a lot of cancellations and, even more problematic, not many bookings for future trips. Travel companies clearly don’t have much cash coming in right now and they can only hold on for so long. Hiring freezes have occurred as flights have been reduced. Now U.S. energy companies are also on the danger list if oil prices remain this low for a while. The big concern is that these companies will start to institute layoffs — or even shut the business entirely, triggering wider pain for workers, a range of small businesses, and even key cities.
As people lose jobs and low-wage workers are forced to stay home because of the coronavirus and they don’t get paid, they will struggle to pay their bills. Around 40 percent of Americans said they were having trouble paying their bills before covid-19 hit, and many of them will be under even more pressure. Much has been said about America’s lack of uniform paid sick leave, which means a sizable portion of the population doesn’t have much of an immediate safety net if they aren’t at work.
Consumer spending powers 70 percent of the U.S. economy. As people lose their paychecks or simply grow fearful of losing their income pay, they rein in their spending. That can start a very quick downward cascade. Less-affluent households will struggle to buy the basics. Middle-class Americans start saving and cooking at home instead of going out to restaurants. They start running around the block instead of going to the gym. They start purchasing cheaper products instead of “luxury” items. And they typically stop buying big items like washers and dryers, cars, furniture and homes.
What to watch from here: All of this explains why economists are closely watching weekly unemployment claims for signs of rising layoffs and Wall Street traders are closely watching how low the corporate debt of certain companies trade for signs of possible bankruptcies. For now, these metrics still look all right, but the risk is rising that they won’t stay that way.
Some firms were already struggling before this latest market panic, similar to the way some American families were already under strain.
“It is widely known that 50% of investment-grade nonfinancial corporate bonds are rated BBB, i.e., nearly junk bonds, and vulnerable if the economy slows significantly, depressing corporate cash flow and leading to a wave of defaults,” economist Ed Yardeni of Yardeni Research wrote in a morning note to clients.
Congress passed an emergency spending bill last week that included about $1 billion for the Small Business Administration to make loans to companies that are struggling. More might be needed, including for larger U.S. companies. Glenn Hubbard, chair of George W. Bush’s Council of Economic Advisers during 9/11, urged the White House to dust off the playbook used in 2001 that led to Congress passing a $15 billion aid package to help U.S. airlines stay afloat.
On the consumer side, economist Sahm is calling on the government to “send people money now.” She says the fastest method would be for Trump to sign an executive order halting federal tax withholding in people’s paychecks for two months that boosts incomes by up to $500 a month. This is what George H.W. Bush did in 1992. Then Congress could pass a larger spending bill to boost money for health care and the hardest-hit areas.
“This plan will work, if the government works together, now,” wrote Sahm, director of macroeconomic policy at left-leaning Equitable Growth. “The real problem is there is a complete lack of fiscal response. The Fed can not do this alone.”