The pace at which all of this is happening is unprecedented. In 2008, it took 274 days for the stock market to enter the dreaded “bear market” territory. It took 24 days to enter a bear market now. (Even after Friday’s rally, the Dow remains in a bear market). JPMorgan just changed its forecast to predict two quarters of negative growth, which is typically defined as a recession.
Economists and big Wall Street investors nearly all agree the nation has to do whatever it takes to get the health crisis under control, even if that means putting the economy into a recession. The hope was that a downturn would be short-lived. Until only a few days ago, most economists were talking about a V- or U-shaped situation with a quick drop this spring that would be followed by a big rebound this summer as Americans cooped up at home do a mass rush back into “normal” life.
But now there is real concern this will look more like a "L" where stocks tank, the economy tanks, and the nation experiences a slow and painful recovery. In other words, even if the health crisis is tamed, the economic crisis could last longer.
Much of this hinges on how long the economy has to be in timeout mode — a few weeks or a few months. As a small-business owner in Michigan, who spoke on the condition of anonymity because he feared worrying his customers, said by text: “My sales are down by half. I won’t survive three months like this.”
The same is true for workers. Layoffs have already started across the country in diverse businesses including ports, hotels and bakeries. Many people can eke by for a few weeks, especially with some government and nonprofit aid to expand unemployment benefits, sick pay and food stamps, but it is a different story if the situation lasts for months. People start missing payments on credit cards, car loans and mortgages because the government aid typically is not as much as they were making before. Then they start losing their car or home.
“The U.S. economy is in a tailspin," writes economist Claudia Sahm on her blog. “This month and in the months to come, the incomes of families across the country will fall, making it impossible for some to make ends meet. As a result, spending will fall, hitting the bottom line hard at restaurants, car dealerships, construction companies, and many more.”
Fears about the economic impact heightened Friday after Anthony Fauci, head of the National Institute of Allergy and Infectious Diseases, said on ABC’s “Good Morning America” that it could take “eight weeks or more” of shutdowns and working from home to control covid-19.
What makes the economic situation so complicated is that uncertainty will remain high until the health situation stabilizes. So the usual playbook of sending Americans money or cutting their taxes or lowering their borrowing costs does not help if they literally cannot — or do not want — to leave their homes.
On top of that, the list of industries that need help is growing rapidly, an eerily reminiscent situation of 2008. Initially the coronavirus was mainly hurting the travel sector — airlines, hotels and cruise lines — and West Coast shipping and ports that are tied heavily to China. But now the pain is being felt across most of the service sector, which accounts for over 110 million jobs, excluding health care.
“Consumption is going to fall like a stone in March. You aren’t going to get that back,” said Constance Hunter, chief economist at KPMG. She is now predicting a 30 percent drop in consumption this month alone, a devastating blow for restaurants, event venues and more.
“You need to help the individuals and businesses most severely impacted. Otherwise it won’t be a V-shaped impact with a bounce back,” Hunter said.
A third blow is the oil price war Saudi Arabia and Russia launched over the weekend. Oil is now trading at barely above $30 a barrel, a level most U.S. firms cannot survive on for long. In another blow, massive layoffs are likely in the energy sector in the coming weeks, and jobs might not bounce back even if coronavirus ultimately goes away.
Policymakers are facing an almost Whac-A-Mole situation as they try to figure out which businesses and Americans are in the most need of support. So much of the economy is interconnected. If energy flounders, manufacturing and business investment are almost certain to sink with it, akin to what happened in 2015 and early 2016. Small business owners and gig workers are likely to be slow to go out to eat again or do expensive travel as they struggle to rebuild their bank accounts after the coronavirus.
“It is worth remembering that in the early days of the housing market downturn, many of us thought that the problems would be limited to the subprime mortgage market,” said Louise Sheiner, policy director for the Hutchins Center on Fiscal and Monetary Policy, in a blog post. “We were very wrong.”
Among economists and Wall Street, the consensus is that U.S. leaders were too slow to respond in 2008 and too stingy with their initial aid. There was too much focus on one part of the market instead of realizing how rapid the spillover would be to the wider economy. No one wants a repeat of 2008.