The best we can do as forecasters is to identify the major forces now buffeting the economy, both up and down. For the moment, they are reducing growth and increasing unemployment. But who knows, especially when so much depends on whether and how quickly the coronavirus pandemic recedes? Perhaps good news is hiding in the statistics.
Let’s start with the bad news.
The rapid spread of the coronavirus has emptied stores, restaurants, movie theaters and other small businesses, as shoppers stay home either out of fear or the requirement to “shelter in place.” Layoffs have exploded, though we won’t know the actual figures until the government publishes them.
Despite the exodus of workers from firms, many small businesses are left without the cash to pay rent, utilities and loans. Meanwhile, lenders either have — or will have — withdrawn credit. The breakdown in the credit system and its repercussions for the broader economy threaten many small businesses. In the week of March 8, initial claims for unemployment insurance exceeded 280,000, up from 210,000 the week before, reports economist Mark Zandi of Moody’s Analytics.
Meanwhile, the stock market crash may further depress consumer spending. People worry about retirement. “The baby-boom cohort in its 50s and 60s and owning more than half of all stocks will turn particularly cautious,” Zandi argues.
Similarly, much of the developed world is headed for recession or already is in one, reports IHS Markit, a forecasting firm. It expects Japan’s economy to shrink 0.8 percent this year, in contrast to 0.7 percent growth in 2019. The prediction could be optimistic; it assumes that the Olympics will take place in the late summer, when a delay of a year seems unavoidable.
The Eurozone (the 19 countries using the euro as its currency) also faces a recession, says IHS Markit. “Germany’s output [has been] flat, while Italy and France [have] suffered q/q contractions. The UK economy also stalled in the fourth quarter. … [The] virus will do serious damage via trade, travel and tourism.” Italy, already hard-hit by the coronavirus, is especially worrisome, because its high debt level leaves it vulnerable to default.
What this means, of course, is that the U.S. economy can’t expect much help from other countries. Where might it expect help? Surprisingly, perhaps, there are a number of sources.
First, there’s the Federal Reserve, America’s central bank. It’s been pouring money into financial markets — the markets for buying and selling stocks, bonds and other securities — at a ferocious pace. So far, the benefits have been scant; stock prices have continued to decline, frustrating the expectations of some investors and traders.
But there’s no ironclad reason why this won’t turn around, especially when other investors think the market is dramatically oversold. The fall of stock prices, in this view, has been so dramatic that many shares are now bargains. They may not be for the fainthearted, but there are plenty of risk-takers prepared to gamble on a rebound.
Nor is that all. A second bit of potential economic stimulus is that huge congressional rescue bill, usually estimated at $1.8 trillion. Even in Washington, that’s a lot of money, and its availability to families and companies — assuming that Republicans and Democrats can resolve their differences — could provide a bridge to a more stable future. The message echoes the Fed’s: We won’t let the economy sink into depression.
There’s at least one other possible source of support: China. “First in, first out?” asks the IHS report. It is beginning to reboot its economy and could contribute to a recovery.
But of course, no one really knows. What we said at the outset remains true: Confidence isn’t everything, but without it, we may be stuck in a bad place for a long time.