There’s little doubt the coronavirus pandemic already has tipped the U.S. into recession, economists say, abruptly ending the record 11-year-old expansion.
Now, the two big questions are: How severe will the downturn be? And how long will it last?
Assuming the number of U.S. cases peaks with warmer weather in late April or May and then wanes, as many health officials believe, most economists predict a recession that lasts about six months and then just a gradual recovery in the second half of the year.
“It will likely be a short but sharp contraction,” says Gus Faucher, chief economist PNC Financial Services Group.
This slump is likely to be deep because a big chunk of consumer spending – the economy’s main engine – suddenly has come to a standstill. Some states have closed down all bars and restaurants or their dining areas while others have also shuttered movie theaters, gyms, casinos and other establishments. Even in states and cities that haven’t gone that far, many Americans are hunkering down and shunning public places.
Sports leagues such as the NBA and NHL have suspended games. Macy’s, Nordstrom and Apple are among chains that have shut all stores. And the travel and hospitality industries have been decimated as people avoid flying and cruise vacations.
All told, such non-essential spending makes up about 39% of the U.S. economy, according to Pantheon Macroeconomics. Pantheon Chief Economist Ian Shepherdson reckons total outlays on those activities will fall 20% in the April-June period.
“Activity just came to a sudden halt,” says Gregory Daco, chief U.S. economist of Oxford Economics.
“That’s unprecedented,” says Mark Zandi, chief economist of Moody’s Analytics.
The coronavirus toll on the economy
Zandi expects U.S. economic output to fall 1.6% at an annual rate in the first quarter and 2.5% in the second quarter before mounting a slow recovery in the second half of the year that picks up steam in 2021, with growth topping 3%.
Morgan Stanley forecasts a 4% contraction in the second quarter. And Pantheon’s Shepherdson projects a 10% second-quarter plunge in gross domestic product, which would be the biggest quarterly decline since 1958. That’s even with a $1 trillion stimulus package – the size the White House is seeking from Congress — that rolls out about half those outlays in the second quarter.
As revenue in travel and recreation plunges, layoffs have begun and are expected to accelerate. Employment in those sectors tops 18 million, according to economist Michael Feroli of JPMorgan Chase. Both Zandi and Daco expect about 1 million job losses in the middle of the year. Zandi figures the 3.6% unemployment rate will rise to 5% by early next year.
A stimulus can minimize the damage by expanding unemployment benefits, sending Americans checks to help them spend at reduced levels and providing loans to small businesses to keep them afloat until the crisis eases. The Trump administration also has proposed tens of billions of dollars in financial aid to the battered airline industry.
Slow rebound from COVID-19 cases
But don’t expect a sharp recovery. Even after the number of coronavirus cases peaks, Americans are likely to return to restaurants, theaters and air travel warily as many fear lingering risk from the virus.
“When people are afraid, they don’t spend,” Daco says.
Also, laid-off workers are likely to pull back spending more dramatically, creating a negative cycle in which some businesses may be reluctant to hire until sales pick up again, economists say.
And it could take time for businesses to ramp back up, especially if their supply chains from China have been disrupted and their credit has been damaged, Zandi says.
The good news: The economy is on far more solid footing than it was during the Great Recession of 2007-09, which lasted 18 months and caused nearly nine million job losses. Household debt as a share of GDP is at historically low levels, down from record highs during the previous downturn. And Americans are saving about 8% of their income vs. just 3.6% in late 2007.
“Consumers are in pretty good shape,” Faucher says, putting them in position to spend robustly after the crisis is over as long as the can weather the storm.
Help from low interest rates
The housing market is also healthy and low mortgage rates – which could be further pushed down by the Fed’s recent interest rate cuts – should bolster sales, Faucher says. Low rates are also leading many homeowners to refinance mortgages, putting more cash in their pockets.
By contrast, the housing market was in tatters during the Great Recession as millions of homeowners lost their houses to foreclosure.
Another positive is that the low employment rate has spawned widespread worker shortages, making many companies reluctant to cut employees they would likely need during a rebound later this year.
The most likely scenario of a spring peak in the outbreak probably means up to 150,000 Americans could be infected, Zandi says, up from the current 5,700 or so. But if the pandemic gathers force into the summer, many struggling large companies that are holding on to workers likely would be forced to lay them off, Steve Odland, CEO of the Conference Board, told CNBC Tuesday.
More outbreak fallout:COVID-19 job cuts: Layoffs accelerate as coronavirus disrupts American economy
In that case, the recession could be much more severe and last well into 2021, Zandi says.