Pandemic derails resilient US economy
The coronavirus pandemic is the greatest challenge that the U.S. economy and financial system have faced in more than a decade.
As the U.S. braces for cases of the coronavirus to rise through the country, Americans are preparing to hunker down and withdraw from society in a bid to avoid infection — or at least buy time for a medical system that may be stretched beyond its limits.
Financial markets have suffered their worst losses since the 1987 stock market crash, wiping out nearly three years of gains and prompting crisis-level action from the Federal Reserve.
Concerts, professional and student sporting events, music and film festivals, parades, and other gatherings across the U.S. have been canceled or suspended, depriving vulnerable service workers, small businesses and the economy at large of crucial consumer spending.
Widespread school and office closures have sapped profits for businesses dependent on steady flows of workers or students through their doors. And the earliest industries affected by the outbreak have already laid off hundreds of workers, a number likely to grow as businesses shutter.
“Unless this passes quickly, this would be worse for the economy than the [2007-2008] financial crisis,” said Jason Furman, an economics professor at Harvard University who chaired the Council of Economic Advisers under former President Obama, in a Thursday interview.
“In the financial crisis, most people kept their jobs. Many people maintained their spending. Now everyone is cutting their spending,” Furman continued. “Lots of people, if they don’t lose their jobs, are going to get substantial pay cuts in a potentially much more widespread way than the financial crisis.”
The sudden advancement of the coronavirus seems almost certain to derail the record stretch of steady economic growth and job creation.
The U.S. economy has added workers and expanded in each month since July 2009, defying the expectations of economists, shattering half-century records in unemployment and driving stocks to historic highs.
Despite a series of government funding crises, widespread political unrest, a variety of economic shocks and a global trade war, the economy remained resilient and even appeared to accelerate toward the start of 2020.
As the coronavirus traveled beyond China, reached the U.S., and began spreading throughout the country, however, stocks plunged and the Treasury bond market seized as the scale of social disruption to mitigate the outbreak became apparent.
The Federal Reserve sought to stabilize financial markets and restore investor confidence with an emergency interest rate cut on March 3 and the issuance this week of up to $1.5 trillion in short-term loans to banks meant to boost Treasury market liquidity. The Fed is likely to slash interest rates to 0 percent next week and could take further dramatic steps to provide liquidity beyond the financial sector.
Even so, economists warn that the sudden synchronized shutdown of nearly every sector of the consumer economy will likely pull the U.S. into a steep downturn — and potentially a recession.
A slew of policymakers and economists have called for a titanic economic rescue package designed to carry laid-off or underscheduled workers and cash-strapped small businesses through the impending slowdown.
“Any kind of social activity just stops on a dime, and that means that the associated revenue and income for workers and revenues for firms just stops, but their obligations don’t stop,” Julia Coronado, founder and president of research firm MacroPolicy Perspectives and a former Federal Reserve economist, said in a Friday interview.
“Policymakers need to get really creative really fast to keep this from escalating from what’s already a public health crisis into a deep economic recession.”
Speaker Nancy Pelosi (D-Calif.) announced Friday afternoon that she had struck a deal with the Trump administration on a bill to provide ensure free coronavirus testing, expand unemployment insurance, provide paid sick and family medical leave for those who miss work because of the virus, and protect food aid for seniors and low-income children who could go hungry during school closures.
Trump announced earlier that he would declare a national emergency, allowing state and local governments to tap into federal funding as they fight the pandemic.
Economists warn that while mitigating the spread of the virus is the most important step to protect the economy, a much larger burst of stimulus and financial relief is essential to prevent the U.S. from falling into a deep recession.
Michael Feroli, chief economist at JPMorgan Chase, said in a Thursday research note that the U.S. economy would likely shrink by 2 percent of gross domestic product (GDP) annualized in the first quarter and by 3 percent of GDP annualized in the second quarter even with a $500 billion stimulus plan.
“We believe at least that much [is] warranted to make up the lost demand,” Feroli wrote.
Furman and economists across the ideological spectrum have called on the U.S. to send cash directly to Americans, akin to the checks deployed by former President Bush during the 2008 downturn.
“It’s more money for people at the bottom, less money for people at the top,” Furman said.
“It’s money for people who have lost their jobs and [are] not getting a paycheck. And it’s lots of money upfront rather than having it dribble out over time.”
While the House is still on track to leave Washington, D.C., for a planned congressional recess, senators are expected to huddle next week on an economic rescue plan that could earn Trump’s support.
Trump and GOP senators have grown anxious about the impact of the pandemic — and their handling of it — on the 2020 election, raising the political pressure to pass an ambitious economic package. The president had sought to ride the strong economy to another term before the pandemic emerged as the greatest international crisis he has faced in office.
“When you think about withdrawing all that activity from the economy, the economy slows down very quickly,” Gary Cohn, who served as Trump’s chief economic adviser from 2017 to 2018, said in a Thursday night interview with CNN’s Anderson Cooper.
“I would be willing to say we are in a recession right now,” Cohn continued, adding that “when we get done with this public health crisis … the market will be resilient enough to recover.”