Economy

Fears mount of a coronavirus-induced depression

Economists increasingly warn that Washington’s current efforts won’t be enough to fight a downturn approaching the devastation seen eight decades ago.

Wall Street


Forecasts of doom for the American economy are quickly turning from gray to pitch black.

As Congress haggles over a multitrillion-dollar coronavirus rescue package, analysts are warning the U.S. could face a prolonged depression rather than the kind of short recession and swift bounce back that President Donald Trump and his top aides expect. And they’re raising questions about whether current government efforts to cushion the economy from the damage will be anywhere near enough.

Across Wall Street and the economic world, forecasters are quickly ramping up their predictions of massive job losses and declines in economic activity by as much as an annualized 50 percent in the second quarter of the year. They’re offering estimates unseen since the Great Depression that began in 1929 and continued for a brutal decade, reshaping governments and economies across the globe.

Morgan Stanley economists on Monday said they now expect a 30.1 percent annualized decline in gross domestic product in the second quarter, the worst quarterly performance in 74 years. The firm’s estimates assume the virus peaks in April and May before growth starts to recover. But if the peak comes later and economic disruption continues in the second half of the year, they wrote, U.S. growth for even the entire year will be down to levels last seen in the early 1930s.

The rescue package being debated in Washington would involve at least $1.6 trillion of government spending, representing just a few weeks of lost economic activity. But the hit will almost certainly be vastly larger than that, analysts say, requiring multiple congressional interventions to come close to offsetting the fastest economic shutdown in American history.

The Federal Reserve stepped into the breach on Monday with strong action to prop up wobbly credit markets. And it promised efforts to aid small and midsize businesses that are failing in large numbers, a main street lending program that could multiply the power of the congressional spending package.

But that did not ease fears in the stock market, where the Dow Jones Industrial Average fell 3 percent to 18,591.93 — the lowest since November 2016. It remains unclear whether the Fed’s actions will be up and running fast enough to ensure that when government officials do flip the lights back on, a functional economy will be capable of a swift bounce back. Stocks rebounded strongly on Tuesday as hopes rose for agreement on the stimulus package.

“A $1.5 trillion stimulus package sounds like a lot, and it is,” LPL Financial Equity Strategist Jeff Buchbinder said in a note to clients. “But given the unemployment rate might be headed to double digits and many impacted businesses won’t survive through the spring without some help, it probably won’t be enough.”

Economists are now mostly just debating how deep and lasting the economic downturn will be. “The U.S. economy has entered recession as the COVID-19 outbreak and public health efforts to combat it have led to a sharp contraction in economic activity,” Gus Faucher, chief economist at the PNC Financial Group, wrote in a research note. “Restrictions on movement throughout the country have led consumers to pull back on their spending, with restaurants, hotels, movie theaters, entertainment venues, sports leagues, and many retail establishments closed. The airlines are rapidly cutting capacity, and U.S. auto manufacturers have stopped production.”

The coronavirus crisis essentially knocked out the strongest pillars of the U.S. economy: consumer confidence and spending. It has also driven a once high-flying stock market into bear market territory, making Americans feel less wealthy and less apt to spend.

Manufacturing was already in recession when the virus hit and will likely fall further into negative territory as factories are shuttered and workers kept at home.

State jobless claims are already reaching record numbers. On Thursday, economists expect the largest national jobless claims number in American history, a figure Goldman Sachs estimates could hit 2.25 million new filings in a single week.

That would smash the all-time record of close to 700,000 in 1982. Some estimates are far higher than that, perhaps up to 5 million. Job losses that will show up in the Labor Department’s April jobs report released in early May could hit 5 million to 10 million or more, wiping out all the gains from 2018, 2019 and the first two months of 2020.

That’s led to complaints from across the economic world that just as the government is far behind in battling the spread of the novel coronavirus, it is also mounting a woefully inadequate economic response.

Federal Reserve Bank of St. Louis President James Bullard said unemployment could hit 30 percent in the second quarter with a 50 percent annualized drop in gross domestic product during the quarter. And the longer Washington waits to send direct aid to individuals and families who have lost their incomes and to small business that cannot meet payrolls, the worse things will look when the coronavirus crisis ends.

“The longer it takes, the deeper the ongoing slowdown will be,” said Pantheon Macroeconomics chief economist Ian Shepherdson. “Fed data shows that 40 percent of U.S. households would not be able to come up with $400 for an emergency expense, and data from 2019 shows that 53 percent of U.S. households don’t have any emergency savings.”

The word “depression” is seeping into more and more financial forecasts, as economists abandon earlier hopes that the virus spread could be halted by April and workers could go back to their jobs and shoppers back into stores.

“At this point, the most optimistic outcome for the domestic economy appears to be a temporary dip into negative akin to the contraction of 2001 with the worst case being a prolonged depressionlike scenario similar to that experienced in 1929,” Stifel chief economist Lindsey M. Piegza said in a note on Monday.

The darkening scenarios have kicked off debates both in Washington and Europe about how long economies can afford to remain in lockdown.

Tough decisions are ahead on the potential cost in lives of reopening America more quickly versus the cost to the economy and general human well-being of keeping people stuck in their homes for weeks or months to come. Economists note that prolonged recessions and certainly a depression would also cost lives and widespread misery.

“We cannot let the cure be worse than the problem itself,” Trump said at a news briefing Monday evening, repeating what he wrote on Twitter shortly before midnight on Sunday. “At the end of the 15-day period, we will make a decision as to which way we want to go, where we want to go, the timing.”

Trump again expressed frustration with the economic downturn and pledged to revisit all the current stay-at-home orders. “The hardship will end. It will end soon. Normal life will return, and our economy will rebound very, very strongly,” he said.

But few economists now believe that even the giant rescue package working its way through Washington will do enough to offset damage that’s already been done to the U.S. economy — a cost that’s mounting by the day.

“Disruption will take the form of a depression-like set of shocks that will require a significant intervention by the federal government into economic and social life for the foreseeable future,” RSM chief economist Joe Brusuelas wrote on Monday. The latest moves by the Fed and other government institutions “are just the latest in a series of actions that are likely to continue throughout this year and likely next in response to the global public health emergency caused by the Covid-19 virus.”