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  • The Coronavirus pandemic is putting an end to the longest economic

  • expansion in U.S.

  • history. We are going into a global recession.

  • We're in an economic downturn.

  • The world is now in recession.

  • Recession in the next quarter or two because everything is shutting down of

  • course. As millions of us remain under orders to stay home, factories have

  • closed and businesses have shut down.

  • Entire parts of the U.S.

  • economy are at a complete standstill.

  • This is an extraordinary disruption.

  • It's almost like a meteor hit the entire planet.

  • And we have to now deal with the fact that we've been knocked off our

  • axis. The Federal Reserve and Congress are taking extraordinary steps to

  • try to keep the economy afloat.

  • Still, economists warn this recession will be unlike other downturns in

  • recent history because it was spawned by a health crisis, not by an

  • unhealthy economy.

  • We may well be in recession, but again, I would point to the difference

  • between this and a normal recession.

  • This isn't, there's nothing fundamentally wrong with our economy.

  • So why is the coronavirus pandemic causing a recession and how long will it

  • last? In technical terms, economies enter a recession after

  • two consecutive quarters of negative GDP growth.

  • Now the U.S. government isn't scheduled to release first quarter GDP data

  • until the end of April and second quarter data until July.

  • So it'll be a while before the official verdict is in.

  • But many economists are already predicting double digit declines in GDP

  • growth in the second quarter of the year.

  • The biggest quarterly decline we've seen an annualized GDP growth was in

  • 1950 and that was 10 percent.

  • Most estimates now are for well over 10 percent.

  • This is probably gonna be the worst we've ever seen.

  • Based on a range of other indicators, many economists agree the U.S.

  • has already entered a recession.

  • The first place we can see recessions signals is in the jobs market.

  • Industries like retail restaurants, air travel and hotels had laid off

  • thousands of workers as business has stopped.

  • Nearly 10 million Americans filed for unemployment insurance claims during

  • the final two weeks in March, the highest level on record after they were

  • let go from their jobs as their employers dealt with the impacts of the

  • virus. Some economists predict the unemployment rate could spike from

  • three and a half percent in February to 15 percent by the middle of the

  • year. The labor market is really a reflection of the broader economy, and

  • we're seeing a lot of signs that we're having a massive increase in

  • unemployment. Surveys of businesses and consumers are also pointing to a

  • recession. One March survey found U.S.

  • companies reported the steepest downturn in economic activity since 2009.

  • Both the services and manufacturing sectors of the economy tumbled.

  • Some companies were already suffering from a supply shock after China shut

  • down factories earlier this year because of the Coronavirus.

  • Now, the U.S. economy is also suffering from a lack of demand as consumers

  • stay home. This drop in demand is reflected in the price of oil, which is

  • near its lowest level in nearly two decades.

  • Meanwhile, wild swings in the stock market also have Americans worried

  • about their savings and retirement accounts.

  • There's no way to sort of even get the calculus on how big of a disruption

  • this is, because it's really bringing the major parts of the U.S.

  • economy to a virtual standstill.

  • Some economists are looking to alternative sources of data to gauge the

  • economic impact of the Coronavirus pandemic.

  • One early indicator is consumer spending at restaurants.

  • This chart shows restaurant reservations through open table in five

  • countries, including the U.S.

  • declined 100 percent during two weeks in March.

  • Consumer spending is over two thirds of the U.S.

  • economy. You knock out the consumer and you knock down the economy in an

  • extraordinary way. We're not only knocking out the consumer, we're

  • shutting down factories.

  • There is no precedent for a crisis like this.

  • These dire economic forecasts and dramatic moves in the stock market have

  • led some to believe this crisis could be worse than the financial crisis

  • that started in 2007 or maybe even than the Great Depression.

  • Depressions last much longer than recessions.

  • The Great Depression went on for more than a decade.

  • Former Federal Reserve Chairman Ben Bernanke studied the Great Depression

  • extensively and says the Coronavirus crisis is different.

  • This has some of the same feel, some of the feel of panic, some of the feel

  • of volatility that you're talking about.

  • But it's it's really it's much closer to a major snowstorm or natural

  • disaster than it is to a classic 1930s style depression.

  • The main reason this economic downturn is different than many others is

  • that it's not the result of instability in the financial system like we

  • saw in the banking sector in the 1930s, the dot com bust in the 2000s or

  • the housing sector in the mid-2000s.

  • Instead, it's the result of measures needed to contain a health crisis

  • like social distancing and isolation.

  • The most important differences this comes out of the real economy,

  • something biological.

  • And people's choices with responding to that and not out of financial

  • excess. In the words of the current Federal Reserve chairman Jerome Powell

  • there was no fundamental problem with the economy when the virus hit.

  • This is a situation where people are being asked to step back from economic

  • activity, close their businesses, stay home from work.

  • Many economists say the challenge is to prevent the coronavirus health

  • crisis from turning into a prolonged financial crisis.

  • The risk is that a health crisis, something that through small businesses

  • out of business overnight, something that threw workers, millions of

  • workers out of work overnight.

  • A health crisis could become a Great Depression if we don't deal with it

  • now and provide that support to get through this period of time and have a

  • recovery on the other side.

  • Policymakers in Washington have taken big steps to try to reduce the

  • economic harm of the Coronavirus pandemic.

  • On March 15th, the Federal Reserve cut interest rates to zero.

  • It also announced it would buy $700 billion in treasuries and mortgage

  • backed securities in an attempt to push down longer term rates.

  • As the central bank has continued to buy more assets since then, the value

  • of its balance sheet exceeded five trillion dollars for the first time

  • ever. They have cut the cost of funding about as low as it can go, and

  • hopefully that does translate into lower mortgage rates, lower auto loan

  • rates and things that should help the economy when we get to the other

  • side of this of this hump.

  • The Fed has also launched emergency programs to make sure other central

  • banks and financial institutions have enough cash on hand.

  • The first and most important thing they're doing is providing dollar

  • liquidity. So not just in the U.S., but around the world.

  • When there's a crisis of real crisis, people want to have dollar cash on

  • hand. The Fed's actions are mainly intended to keep credit markets running

  • smoothly so that the economy can bounce back once the pandemic ends.

  • There are limits to what the central bank can do while consumers and

  • businesses are on lockdown.

  • No one's going to open houses right now.

  • No one's going to auto dealer lots.

  • But if those rates stay low, when when we can all leave our houses in the

  • summertime, hopefully, you know, then maybe you will be more incentivized

  • to buy that car or that house.

  • You can't force the economy to grow through this means.

  • That's why every central banker from Jay Powell on down is saying you need

  • fiscal policy right now.

  • Congress is in charge of that fiscal response.

  • At the end of March, lawmakers passed a record 2 trillion dollar stimulus

  • package. It included direct payments to individuals, additional

  • unemployment insurance benefits, loans for small businesses and funding

  • for industries like airlines.

  • I think what they have done has been a good a good first step, but they

  • should be prepared to do more.

  • Economists say the action that policymakers take now will help determine

  • how long the coronavirus recession lasts and how quickly the U.S.

  • economy can recover.

  • Many agree that the first step on the road to recovery is containing the

  • spread of the virus.

  • If you can get the biology under control, then the economy can start to

  • recover. Some like to think of economic recessions and recoveries in terms

  • of the letters V U or L.

  • V is a quick rebound in growth where consumer and business activity

  • surges after a downturn.

  • U means a slightly longer downturn followed by a recovery.

  • L is the worst case scenario, a long, slow recovery like the one we saw

  • from the financial crisis.

  • Goldman Sachs, for example, predicts a V-shaped recovery from the

  • coronavirus, with GDP dropping as much as 34 percent in the second quarter

  • and rebounding 19 percent in the third quarter.

  • This will be a very deep recession in terms of GDP loss and job loss.

  • And the question is, when we get to the other side and when the virus

  • passes, how you know, how fast to how speedy is the recovery.

  • Businesses' abilities to stay solvent while they're closed is one factor

  • that will affect the shape of the recovery.

  • Another factor is how quickly Americans who are laid off will be able to

  • get their jobs back. And if the relief from policymakers will be enough to

  • get them through prolonged uncertainty.

  • There's also the question of how quickly consumers are willing to go back

  • to their normal activities even after the virus has been contained.

  • Nothing is going to force the people of the world to suddenly start flying

  • airplanes again. Nothing's going to force the people of the world to

  • suddenly start crowding into stadiums again.

  • Some are raising alarms that Congress and the Fed are risking another

  • crisis by increasing debt and deficits with their stimulus measures.

  • But as the human costs of the pandemic continues to mount, policymakers

  • and economists say that the focus for now should be on providing relief to

  • workers and to companies so that the economy can bounce back.

  • You can't put this in the framework of other recessions.

  • This is hitting us on so many different sides and could metastasize into

  • something that is literally viral for the economy as well, and that the

  • whole point is to survive this and come out healthy on the other side.

The Coronavirus pandemic is putting an end to the longest economic

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Why The Coronavirus Recession Is Unlike Any Other

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    ally.chang posted on 2020/04/16
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