March 23, 2020
Executive Summary: A global recession is unavoidable and it will extend to the US. The depth will be influenced by the virus containment efforts, and the duration will be shaped by monetary and fiscal stimulus. Our base case now calls for a US recession, which starts in the current quarter and includes a painfully deep decline in the second quarter of 2020, with the trough likely occurring in July or August. We believe that the unprecedented amount of monetary policy accommodation by global central banks, coupled with bold fiscal stimulus by key countries such as the US and Germany, should work to blunt the downside and hasten the recovery.

Factors Influencing Our Updated Outlook

In the very early stages of the global coronavirus (COVID-19) outbreak roughly a month ago, we said that the impact on the US economy should be more muted and it was too early to peg the exact magnitude as well as talk of a US recession.

Unfortunately, this episode has tracked much worse than we initially anticipated on nearly every level (the spread of the epidemic, global and US economic fallout, financial market turmoil, etc.). While government action was the right thing to do from an epidemic standpoint, the speed and extent of the shutdown has swiftly halted large chunks of the global and US economy.

Moreover, this a unique situation, insofar as there has never been such a widespread shutdown in the US. While the initial shutdown was most apparent within leisure and hospitality, including hotels, airlines, cruise lines, and restaurants in certain select cities, it has mushroomed quickly into state-level “stay-at-home” orders. This means closing everything but essential industries, which generally means grocery stores and pharmacies, food producers, utilities, certain transportation sectors (such as trucking and shipping), banking, governmental services (including trash collection and military), health care, and safety and law enforcement. Furthermore, schools on all levels in most states have been shuttered and are a large component on of the non-essential side.

There has been an unprecedented amount of monetary policy accommodation by global central banks to blunt the downside, highlighted by more than 30 emergency rate cuts. The Federal Reserve (Fed) has led the way, slashing interest rates effectively to zero and unfurling multiple tools, as well as expanding US dollar liquidity swap lines with 14 key central banks to provide liquidity for global banks and markets. But the Fed has gone well above and beyond its actions during the Great Recession era including buying corporate bonds and bond exchange-traded funds (ETFs). Ultimately, the Fed’s actions should help markets function properly and ensure the general flow of credit to businesses and individuals, but monetary policy has limitations.

Fiscal stimulus would be much more useful for Main Street. Yet, only a relatively small sliver of the expected fiscal stimulus has been enacted to this point including paid sick leave, pushing back the deadline for tax filings and payments to the IRS, enhanced jobless benefits, and increased food assistance, which would help support hourly workers disproportionately impacted by the fallout from COVID-19 shutdowns.

A significantly larger fiscal stimulus package is in the works from Congress and the White House with estimates of the size being between $1.5 trillion to $2 trillion. Among the potential features are $1,000 checks for consumers, interest-free relief for federal student loans, and extending unemployment benefits for up to 39 weeks (from 14 to 20, depending on the state). Also, more funding for Medicaid has been proposed, which would help states deal with the increased health care costs of COVID-19.

Outlining a US Recession

Our base case now calls for a US recession. The downturn starts in the current quarter (the first quarter of 2020) with the abrupt shutdown of activity. It progresses and accelerates into a painfully deep decline during the second quarter of 2020 as the cascade of closures—due to a dramatic increase in unemployment and the loss of incomes for many workers—leaves a crater in gross domestic product (GDP), which could perhaps decline double digits. Based on current information, we believe the trough is likely to occur in July or August.

While the process of climbing out of that hole is likely to be uneven, the path should be greatly improved by fiscal stimulus. Yet, a concrete fiscal stimulus package from Congress has not been determined. Accordingly, we have not included all of the possible fiscal stimulus in our estimates as the size, scope and specific form of the plan will greatly impact the speed, efficacy, and shape of the recovery.

As such, our updated estimate of the US economic impact due to the COVID-19 outbreak remains uncomfortably wide, reducing our expected 2020 GDP range to somewhere between -2% to 0.5% on a year-over-year percent change basis. Similarly, while the recovery might result in V-shaped pattern (a sharp downturn with an equally sharp snapback), it could be a U-shape (a sharp downturn with an extended bottom and then a sharp ramp up) or an asymmetric shape.

Again, in the absence of hard data, we warn that it is too early to comfortably rely on these estimates and forecasts. This situation is fluid, and we will adjust as necessary based on new information.

Bottom Line

All economic data is inherently backward looking. Some data, including quarterly data such as GDP and productivity, are reported on a considerable lag. Therefore, it will be several more weeks (or months in the case of quarterly data) before most data begin to reflect the COVID-19 shutdown period. Alas, we anticipate a sharp downturn in most data, which will get much uglier before it gets better.

That said, we believe that the unprecedented amount of monetary policy accommodation by global central banks, coupled with bold fiscal stimulus by key countries such as the US and Germany, should help blunt the downside and hasten the recovery.

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