COVID-19 Economic Outlook: Race Against Time

Policymakers are acting fast to keep the economy as stable as possible and reduce the duration of an inevitable recession in the wake of the COVID-19 pandemic, said Ali Wolf, chief economist of Meyers Research, in a webinar on March 25. (See Wolf’s economic forecast from Meyers Research’s first webinar on March 18.)

In one week alone, leadership on the state level ramped up its containment efforts, with 18 states issuing shelter-in-place orders and a dozen other states implementing partial shelter-in-place orders. Essential businesses are permitted to remain open, which includes construction in all states except for Pennsylvania.

Labor market data also is telling of the state of the country, says Wolf. Initial jobless claims posted 60,000, a 33 percent week-over-week increase. Economists predict this coming week will see 2 million to 4 million initial jobless claims. To put that 2 million figure in context, says Wolf, the current unemployment in the U.S. is 5.5 million.

The unemployment rate will likely go from 3.5 percent to 5 percent in one week. Some economists predict unemployment could hit 20 percent, with James Bullard, St. Louis Fed President, predicting a dire 30 percent unemployment. (Unemployment was 10 percent during the Great Recession.)

Revised forecast

Meyers Research bases its forecast on GDP, which Wolf describes as the broadest rollup of the overall economy. As was the case in last week’s forecast, Wolf’s base case still is a short recession with a 10 percent drop in the second quarter and a quick rebound in subsequent quarters. She describes this as a V-shaped recovery where the graph drops quickly and comes back up quickly. 

Case two, however, is more dire, with a predicted 16 percent drop in the second quarter and no rebound in subsequent quarters.

“We are in this race against time,” says Wolf. “An exogenous shock is not a financial crisis unless it goes on for too long and becomes a financial crisis.” Policy will determine the outcome of this race, she says. “It’s moving in the right direction,” she says. “It's moving fast and picking up on the biggest parts of the sector that will get hit in the economy.”

Policy

Policy addressing the coronavirus is moving fast. President Trump signed the Families First Coronavirus Response Act into law last week and on March 25, the Senate unanimously voted in favor of a $2 trillion aid package. The House will vote on it within days, where it is also expected to pass. NPR reports that package will provide direct financial assistance to Americans, extend unemployment benefits, pump more than $150 billion into the health care system, as well as provide billions of dollars in aid to state and local governments and to small businesses affected by the pandemic.

That $2 trillion number equals 8 percent of the U.S. total existing debt, says Wolf. Although high levels of debt often lead to inflation, which ultimately drives up interest rates and thereby discourages private spending, which ultimately slows economic growth, Wolf believes spending that money is advantageous. “Right now, I think the right thing to do is to add to this level [of debt], but know we have to figure out how to solve for it in the longer run,” says Wolf.

Wolf also cited Lawrence Kudlow, White House economic advisor, who told Fox earlier this week that, “We have to deal with debt and deficits at some point down the road. But during crises or war, you have got to sort of not worry about borrowing.”

Although it still isn’t clear if the economic landscape will look like the short recession of case one or drawn-out recession of case two, Wolf says policy is moving in a direction that pushes her toward thinking the shorter recession is still most likely.

Builder sentiment

In a survey of builders, 68 percent experienced a decrease in contracts, 24 percent had no change and 8 percent indicated an increase. Almost all (93 percent) builders kept prices flat week over week, but 26 percent increased incentives, which Wolf says is the typical progression.

The majority of builders (70 percent) saw onsite traffic decrease by 20 percent or more, driven partly by containment measures and partly by fear of going out. Builders’ top-of-mind concerns include governments not being open or having limited staff, which can negatively impact inspections and permitting, and nervousness around April contracts and fear of cancellations.

Most building materials come from China, Mexico and Canada, and although very few builders indicated they have experienced a disruption in the supply chain, 80 percent expect to have supply chain disruptions.

Housing, she asserts, can lead the country out of recession. “We entered this lower period with more demand than we ever could have imagined," Wolf says. "Low interest rates were driving interest. People were there and wanted to buy homes.” She also cited home building as a job booster – 2,975 jobs are created for every 1,000 average single-family homes built.