The coronavirus pandemic is putting an end to the longest economic expansion in U.S. history. Policymakers and economists warn this recession will be unlike any other downturn.
After expanding for a record 126 months as of December 2019, economists now predict GDP growth will plummet in the first and second quarters of the year as businesses shutter and hundreds of millions of Americans are locked down.
“This is a huge, unprecedented, devastating hit,” former Federal Reserve Chair Janet Yellen told CNBC on Monday, adding she expects GDP to tumble 30% year on year in the second quarter.
Dire unemployment and growth forecasts have led some to compare the coronavirus downturn to the Great Recession from 2007 to 2009 or the Great Depression in the 1930s. However, policymakers say this recession is unlike any other in U.S. history because it was spawned by a health crisis, not by an unhealthy economy.
“I would point to the difference between this and a normal recession: There is nothing fundamentally wrong with our economy,” Federal Reserve Chairman Jerome Powell told NBC’s “TODAY” last month.
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Why The Coronavirus Recession Is Unlike Any Other
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The Coronavirus pandemic is putting an end to the longest economicexpansion 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 ofcourse. As millions of us remain under orders to stay home, factories haveclosed 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 ouraxis. The Federal Reserve and Congress are taking extraordinary steps totry to keep the economy afloat.Still, economists warn this recession will be unlike other downturns inrecent history because it was spawned by a health crisis, not by anunhealthy economy.We may well be in recession, but again, I would point to the differencebetween 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 itlast? In technical terms, economies enter a recession aftertwo consecutive quarters of negative GDP growth.Now the U.S. government isn't scheduled to release first quarter GDP datauntil 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 GDPgrowth in the second quarter of the year.The biggest quarterly decline we've seen an annualized GDP growth was in1950 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 offthousands of workers as business has stopped.Nearly 10 million Americans filed for unemployment insurance claims duringthe final two weeks in March, the highest level on record after they werelet go from their jobs as their employers dealt with the impacts of thevirus. Some economists predict the unemployment rate could spike fromthree and a half percent in February to 15 percent by the middle of theyear. The labor market is really a reflection of the broader economy, andwe're seeing a lot of signs that we're having a massive increase inunemployment. Surveys of businesses and consumers are also pointing to arecession. 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 shutdown factories earlier this year because of the Coronavirus.Now, the U.S. economy is also suffering from a lack of demand as consumersstay home. This drop in demand is reflected in the price of oil, which isnear its lowest level in nearly two decades.Meanwhile, wild swings in the stock market also have Americans worriedabout their savings and retirement accounts.There's no way to sort of even get the calculus on how big of a disruptionthis 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 theeconomic impact of the Coronavirus pandemic.One early indicator is consumer spending at restaurants.This chart shows restaurant reservations through open table in fivecountries, 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 anextraordinary way. We're not only knocking out the consumer, we'reshutting down factories.There is no precedent for a crisis like this.These dire economic forecasts and dramatic moves in the stock market haveled some to believe this crisis could be worse than the financial crisisthat 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 Depressionextensively and says the Coronavirus crisis is different.This has some of the same feel, some of the feel of panic, some of the feelof volatility that you're talking about.But it's it's really it's much closer to a major snowstorm or naturaldisaster than it is to a classic 1930s style depression.The main reason this economic downturn is different than many others isthat it's not the result of instability in the financial system like wesaw in the banking sector in the 1930s, the dot com bust in the 2000s orthe housing sector in the mid-2000s.Instead, it's the result of measures needed to contain a health crisislike 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 financialexcess. In the words of the current Federal Reserve chairman Jerome Powellthere was no fundamental problem with the economy when the virus hit.This is a situation where people are being asked to step back from economicactivity, close their businesses, stay home from work.Many economists say the challenge is to prevent the coronavirus healthcrisis from turning into a prolonged financial crisis.The risk is that a health crisis, something that through small businessesout of business overnight, something that threw workers, millions ofworkers out of work overnight.A health crisis could become a Great Depression if we don't deal with itnow and provide that support to get through this period of time and have arecovery on the other side.Policymakers in Washington have taken big steps to try to reduce theeconomic 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 mortgagebacked securities in an attempt to push down longer term rates.As the central bank has continued to buy more assets since then, the valueof its balance sheet exceeded five trillion dollars for the first timeever. They have cut the cost of funding about as low as it can go, andhopefully that does translate into lower mortgage rates, lower auto loanrates and things that should help the economy when we get to the otherside of this of this hump.The Fed has also launched emergency programs to make sure other centralbanks and financial institutions have enough cash on hand.The first and most important thing they're doing is providing dollarliquidity. 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 onhand. The Fed's actions are mainly intended to keep credit markets runningsmoothly so that the economy can bounce back once the pandemic ends.There are limits to what the central bank can do while consumers andbusinesses 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 thesummertime, hopefully, you know, then maybe you will be more incentivizedto 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 needfiscal policy right now.Congress is in charge of that fiscal response.At the end of March, lawmakers passed a record 2 trillion dollar stimuluspackage. It included direct payments to individuals, additionalunemployment insurance benefits, loans for small businesses and fundingfor industries like airlines.I think what they have done has been a good a good first step, but theyshould be prepared to do more.Economists say the action that policymakers take now will help determinehow 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 thespread of the virus.If you can get the biology under control, then the economy can start torecover. Some like to think of economic recessions and recoveries in termsof the letters V U or L.V is a quick rebound in growth where consumer and business activitysurges 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 sawfrom the financial crisis.Goldman Sachs, for example, predicts a V-shaped recovery from thecoronavirus, with GDP dropping as much as 34 percent in the second quarterand 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 viruspasses, how you know, how fast to how speedy is the recovery.Businesses' abilities to stay solvent while they're closed is one factorthat will affect the shape of the recovery.Another factor is how quickly Americans who are laid off will be able toget their jobs back. And if the relief from policymakers will be enough toget them through prolonged uncertainty.There's also the question of how quickly consumers are willing to go backto their normal activities even after the virus has been contained.Nothing is going to force the people of the world to suddenly start flyingairplanes again. Nothing's going to force the people of the world tosuddenly start crowding into stadiums again.Some are raising alarms that Congress and the Fed are risking anothercrisis by increasing debt and deficits with their stimulus measures.But as the human costs of the pandemic continues to mount, policymakersand economists say that the focus for now should be on providing relief toworkers 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 intosomething that is literally viral for the economy as well, and that thewhole point is to survive this and come out healthy on the other side.