BUYING OUR WAY OUT OF FISCAL DANGER?
Whether the nation falls into a recession may ultimately hinge on the American consumer, experts say.
WASHINGTON — As the White House, Congress and the Federal Reserve struggle to stem the growing financial and economic crisis, the likelihood of success may ultimately come down to one factor: the American consumer.
What’s largely behind the mounting recession fears and wild gyrations of financial markets is the fact that what drives the U.S. economy is not new investment by corporations, not tax cuts or big new federal spending programs, but millions of ordinary Americans buying new cars, cruising the malls and upgrading to bigger TV sets.
Fully 70% of the American economy consists of consumer spending, which has held up remarkably well in the current record-breaking expansion that followed the Great Recession more than a decade ago. Even though wages and incomes have been stagnant for many households, they have continued to spend.
But the novel coronavirus strikes a blow at that long-running source of economic strength. It’s already begun to force people to cancel business trips and forgo personal travel, and to shelter in place instead of going to movies, restaurants and shopping malls.
Although it’s not clear how far-reaching or longlasting the coronavirus pullback will prove to be, the very uncertainties caused by the continuing spread have sparked fears of impending recession.
“Will consumers stop their travel-related expenses? Are they going to stop spending money on entertainment? Will they be nervous to go to areas that are populated and take mass transit?” asked Jeff Schulze, investment strategist at ClearBridge Investments.
While a clearer picture of the fallout may emerge in the next couple of weeks, for
now he said markets are fearing the worst-case scenario.
Schulze sees a 50-50 chance of recession in the near term, and the cratering of oil prices, which added to financial market woes, could be the straw that breaks the camel’s back.
Plunging crude prices, triggered in part by falling demand from China due to the coronavirus, caused chaos in global markets and dragged the Dow down more than 2,000 points on Monday.
U.S. Treasury yields have fallen to unprecedented lows as investors flee risky assets for the safety of government bonds.
All of this is certain to weigh on consumer confidence, not only among wealthier households that have accounted for a disproportionate share of spending but across middle-class and lower-income families as well.
To be sure, lower Treasury yields have brought down mortgage rates, and that will help families through refinancings. But the benefit to the housing market more broadly could be limited. As Richard Curtin, director of the University of Michigan consumer confidence survey, observed, “There’s some hesitancy to open their houses to visits by the public.”
In his most recent survey conducted in February, when the virus was still seen largely as a China and foreign problem, Curtin said only 1 in 5 Americans brought up the coronavirus issue, and then mainly as a global or trade concern. But Curtin said he wouldn’t be surprised to see a very different result in the March survey to be released Friday.
“We’re going to see the reaction of consumers to the virus, to put more space between them and another person,” he said. “And that argues against them going into stores, malls, restaurants and all range of activities.”
To some degree, lower oil prices will provide welcome relief for consumers, who could pocket savings from lower pump prices. And it’s a plus for airliners and transportation services as they face cheaper fuel costs. But it’s much less of a benefit when people are too fearful to travel. The net result of the oil collapse is likely to be negative.
The reason is that unlike past oil shocks, the United States today is the world’s largest oil producer. That means sagging petroleum prices will cause a significantly bigger hit to the American economy, with severe strains for energy companies and their employees, particularly in states like Texas and North Dakota.
The oil market’s tumble came after Saudi Arabia pledged over the weekend to reduce its crude export prices and boost output to effectively put pressure on Russia and other major oil producers, including the United States, at a time when demand is sinking from the coronavirus outbreak.
Amid worries about the financial health of the energy industry as well as the transportation sector, the New York Fed on Monday moved to increase shortterm funding to support credit markets.
“Markets are sending a very strong signal that the risks are very large right now for the U.S. economy,” said Michelle Meyer, head of U.S. economics at Bank of America Merrill Lynch.
She said financial markets are now looking for the Fed to slash interest rates by another 0.75 to 1 point in the coming days and weeks. But the central bank already made a half-point emergency cut last week, to 1% to 1.25%, and heeding market demands for more would bring the central bank’s main rate close to zero, using up practically all of its traditional firepower to boost growth.
With the Fed being close to tapped out and the U.S. economy moving ominously closer to recession, that has set off a growing call for action by the federal government.
“If we could get a targeted and timely fiscal response, it would be viewed as a positive development,” Meyer said.
But while the administration has begun early discussions of programs particularly to help workers and families hit hardest by the outbreak, it comes at a time when Washington is so politically divided and polarized that it will be very hard to get agreement on a plan.
Unlike the 2007-08 financial crisis, when the Bush and Obama administrations were able to achieve a unified and effective response despite partisan differences, few experts see a repeat of a large stimulus.
Over the last three years of the Trump administration, for example, both Republicans and Democrats have talked often of a government infrastructure spending program, but nothing has ever come of it.
Economists like Schulze aren’t counting on a large fiscal policy response.
“Republicans will want tax cuts like the payroll tax cut announced by Trump, while the Democrats will favor higher spending,” he said.
Schulze added: “It’s important to point out that any stimulus would boost the economy immediately before the presidential election, which could help reelect Trump. Democrats may be reluctant to move unless we witness worse economic data.”
Economists said it may not be until job growth stalls before both sides sense the urgency to pass a big fiscal stimulus. So far, the job market has held up very well. The economy added 273,000 jobs in February, although that was inflated by unusually warm weather.
Also, consumers by and large are in relatively good financial shape, with historically low debt burdens. Scott Hoyt, who follows consumer spending for Moody’s Analytics, said that as long as people aren’t afraid of losing their jobs or source of income, a consumer pullback may not be so severe.
At the same time, he and other analysts said it would be prudent for the federal government to act before things get too bad. Besides a payroll tax cut, other programs that may be considered include regulatory relief, help for small businesses and expansion of unemployment benefits for those who are temporarily laid off.
“Some preemptive action or putting something in the books that will kick in [when conditions worsen] could help restore confidence and prevent the need for it,” Hoyt said.
Economists will be keeping a close eye on joblessness, weekly unemployment claims and any other signs of increasing layoffs — indicators of a recession.
Andrew Challenger, vice president at the outplacement firm Challenger, Gray & Christmas, noted that a Florida toymaker, Basic Fun, cut jobs because of a stoppage in Chinese factories. Some U.S. airlines and hotels also have put in hiring freezes. And next to restrain hiring or lay off workers, he said, could be restaurants, retailers and entertainment venues as people avoid large gatherings.
By then, however, the country may already be in a downturn. In fact, Challenger said, “Economists may look back and discover that we entered the recession on Feb. 21, the day the stock market started falling.”