Pandemic will produce unprecedented economic fallout
Financial calamities, reported a character from Ernest Hemingway’s 1926 novel “The Sun Also Rises,” happen in two ways: “Gradually and then suddenly.”
Chalk the current version up to both. The economic expansion that took root in the wake of the Great Recession always was unnervingly reliant on unusually low interest rates and unusually high budget deficits. One quarter of Americans continued to live hand to mouth despite unusually low unemployment. Consumer demand was bolstered by the wealth effect linked to a stock market aided by companies buying back shares with hundreds of billions of dollars saved from the 2017 tax cut.
Unusual or not, the longest business cycle in the nation’s history nonetheless trudged on — until the worst human health crisis since 1918 changed everything.
Gyrating stock prices resemble an EKG of a heart attack patient, which now seems an apt description of the global economy.
The S&P 500 took barely three weeks to fall into bear market territory, the fastest such decline in 100 years. At its recent bottom, stocks had fallen by close to 40%, far surpassing the average for all bear markets since 1929.
The economic fallout is certain to be unprecedented.
Over the 11 recessions since 1947, the average maximum quarterly contraction at an annual rate in real GDP was 5.7%, with the steepest decline of 10% during the 1958 recession that was caused, in part, by a bird flu pandemic. (The maximum GDP decline during the Great Recession was 8.4%, in early 2009). By comparison, current estimates for second-quarter 2020 GDP range from minus 10% to minus 30%.
Though quarterly numbers before World War II are not available, the cumulative decline in real GDP during the first wave of the Great Depression (193032) was 25%. In other words, the U.S. economy could contract in percentage terms by as much over the next three months as it did over the first 36 months of what is considered the worst economic crisis in American history.
What’s a life worth?
A preponderance of health experts agree that reopening the U.S. economy prematurely could be catastrophic in human terms.
According to one report from the Imperial College of London, without “drastic” measures, 80% of the U.S. population could become infected by the novel coronavirus. That’s 10 times the rate of infections from the seasonal flu in an average year. The toll only rises from there, due to at least a nine-fold increase in COVID-19 mortality relative to a “normal” flu.
At 0.1%, the flu kills, on average, about 27,000 Americans a year; after plugging in a conservative mortality rate of 0.9% for the coronavirus, that number would soar to 2.2 million
deaths, or 81 times the number of fatalities in an average seasonal flu.
Even with “mitigation” — mass closures, social distancing, sheltering in place, etc. — over 1 million Americans could be expected to die, according to The Imperial College report, which was co-authored by the esteemed British epidemiologist Neil Ferguson. Various scenarios developed by the CDC and analyzed by outside experts are only slightly less chilling.
The Imperial College modeling spurred U.K. Prime Minister Boris Johnson to impose draconian measures in Britain, but after an initial burst of heightened concern, they may have only a fleeting influence on U.S. health policy.
Not-so-bad old days
For most of the post-Great Recession period, economists have worried that the unusually easy fiscal and monetary measures required to get the U.S. economy to expand at barely half the rate of the previous 60 years — a slow-growth environment dubbed the “new normal” — would leave policymakers with little ammunition to fight the next downturn.
To its credit, the Federal Reserve has fired virtually every weapon in its arsenal — many of which were dusted off and refined from the 2008 financial crisis — to unclog the nation’s financial plumbing. But there is no room to further lower benchmark interest rates, and the Fed seems committed to restarting and expanding asset purchase programs with newly minted money.
On the fiscal side, the $2 trillion rescue package will increase the nation’s debt by 9%, even before more stimulus is added in coming months. The budget deficit, already at unusually high levels relative to GDP for what was a peacetime expansion, could reach crisis proportions.
For all its negative connotations, the new normal never looked so good.
Tom Saler is an author and freelance financial journalist in Madison. He can be reached at tomsaler.com.