Fears of recession rise again
The Fed made a rare, but not unprecedented, intra-meeting rate cut of half a percentage point on March 3. In a unanimous decision, officials said that despite an economy that remains strong, “the coronavirus poses evolving risks to economic activity.”
Fed Chairman Jerome Powell acknowledged that the action would not shield the economy from the potential negative impact from the spread of the virus but was an attempt to ensure that there was ample liquidity in the market and to boost confidence.
Regarding the hope for confidence building, economists were not convinced. Mohamed ElErian, chief economic adviser at Allianz, explained that the problem that the Fed faces is that it can’t address the supply shock (not enough stuff available to sell) that occurred because China (the world’s manufacturer) was shut down for at least month. However, the central bank is worried about how consumers may react to the virus, which could create a demand shock (spooked people may pull back on spending).
Joel Naroff, president and founder of Naroff Economic Advisors, was blunt in his assessment of the action: “You cannot fight a virus with rate cuts . ... It is hard to believe the
Fed members actually think rate cuts will induce greater business or consumer spending.”
The sharp tip of the economic impact from coronavirus has already been seen in the travel, tourism and hospitality industries, as companies enact travel bans and organizers all over the world are canceling conferences and trade shows; the energy sector, which is coping with oil prices that have plunged by more than a quarter; and tech and chip companies that are unable to fulfill orders without precious Chinese components.
Still, the U.S. may be in better shape than the rest of the world, because manufacturing accounts for only 11 percent of GDP and tourism accounts for 2.9 percent (the corresponding shares for Italy are 15 percent and 13 percent, respectively). But that down not mean that the country will escape the impact of the virus.
Paul Ashworth, chief U.S. economist at Capital Economics, notes that “U.S. air transportation (0.7 percent of GDP), retail (5.5 percent of GDP) and arts, entertainment, recreation, accommodation and foods services (4.2 percent of GDP) could all be hit hard.”
The virus has prompted economists to slash growth estimates for the year.
The Organization for Economic Cooperation and Development predicted global growth could plummet to just 1.5 percent in 2020, down from the 2.9 percent predicted before the outbreak took hold. Diane Swonk, chief economist at Grant Thornton, said “growth is likely to be flat to negative in seven of the 10 largest economies in the first quarter,” including China, Japan, Germany, the UK, France, Italy and Canada.” She believes global growth will slow to 1.8 percent in 2020, “well below the 2 percent threshold that indicates a global recession.”
Swonk thinks that “a recession cannot be ruled out.” El-Erian increased the odds of a 2020 recession in the US to as high as 50 percent, up from his prior assessment of 25 percent. I’m often asked what people should do if a slowdown were to occur. The answer is simple: pay down outstanding consumer debt (not home loans) and be sure that you have an adequate emergency reserve fund of 6-12 months of living expenses (12-24 months if you are retired) socked away in a savings, checking or money market account.