Radical Uncertainty into March Sadness

Chief Economist Scott Brown discusses current economic conditions.

In recent weeks, we’ve seen economic concerns about COVID-19 moving from supply chain disruptions, to expectations of softer global growth, to fear of the impact from social distancing. The odds of a recession have been rising day by day. Some economists believe that we’re already in one. Yet, a sharp, brief downturn should be followed by a strong rebound. Low interest rates, low gasoline prices, and fiscal stimulus may limit (but not prevent) economic weakness, but should support growth on the other side of the coronavirus. The risks rolled quickly into the credit markets last week, suggesting a more critical phase in the crisis, but the Federal Reserve has responded.

The coronavirus is highly transmittable. While 80% of those infected exhibit mild symptoms, the other 20% are severe cases and about 1% die. The elderly and those with reduced immune systems are most at risk. Left unchecked, COVID-19 would spread widely, perhaps infecting 100 million or more Americans. The need for care would soon exceed capacity. Hospitals would be overwhelmed. Mitigation efforts, including increased social distancing, will slow the spread of the virus and allow hospitals to respond, but will also prolong the economic impact. By March 12, the U.S. has tested fewer people than South Korea does in a day. The lack of adequate testing makes it impossible to pinpoint where we are in this contagion. The number of infected is surely a lot higher than what is reported.

Life comes at you fast. Within the last week, we’ve seen the cancellation of the NCAA tournament, the suspension of the NBA, MSL, and NHL seasons, the cancelation of spring training, and the delay of the start of Major League Baseball and the Masters Golf Tournament. Major music festivals have been cancelled or postponed. Broadway has gone dark. The loss of these events and the reduction in spending in leisure and hospitality will reduced consumer spending significantly. Many workers who would be supporting these sectors won’t be paid. The virus-sensitive sectors of the economy account for about 30% of nonfarm payrolls.

Fiscal stimulus is on its way, or rather, will be on its way once the folks in Washington find agreement. Cutting payroll taxes is easy, but that doesn’t help if you’ve lost your job, and workers in other sectors would be more likely to save the windfall, then spend it. As tax revenues begin to dry up, aid to the states will be important. Targeting relief for those laid off due to the virus would be most effective, but could be tricky.