The United States is suffering the most abrupt and widespread cessation of economic activity in its history, hurtling toward a recession that could mean lost jobs, income and wealth for millions of Americans.
Across the country, consumer spending—which supports 70% of the economy—is grinding to a halt as fears of the escalating coronavirus pandemic keep people from stores, restaurants, movie theaters and workplaces.
The rapid national shutdown already has caused layoffs and reverberated on Wall Street, driving stocks into their first bear market in 11 years. Amid panic selling, unusual strains have appeared in less visible market niches that are critical to the ability of businesses to operate normally.
For millions of workers, consumers and investors, the economy’s sudden stop comes as memories of the 2008 global financial crisis remain fresh. Less than 12 years ago, the economy sank into a painful recession after risky Wall Street investments tied to real estate went sour. The number of jobless workers more than doubled in the aftermath while the stock market lost more than half its value.
Some veterans of that tailspin—the worst since the Great Depression—say today’s epidemic is hammering the economy in complex ways that could prove even more difficult to combat.
“The problem is everyone in America is cutting back their consumption,” said Jason Furman, who led the Council of Economic Advisers during the Obama administration. “A lot of sectors are being hit, especially the services sector. A lot of income and spending is being reduced. That’s just an enormous shock to the economy.”
The economy has weathered numerous painful recessions and previous shocks, including natural disasters and terrorist attacks. But what’s different this time is the speed of decline and the comprehensive economic hit caused by an unpredictable health scare that interferes with Americans’ ability to produce and consume.
By the end of this month, the global economy probably will have shrunk by 1.2 percent—”not far short of the 1.6% drop in world output seen at the depth of the global final crisis” in the fourth quarter of 2008, according to Capital Economics in London. As the United States reels, Europe and Japan are also probably in recession.
“This is like a hurricane happening everywhere simultaneously for months and months on end,” Furman said.
The economic costs in the United States are mounting quickly. Apple Chief Executive Tim Cook said Saturday that the company is closing all stores outside China until March 27.
In Las Vegas, MGM Resorts—where several employees have tested positive for the virus—said late Friday that it would begin layoffs and furloughs in the coming week. “Business demand has decreased significantly,” CEO Bill Hornbuckle wrote in a letter to employees, which was first reported by the Las Vegas Review-Journal.
As Americans hunker down at home because of the health scare, eateries are among the hardest hit. Within three weeks of the first reported coronavirus death in a Seattle suburb, restaurant reservations in the city fell nearly 60 percent, according to OpenTable, the online service.
In Boston, Ayr Muir, who runs Clover Food Lab, a 12-restaurant chain, said he expects “a very serious drop-off” in sales. Several of his restaurants are on, or near, college campuses that are closing. Others are in business districts that have become ghost towns as workers telecommute.
Muir said he knows of restaurants that have closed rather than risk incurring additional debt riding out an extended business interruption.
“”I think it’s less about people choosing not to go out and more that they’re not there,” he said. “I think this is going to end up being a pretty dramatic period, certainly for smaller businesses, but some larger ones, too.”
On the corporate front, the Big Three automakers and their suppliers pleaded with the Trump administration for a delay in the planned June 1 scheduled implementation of a new North American trade deal.
“We are in the midst of a global pandemic that is significantly disrupting our supply chains, and the industry is throwing all available resources into managing production through this crisis,” an industry statement said.
The eventual economic damage could be massive. More than 18 million Americans work in industries that are being hurt by the initial efforts to contain the virus: travel and tourism; spectator sports; museums; hotels; railways; and the performing arts, according to economist Michael Feroli of JPMorgan Chase.
Activity in this roughly $2 trillion slice of the economy will be significantly depressed for three months, he wrote in a note to clients Thursday, longer if the virus does not dissipate in the summer.
A sign of what’s ahead came Friday, when Delta Air Lines said it is slashing flights by 40 percent, the largest reduction in its history, surpassing even that executed after the Sept. 11 terrorist attacks. “The speed of the demand falloff is unlike anything we’ve seen—and we’ve seen a lot in our business,” Ed Bastian, Delta’s chief executive, wrote in a note to employees.
The U.S. economy that President Donald Trump hailed in January as “the best it has ever been” will be smaller at the end of June than it was on New Year’s Day, according to Feroli. And it will shrink in the second quarter at an annual rate that exceeds the decline at the time the failure of the investment bank Lehman Brothers turned the 2008 downturn into a cataclysm.
“If we don’t change the trajectory, we are certainly headed for a worse outcome than officials are indicating,” said Simon Johnson, who was the International Monetary Fund’s chief economist in 2008. “We’ve never experienced a shock like this.”
Still, many economists, including Feroli, anticipate an economic rebound in the second half. That assumes that the coronavirus outbreak ebbs, perhaps because of warmer weather. But amid tremendous uncertainty about the disease, all such forecasts are tentative.
On Friday, Treasury Secretary Steven Mnuchin said the president was moving quickly to counter the epidemic and ensure that the economy rebounds before year’s end. The House early Saturday passed legislation, backed by Trump, that would spend billions of dollars on medical tests, paid sick leave for affected workers and unemployment insurance.
“This isn’t like the financial crisis. We have a medical situation that has shut down and will shut down parts of the economy like we’ve never seen,” Mnuchin told CNBC. “But then they’re going to open back up and I think there’s going to be a lot of demand.”
In 2008, the economy felt the effects of problems that originated in the financial markets. This time, the virus-induced paralysis of real activity is putting key financial channels at risk of seizing up.
A key worry is the ability of businesses to access sufficient cash to fund their routine operations. As companies from Main Street to the oil patch fret about paying their bills, many are drawing down their bank credit lines.
Leaders of the largest U.S. banks told Trump on Wednesday that—thanks to deeper reserves and years of Federal Reserve stress tests—they are financially sound. But banks will face enormous pressure to keep funds flowing to businesses that are struggling to keep their doors open.
Minutes after the president’s prime-time coronavirus speech Wednesday, Linda Schreiber, owner of travel agency Starship Travel outside Chicago, started hunting for a financial lifeline.
Virus fears have resulted in numerous cancellations of spring break trips, graduations and destination weddings that account for most spring bookings. “It’s horrible timing for this to happen,” she said. “People are canceling left and right.”
The next day she secured a small-business loan to cover two months of overhead and salaries for 29 employees. If the downturn continues past the two-month window her loan covers, she plans to close one location and reduce her staff to part time.
“I’ve been through 9/11, Zika, MERS, SARS; I’ve been through it all over 34 years,” she said. “With this, the timing couldn’t have been worse.”
The resulting pressure has been most evident in bond markets. Typically, as stocks plummet, investors buy U.S. government bonds, which are widely viewed as a haven. But last week, both stocks and bonds sold off.
As stock prices plunged, some hedge funds sold Treasury bonds to raise cash to repay borrowings they had used to make risky investments. Cash-strapped energy companies likewise sought to turn their government securities into cash. And banks that needed cash to fund their business customers did the same.
“Bank treasurers are faced with a choice: Support their corporate customers who want a line of credit or deploy capital to markets. It’s clear which one they’re choosing: their customers,” said Guy LeBas, chief fixed income strategist at Janney Capital Management.
In the trading frenzy, bond sellers demanded much higher prices than the handful of ready buyers would accept—an extraordinary sign of dysfunction in a market that is usually the epitome of order.
“What happened is the Treasury market became one-sided: everyone is selling and not many people are buying,” said Roberto Perli, a former Fed official in 2008 and now a partner at Cornerstone Macro.
The Fed stepped in twice in recent days to inject extra cash to grease bond market operations. That came on top of the Fed’s March 3 interest rate cut of half a percentage point, which did little to calm the market. More aid might be needed and could come on or before the central bank’s next rate-setting meeting scheduled for Wednesday.
Further complicating the economic outlook is an intensifying oil price war involving Saudi Arabia and Russia.
Oil prices face a one-two punch. The coronavirus is idling people, trucks and ships, causing a collapse in demand. And after price-setting talks between the Organization of Petroleum Exporting Countries and Russia broke down this month, the Saudis opted to increase production. That flooded the market with oil and sent prices spiraling toward levels not seen since the late 1990s.
“We’ll see a huge surge in oil supply over the next few weeks and no demand for it. We think the price will dip into the $20 range and could even touch the teens,” said Francisco Blanch, head of commodities and derivatives research at Bank of America.
At those prices, the United States’ shale oil and gas boom is in trouble. Most U.S. and European companies can’t survive for long with oil below $40 a barrel, many analysts say. On Friday, the president announced that the government will buy oil on the open market to fill the nation’s strategic reserves.
The news nudged oil up a few dollars per barrel, but prices remain well below the break-even point for most producers. Goldman Sachs predicts that nearly one-third of the oil and oil services companies in the country will vanish, acquired by rivals or driven out of business.
Traders are watching for signs that energy companies may default on their debts, a development that would batter regional banks in Texas and Oklahoma and could cascade through the $10 trillion corporate bond market.
For now, analysts say the financial pain is unlikely to be as widespread as in 2008 because fewer financial products are linked to these securities in the way that mortgages were used to create complex derivatives during the housing bubble.
Even so, investors are nervous. Overall financial conditions—a measure of access to credit that takes into account interest rates, currency values and bond yields—are tighter than they have been in nearly a decade, since a 2011 scare over a potential sudden slowdown in China.
And when Wall Street opens Monday, analysts will be watching potential trouble spots such as risky corporate borrowings called leveraged loans and exchange-traded funds, a popular consumer investment, for any hint of bottlenecks.
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