Second Quarter Collapse in Economy Seen as a Transitory Natural Disaster

In the fourth quarter of 2019 real GDP grew at a 2.1% annual rate. The positive contributors to growth were consumer spending, government spending, net exports, and residential investment. This report shows the economy was holding up well before the Covid-19 pandemic. Economists’ projections for the next few quarters vary considerably. The median forecast for first quarter GDP is a contraction of 0.3% (Goldman Sachs: -9%), a 13% decline in second quarter (Goldman Sachs: -34%, their lowest forecast since Great Depression), a third quarter increase of 6.4% (Goldman Sachs :+19%), and a fourth quarter increase of 4.9%. Economic growth is projected to resume after a second quarter plunge, with growth returning to a 4.5% to 5.0% average rate in the second half of 2020 and all of 2021.

The predictions show only one quarter of negative growth, but it’s a whopper. March macro-economic reports show an economy in a recession. Unemployment claims, ISM Manufacturing Index and ISM Service Index contracting implying a deepening recession. The stock market is looking through a second quarter collapse in economic activity as a transitory natural disaster.

The sudden shutdown of many parts of economy, in an effort to curb the spread of Covid-19, forced a record 3.3 million workers to file for unemployment insurance benefits last week. This is nearly five times the previous record in October 1982. Economists expect unemployment to reach 15% in April. If economists are correct, it implies that GDP will fall at a roughly -15% annualized rate in the second quarter of 2020. A 3.0 million increase in the number of unemployed would immediately push the unemployment rate up to 5.3% from the 3.5% recorded in February, and would likely raise it above 10% level in May. On a positive note, we should see the jobless rate to return to 4% by the end of 2021.

Congress passed a record $2.0 trillion stimulus bill to counter the Covid-19 impact on U.S. economy. The $2 trillion of fiscal “relief” package is a stunning 10% of GDP. It’s greater than that of the 2008 Financial Crisis. The stimulus seeks to relieve the cash flow pressures facing households and businesses. This would ease the economic pain on households and lay the groundwork for an economic recovery once the spread of the virus has abated and the near-lockdown of economic activity is lifted.

The Federal Reserve has unleashed an array of liquidity and new facilities programs that support credit markets, and stimulate economic growth. The Fed said it would do what it takes…unlimited stimulus. First, Fed cut the funds rate by a full percentage point. Second, the Fed will buy an additional $700 billion in securities ($500 billion in Treasury debt and $200 billion in mortgage securities). Third, the Fed stepped in to support the US municipal bond market and money market funds through bond-buying program and a lending facility for money market mutual funds. New facilities will help some entities stay solvent, and avoid defaults, and bankruptcies.

Former Federal Reserve Chairman Ben Bernanke expressed optimism about the longer-term picture for the U.S. economy. While the country is in for a “sharp, short” recession,” he sees a “fairly quick rebound” ahead. This is a very different recession from the Great Depression or the Great Recession, which were man-made, monetary and financial shocks. Mr. Bernanke said it’s much closer to a major natural disaster. He stressed the importance of getting the coronavirus itself under control, so that policy can do its work and people can get back to work.