Cruel paradox: Beating virus means causing U.S. recessionFree

WASHINGTON — The coronavirus is dealing a death blow to the longest U.S. economic expansion on record, triggering layoffs and putting intense strain on the nation’s financial system.

In a cruel paradox, the very steps that are needed to contain the outbreak — quarantines, travel restrictions and business closures — are bringing everyday business to a halt and shoving the U.S. economy into recession for the first time since 2009.

“The more rapidly you want to contain the virus, then the more severe the lockdown has to be and the more severe the disruption to economic activity is,” said Gregory Daco, chief U.S. economist at Oxford Economics. “The hope is, the more severe the lockdown, the sharper the rebound will be.”

The “Lockdown Paradox,” he calls it.

Much will depend on how swiftly and aggressively the Federal Reserve, Congress and the Trump administration deliver financial aid to tens of millions of economic victims — from hourly workers with no more income to suddenly furloughed employees to businesses with loans to pay but no customers. Solving the health crisis by shutting down the economy, though, will have to come first.

The U.S. economy has never endured anything like this. The economic shock from the 9/11 terrorist attacks, painful as it was, was short-lived. The financial crisis and the Great Recession were devastating. But they weren’t intertwined with a calamitous health crisis.

In the near term, at least, Daco foresees excruciating economic pain: He expects the American economy to shrink at a staggering 12 percent annual rate in the April-June quarter. That would be the most dismal quarter on record dating back to 1947. After a second-half rebound, Daco thinks the economy will post zero growth for 2020 as a whole.

Financial markets are bracing for the worst. On Wall Street Wednesday, for instance, the Dow Jones Industrial Average was down more than 1,300 points in late-morning trading and has plunged more than 9,600 points or 33 percent since Feb. 12.

The economy has deteriorated with stunning speed. And the United States is hardly alone: The U.N.’s International Labor Organization estimates that the coronavirus outbreak could lead to nearly 25 million job losses worldwide and drain up to $3.4 trillion worth of income by year’s end.

In the United States, a wave of layoffs has just started, especially in industries most vulnerable to an economic standstill: Travel, entertainment, hotels, restaurants, retail stores — the heart of the service sector, which makes up most of the U.S. economy. Unemployment is sure to rise, perhaps sharply, in the months ahead.

“The U.S. has 2.6 million waiters and waitresses, nearly all of whom will be unemployed by Friday,” said Michael Hicks, an economist who directs Ball State University’s Center for Business and Economic Research. “The April 3 jobs report (for March) will be the single-worst monthly job report in U.S. history. The record is 1.96 million job losses in September, 1945, right after V-J Day.”

“We are already in recession,” said Robin Brooks, chief economist at the Institute of International Finance, an association of financial companies.

Brooks reckons that the U.S. gross domestic product — the broadest gauge of economic output — will fall at a 0.2 percent annual rate in the January-March quarter and then by 3.6 percent in the April-June period.

Even President Donald Trump, ever celebratory of the economy’s performance on his watch, conceded this week that the U.S. “may be” heading toward a downturn.

Statistics that will capture the economic damage from the virus and the efforts to contain it are beginning to surface. For now, Brooks fears “all the things we don’t see: The social distancing, the quarantining and the uncertainty aren’t in the hard data yet.”

The early evidence is sobering: The Federal Reserve Bank of New York reported Monday that manufacturing activity in New York state plunged this month to the lowest level since the Great Recession year of 2009.

On Tuesday, hotel executives, whose bookings have swiftly dried up, took their worries to the White House.

“I personally lived through many crises, starting with the S&L, the 9/11 crisis, the Great Recession,” said Hilton’s CEO, Christopher Nassetta. “I’ve been doing this for 35 years. Never seen anything like it.”

Chip Rogers, president and CEO of the American Hotel & Lodging Association, noted that hotels last year were, on average, roughly 67 percent full.

Now?

“We’re probably under 20 percent nationwide and headed south,” he said. “If, by the end of the year, we get up to 35 percent and nothing else happens, that will be about 4 million jobs lost.”

Caught off guard

The speed with which the virus broke out of China and traversed the globe caught forecasters off guard. Federal Reserve Chair Jerome Powell said Sunday that the Fed won’t even bother to issue its usual quarterly economic forecasts this week.

Its economic view depends on how the virus outbreak evolves, “and that’s just not something that’s knowable,” Powell acknowledged to reporters. “So actually writing down a forecast in that circumstance didn’t seem to be useful.”

On Wednesday, the economy continued to shut down. Ford, General Motors and Fiat Chrysler, along with Honda and Toyota, said they will shut all of their factories in the U.S., Canada and Mexico. The closing of Detroit’s Big Three alone will idle about 150,000 workers, who are likely to receive supplemental pay in addition to unemployment benefits.

The governor of Hawaii encouraged everyone to postpone vacations there for at least 30 days. Nevada’s governor ordered casinos to close for the month. Major casinos have ceased operations on the Las Vegas Strip.

Compounding the threat, oil prices started to tumble in the face of weakening global growth. Plummeting prices, though welcome to motorists, threatened to discourage investment by U.S. energy companies that contributes to economic growth. Trouble in the oil patch put pressure on deeply indebted oil and gas exploration and drilling companies. This trend intensified fears over the health of the corporate bond market.

As the economic outlook darkened, financial markets began to crumble — brought down, too, by the U.S. government’s fumbling initial response to the crisis. Tumbling markets are more than a symptom of economic distress. They can cause it. Mark Zandi, chief economist at Moody’s Analytics, calculates that every $1 of wealth lost to falling stock prices reduces by nearly a nickel spending by consumers, who drive about 70 percent of U.S. economic activity.