At the start of the year a recession in 2020 seemed unlikely to all but the few permabears who incorrectly predicted one every year since America’s record long economic expansion began. In our 2020 outlook, though, we did say that the U.S. economy as always was exposed to exogenous shocks, and the COVID-19 outbreak indeed appears to be such a grey swan. Specifically, the supply and demand disruptions that will result directly from the virus and related containment efforts have the potential to essentially grind economic activity to a halt in this country. The first meaningful evidence of this will show up in the weekly initial jobless claims figures from the U.S. Labor Department. The latest of these reports released this morning revealed that the number of Americans making first-time claims for unemployment benefits jumped to 281,000 last week.
That is the highest reading since 2017 but it should get even worse next week (see below) due to the more recently mandated business closures and other efforts to help mitigate the spread of the coronavirus. This indicator, along with most other incoming economic reports, will likely continue to deteriorate rapidly over the next few weeks, and the probability of a technical recession occurring this year has therefore surged due to the sheer scale and velocity with which these disruptions are occurring. However, unlike past downturns that are typically caused by a buildup of major imbalances such as an over-indebted household sector or extremely-leveraged bank balance sheets, the economy ahead of this downturn was by most measures very healthy. This means that even though the immediate weakness may be severe, the inevitable economic rebound could be quick compared to classical recessions. Further, recent developments in D.C. suggest that the government’s monetary and fiscal response will be substantial, which should help soften the blow for those Americans hit the hardest by the outbreak, and also speed up the subsequent recovery. When this rebound occurs, though, will of course depend on how quickly the spread of the coronavirus can be brought under control.
Sources: Econoday, U.S. DoL, Google, MarketWatch, FRBSL