Today was supposed to provide a statement and new Summary of Economic projections from the Federal Open Market Committee, but the panel met Sunday instead, making today’s meeting superfluous.
The economy is likely entering a recession as COVID-19 fears and precautions have tamped consumer spending, the fuel for economic growth. Economists are predicting gross domestic product will contract for two quarters — with two consecutive quarters of negative readings the definition of recession.
So what happens now? The markets are ignoring talk of stimulus, apparently convinced that giving cash to consumers will not be spent because restaurants, casinos, hotels, bars, theaters, amusement parks, and many shopping malls are shuttered.
“Uncertainty about the epidemiology continues and will increase as more and more testing is done, and results are known,” said Steve Skancke, chief economic advisor at Keel Point. “One bright spot on the contagion front is that China is reporting a significant decline in new infections and seem to be restarting factories in Wuhan, which anecdotally provides helpful information about an infection/containment/abatement cycle.”
And while the economic “impact and duration” are yet to be determined, “economic news has been positive: consumer spending through the end of February was strong, and consumer confidence reported mid-March was strong as well,” he said. “Both of these don’t reflect the recent barrage of negative news and uncertainty of government policies.”
He expects first quarter growth will be positive, but next quarter “will have negative growth and negative earnings and pretty significantly. So in the third quarter spending, investment and earnings will have a long way to come back to positive territory. As a result, the third quarter growth will likely also be negative,” but will rebound in the fourth quarter.
Economic numbers “continue to provide helpful metrics about how the economy is behaving and in particular, how the important components of GDP and GDP growth are responding and seeing the future,” Skancke said. “Housing starts, inventory changes, and the components GDP growth are pretty reliable even in the current uncertain environment.”
And it will be important to watch data on jobs, incomes and consumer confidence, he said.
“At this point, a recession lasting at least one or two quarters seems inevitable,” said Gary Zimmerman, CEO of MaxMyInterest. “Whether that migrates into a depression will be a function of how long it takes to contain COVID-19, as that will impact the duration of job losses and the corresponding impact on consumer spending and the economy more broadly.”
In some ways, the financial crisis was easier to solve, but the coronavirus is causing demand shocks “driven by the need for self-isolation, which cannot be offset by monetary or fiscal policy (although fiscal policy can help mitigate the impact to some extent),” he added. “Based on what we know today, the only solutions appear to be the development of an approved vaccine (12-18 months away) or effective global containment efforts. This explains why governments are so focused on the latter.”
And the uncertainty of the length of time it will take to contain the virus, and hence its final impact on the economy, is driving market volatility, he said. “Fortunately, once this crisis is resolved, economic activity should resume, potentially quite quickly, and we could experience a robust economic boom.”
“The enormous degree of uncertainty on the virus, in the economy, in global credit, and in the efficacy of all of the policy prescriptions have the markets under severe stress amid strained liquidity conditions,” Marty Mitchell wrote in the Mitchell Market Report. “It also has market participants all up in arms sensing that there may be no answers for the havoc that COVID-19 is wreaking other than time. And that time frame lengthened considerably in the last few days.”
Bill Merz, director of fixed income at U.S. Bank Wealth Management, noted, “The substantial stimulus package from the Fed provides necessary support to markets, but the spread of the coronavirus must slow before markets regain confidence.”
"Retail sales were disappointing in February confirming the notion that consumers were already losing momentum heading into 2020 before the coronavirus,” noted Stifel Chief Economist Lindsey Piegza. “While the U.S. economy was on ‘moderate’ footing at the start of the year, an increasingly fragile consumer in Q1 suggests a pullback resulting from the coronavirus and the policies of containment may be even more impactful come Q2."
Federal Reserve Bank of Atlanta President Raphael Bostic said new tools will be needed to combat the economic strife and policymakers will have to be creative, as they were during the financial crisis. “At this stage everything is on the table,” Bostic said in a telephone interview Tuesday with Bloomberg News and Reuters. “We will continue to respond in ways that are appropriate.”
“Measures taken to flatten the virus spread curve (so as not to overwhelm healthcare systems) are creating extreme short-term economic strain,” noted Nick Reece, senior analyst and portfolio manager at Merk Investments LLC. “And that’s putting a lot of stress on the global financial system. Financial conditions will be the primary concern of the Fed over the next several weeks.”
He expects “a significant increase in the Fed’s balance sheet in the weeks and months ahead with further [quantitative easing] purchases, commercial paper backstop, foreign swap lines, and usage of the discount window.” And the Fed may work with Congress and Treasury “to minimize the economic damage of this exogenous shock. I expect that policymakers will act aggressively.”
While the Fed has done its part “to backstop the system (in the grand scheme of things this is a small but vital role),” he said, “now it's a matter of getting the heath situation under control so the economy can get back to work, which will take time. The big question on the restart of the economy is how well the fiscal package can bridge the gap between where we were coming into this (with a very strong economy in January and February) and where we will be on the other side.”
RBC Capital Markets, LLC Chief U.S. Economist Tom Porcelli notes the Fed will continue stimulation efforts, and “the U.S. government is just beginning.” He said, “There is a lack of appreciation for some of the fiscal policies that were already floated. This point should not be lost in the noise. Help to the small business community is critical. Overall, we maintain our view that most of the authorities are basically doing the right thing, and once we get beyond the ugly ding to [economic] growth that is coming, policies in place should allow for growth to start the process of healing in the second half [of the year].”
RBC Global Asset Management Inc. Chief Economist Eric Lascelles sees “slightly positive growth in the U.S.,” but “even the U.S. and Canada are now more likely than not to suffer technical recessions as their economies decline for two consecutive quarters.”
And in the bond market, “conditions have shut down the new-issue market, and this has incentivized borrowers to shore up liquidity where they can. To this end, a number of companies reported drawn down bank lines,” he said.
Housing starts
In the only economic data released Wednesday, housing starts and building permits declined in February, the Commerce Department reported.
Starts fell 1.5% — less than expected — to a 1.599 million annual rate, while permits slumped 5.5% to a 1.464 million rate, suggesting even before the effects of COVID-19 construction would slow.
Economists polled by IFR Markets expected 1.5 million starts and 1.505 million permits.
"Housing starts were strong at the outset of 2020, as builders started production of homes to meet consumer demand at the beginning of the year," according to Dean Mon, chairman of the National Association of Home Builders. "While these are solid numbers, the report is backward looking. Challenges lie ahead due to broad economic weakening stemming from the coronavirus crisis."
“Due to the slowdown in economic growth and the volatility in markets from the coronavirus, mortgage rates will remain lower for longer, which will help homebuyers in the longer run,” noted Mortgage Bankers Association Associate Vice President of Economic and Industry Forecasting Joel Kan. “However, we may start to see these homebuilding trends take a turn for the worse, depending on the industry’s ability to continue day-to-day operations during these difficult times.”
