Monday, March 09, 2020

Going on Recession Watch

by Calculated Risk on 3/09/2020 11:39:00 AM

I'm not forecasting a recession, just moving to Recession Watch for the first time since 2006.  Note: In early 2007, I moved from Recession Watch to forecasting a recession that started in December 2007.

As I noted in Predicting the Next Recession, the usual leading indicators are not useful if there is "a pandemic, significant military conflict, disruption of energy supplies for any reason, a major natural disaster (meteor strike, super volcano, etc), and a number of other low probability reasons".

The reason I'm moving to Recession Watch now is a combination of the COVID-19 pandemic, and the response to the pandemic of the current administration.

Leadership is key in a crisis.   Information should be clear, transparent, and accurate.   Action should be proactive.

Usually the CDC leads the world in responding to a health crisis. However, the CDC was caught flat-footed this time.   Testing for COVID-19 should already be ubiquitous and free for all (not just those with insurance).    It appears testing will increase dramatically over the next several weeks, but the administration still needs to make testing free for all (otherwise the uninsured will avoid the test and spread the disease).

And the administration should have fiscal policies ready to go to address the economic impact of the health crisis. Here are my suggestions: Fiscal Policies to Address COVID-19. There is news out this morning that White House advisers will have a list of policy options for Mr. Trump today. My sense is the administration will slow track a fiscal response and try to embrace ineffective policies. For example, enacting corporate tax cuts would be bad policy - it would take many months to have an impact, and the cuts would target the wrong segment of the economy.

Before predicting a recession, we need to see how this unfolds.  Perhaps COVID-19 will be seasonal like the flu and the economy will bounce back in the Summer.  If that is the case, we will have time to prepare for a probable resurgence of the disease in the Fall.    But that is a thin thread to pin our hopes.