Tuesday, March 03, 2020

Pandemic: A Slowdown or a Recession?

by Calculated Risk on 3/03/2020 11:54:00 AM

Back in 2013, I wrote "Predicting the Next Recession". Since then, I've updated that post several times, most recently last September.

In that post I noted that the next recession could be caused by ...

"An exogenous event such as 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. All of these events are possible, but they are unpredictable ..."
emphasis added
Now that a pandemic is here, the question is: Will the economy just slow down, or will there be a recession?

A recession or a slowdown depends on the severity of the pandemic and the actions of the Federal Government (both on coordinating the response and fiscal policy). The Federal Reserve cut rates 50 bps this morning, but they can only do so much.

The severity of the pandemic is unpredictable, although looking at China - and now South Korea - the economic disruptions could be huge.

The actions of the Chinese government, and the US actions to limit travel from China, bought policymakers in the US time to plan for the pandemic.   Unfortunately it appears US policymakers were caught flat-footed, apparently expecting containment would be successful (even though the experts were saying containment would most likely fail).

At this point, the Government should follow the advice of the medical experts - obviously increase testing dramatically and making testing free for every person in the US..

On fiscal policy, tax cuts would be pointless. I think even a payroll tax cut would have limited benefit. We need policies aimed directly at those impacted. For example, if schools close, how will parents handle child care? If a parent needs to stay at home to take care of their kids, what about their income?

My suggestion is to strengthen the automatically stabilizers (increase the amount of unemployment insurance for the next several months), and target fiscal policy directly at those impacted.   I offered some suggestions yesterday that were aimed at those impacted.

The actions of the Federal Government over the next few weeks, on coordinating the response and putting in place targeted policies, will be important in determining whether we see a slowdown or a recession.  The course of the pandemic is unpredictable - and we might get lucky (perhaps seasonality will play a role - but that is an unknown).

Fear and confidence are important factors too.  The Government needs to be honest and transparent about the extent of the pandemic, and provide accurate and timely updates on the situation.

In China, the epidemic brought the housing market to a stand still, and even with very low mortgage rates, that might happen in the US too (People might just stop looking).  If the housing market slows sharply for more than a few months, a recession will be very likely.

I will focus on high frequency indicators (like weekly unemployment claims) and provide updates on my outlook.