Coronavirus raises spectre of depression for US economy as business activity halts

NEW YORK (BLOOMBERG) – The United States is entering a recession. The ultimate fear is that it could turn into a protracted malaise that has some flavour of a depression.

That’s far from the base case, with many analysts and investors taking heart from signs of revival in the original epicentre of the coronavirus – China – and predicting a second-half upturn in the US after the contagion hopefully subsides.

But as business activity halts and layoffs surge, some prominent economy watchers – including former White House chief economists Glenn Hubbard and Kevin Hassett and former Federal Reserve vice-chairman Alan Blinder – have drawn comparisons to the Great Depression, though they’ve stopped well short of forecasting another one.

Former International Monetary Fund chief economist Maury Obstfeld said the world hasn’t seen a synchronised interruption in economic output in decades. The best example the University of California, Berkeley, professor can think of: “Well, maybe the Great Depression.”

The US undoubtedly will suffer a huge economic contraction as businesses close and Americans stay home. By some estimates, the economy is headed towards its worst quarter in records since 1947. JPMorgan Chase & Co expects gross domestic product to shrink at an annualised rate of 14 per cent in the April-June period while Bank of America Corp and Oxford Economics both see a 12 per cent drop. Goldman Sachs Group sees a 24 per cent plunge.

In a Bloomberg interview on Sunday (March 22), Federal Reserve Bank of St Louis President James Bullard predicted the unemployment rate may hit 30 per cent in the second quarter because of shutdowns to combat the coronavirus, with an unprecedented 50 per cent drop in GDP.

While that’s an enormous wallop, it’s only one quarter at an annualised rate. In the Great Depression of 1929-33, the entire economy shrivelled by roughly a quarter as unemployment neared 25 per cent.

Recessions, which refer to periods of significant, broad-based declines in economic activity, vary in length. Depressions, of which there has been only one since 1900, require the downturn to last for a long time, perhaps years.

Whether the coming contraction proves to be prolonged depends a lot on how long it takes to check the contagion.

“Unless this virus miraculously disappears from the population over the course of the next few months, it is a reasonable scenario that we might be in this lockdown setting for quite a while, measured in quarters,” said Harvard University professor James Stock, who is a member of the National Bureau of Economic Research panel that dates the timings of recessions.

If everybody stays home for six months, “it is going to be like the Great Depression”, Mr Hassett, who’s returning to the White House to advise on economic matters, told CNN last Thursday.


The downturn’s depth and duration will depend on the economic policy response. It was policy mistakes – particularly by the Fed – that turned the contraction nearly a century ago into a depression.

“I am fearful of that if we don’t do the right policy,” said Mr Hubbard, now at Columbia Business School.

A big concern: The sudden stop leads to widespread firings and bankruptcies that scar the economy for years, as in the Great Depression.

Goldman Sachs sees jobless claims surging to a record 2.25 million in the week ended March 21, while Bank of America projects three million and Citigroup four million. That compares with 281,000 in the prior week and would be more than triple the record 695,000 during one week in 1982.

Finance professor Greg Brown, at the University of North Carolina’s Kenan-Flagler Business School, said unemployment will rise as high as 9 per cent in two months, from February’s 50-year low of 3.5 per cent.

Mr Andrew Hollenhorst, chief US economist at Citigroup Inc noted that with such job loss, “spending is not going to be as easy to restart because you just can’t see the same level of spending if you have people that have lost that income”.

In addition, if companies can’t make planning and investment commitments now, “that can have impacts on spending today but also on potential innovation in the future”, said Prof Tara Sinclair, an economist at job website Indeed and professor at George Washington University.

Unlike nearly a century ago, the Fed has acted fast, cutting interest rates effectively to zero, restarting quantitative easing and resurrecting emergency financing facilities it used during the financial crisis.

President Donald Trump, who has been criticised by some for a sluggish response, has also now recognised the enormity of the coming economic hit.

He said last Saturday that negotiators in Congress and his administration are “very close” to agreement on a plan that an adviser said will aim to boost the US economy by about US$2 trillion (S$2.9 trillion). Majority Leader Mitch McConnell was aiming for a final vote on the measure on Monday.

“The economic hit could be sharp and deep,” said Harvard University professor Jeffrey Frankel. But assuming that infections peak in 2020, “there is no reason why economic activity should stay depressed for a period of years, which I take to be the definition of a depression”.

Some analysts trying to project the economy’s path cite the 1918 influenza pandemic that claimed an estimated 50 million lives worldwide.

In a recent presentation to a virtual Brookings Institution conference, economist Robert Barro said that countries back then typically suffered a 6 per cent reduction in GDP, about in line with that of the last recession but far smaller than in the Great Depression.

He described his findings as an upper-bound estimate of the economic impact from the coronavirus. Global health systems are better equipped to handle contagion now, but the world is more interconnected, he said.

Mr Blinder, now a Princeton University professor, said “we think of a depression as a recession that is very, very deep and very, very long… That’s the kind of thing that could happen” should infections peak only temporarily then return in the autumn.

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