36 BARRON’S March 16, 2020
THE ECONOMY
In The Wall Street Journal’s latest poll of
economists, 49% said they see a recession
in the next year, up from 26% a month ago.
T
his coronavirus is
novel not only for
its first appearance
in humans, but also
for the impact it
stands to have on
the world economy.
The threat is unprecedented and the
ultimate toll uncertain.
The unfolding calamity is at turns
similar to the financial crisis, marked
by market dislocation; the Sept. 11 ter-
rorist attacks, whichaffected consumer
behavior; and adverse weather events
like the polar vortex in 2019 that kept
swaths of people home-bound and
visibly dented economic growth.
Predicting the impact has been a real
bear (pardon the reference). China’s
data aren’t trustworthy. Italy has only
just begun to come to terms with the
impact. Limited testing in the U.S. isn’t
accurately measuring the spread. Just
three weeks ago, the consensus mood
was of modest concern, at least as far as
the domestic economic impact.
“Within a very short period of time,
the world has become obsessed with
the coronavirus,” says David Kelly,
chief global strategist at J.P. Morgan
Funds. “Even since Monday, I’ve be-
come substantially more pessimistic,”
he said on Friday morning, adding
that a recession now seems inevitable.
Yet the piecemeal response across
the U.S. and the still-developing fall-
out mean it’s futile to compare this to
any prior economic shock or other
country’s response. After all, the U.S.
isn’t China, with an authoritarian
government that can seal off cities,
or Italy, with its far-smaller economy.
What we do know is that reported
cases—even if underrepresenting the
problem—are ballooning, prompting
school closures, canceled events, and
social distancing. Such measures,
though they may help limit the spread
of the virus and prevent a protracted
recession or slowdown, will no doubt
hurt the domestic economy in the near
term. Cancelled events mean that con-
sumers aren’t traveling, buying food
and drinks, staying in hotels, or just
generally spending money. They also
mean that companies might not need
to be fully staffed, putting some
Americans’ paychecks in doubt.
Economists, racing to keep up with
developments and adjust their models,
are split on whether the shock pushes
the U.S. economy into recession. In
The Wall Street Journal’s latest poll of
economists, conducted on March 6-10,
49% said they see a recession in the
next year, up from 26% a month ago.
Bond and oil markets are flashing
recession warnings, and betting mar-
kets reflect rising recession odds.
Whether the U.S. tips into recession
depends on whether activity does in
fact turn negative in the second quarter
and whether it snaps back in the third
quarter, since a recession is defined by
two consecutive quarters of negative
growth. For economists at Barclays,
contraction in the second and third
quarters is the worst-case scenario,
followed by a recovery thereafter.
J.P. Morgan’s Kelly, meanwhile,
now sees at least a 25% drop in restau-
rant sales and a 60% to 70% decline
in hotels and airline revenue, which,
added to other declines, will take five
percentage points off second-quarter
gross domestic product and two
points off third-quarter GDP before
growth resumes in the fourth quarter.
Reflecting the wide variance in
GDP predictions, the Federal Reserve
Bank of New York is forecasting 1.1%
second-quarter growth with its real-
timeNowcast as of Friday.
As markets hope for some sort of
fiscal response, some companies have
tried to soften the blow to their work-
ers.Starbucks(ticker: SBUX) says it
would pay its U.S. workers during a
14-day quarantine required by expo-
sure to the virus;McDonald’s(MCD),
that it would pay certain employees if
they need to be quarantined; and
Darden(DRI), owner of Olive Garden
and other restaurant chains, that it’s
working to provide paid sick leave to
some 180,000 hourly workers. It re-
mains to be seen how far responses by
Corporate America will go to help
mitigate the outbreak’s impact.
A hit from the virus hasn’t really
shown up in the data yet; initial job-
less claims, the best high-frequency
gauge for measuring the impact, fell in
the most recent week, a reminder that
it is too soon to predict the extent of
the outbreak’s impact. Consumer con-
fidence as measured by the University
of Michigan through March 11 slipped,
but remains close to record highs.
Another bit of perspective: Half of
the economists in the WSJ survey are
still not predicting a recession. Nancy
Lazar at Cornerstone Macro is one of
them, and she and her team say their
own Recession Risk Index is actually
moving lower, not higher.
“Recession odds are falling, as U.S.
energy prices, mortgage rates, and
global bond yields decline,” Lazar
says. She says some of the index’s in-
puts do call for a recession, including
the yield curve and corporate profit
margins, and she notes that Corner-
stone’s daily consumer confidence
survey shows that sentiment has
fallen to the lowest level since late
- But most of the index’s other
factors still suggest otherwise.
Whether the U.S. does fall into
recession this year is less important
than how quickly and robustly the
rebound occurs. Even those with dire
near-term projections see growth
resuming by the end of the year and
into 2021—offering a dose of opti-
mism for investors already hunkering
down and living off hoards of non-
perishables that, coincidentally, will
boost first-quarter GDP and help
support full-year GDP.B
By Lisa Beilfuss
The Virus’ Impact on
Growth Will Be Novel
Your GDP Estimate Is as Good as Ours
Source: Cornerstone MacroCornerstone Macro's Recession Risk Index has been moving lower, not higher, as the
coronavirus impact plays out. Other economists' growth predictions are all over the map.
1960 ’70 ’80 ’90 2000 ’10 ’20020406080100Above average
recession risk
Below average
recession risk