Barron\'s 03.16.2020

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March 16, 2020 BARRON’S 7


UP & DOWN WALL STREET


billion in spending. That was after the


Dow plunged Thursday in the wake of


his address outlining steps to fight the


spread of the virus, including a travel


ban from Europe, among other, more


limited measures.


While most economists are cau-


tiously lowering their forecasts, the


potential decline in gross domestic


product could be far worse than the


consensus view suggests. Most of


their number taketheir cue from1987,


when the Dow’s record 22% one-day


plunge did not lead to a recession, but


instead was followed by continued


growth—in part because of a drop in


interest rates, as the Federal Reserve


eased policy promptly and aggres-


sively to cushion the effects of the


stock market’s plunge.


Joseph Carson, the veteran fore-


caster who was formerly the chief


economist at AllianceBernstein as well


as at major banks, thinks other epi-


sodes could be more relevant anteced-


ents to what the U.S. economy is facing


now. Writing on his LinkedIn blog, he


argues that the U.S. could face record


quarterly declines in GDP, similar to


what occurred in the fourth quarter of


2008 during the financial crisis, or in


the second quarter of 1980.


While the experience of the


2008-09, the worst economic crisis


since the Great Depression, remains


The potential falloff in


GDP could be far worse


than the consensus view


suggests.


By Randall W.


Forsyth


H


istory was made in


the week just past,


but not the sort


that will be cele-


brated in the fu-


ture. Not just the


markets, but the


nation, were rocked by big events that


recalled past chaotic episodes. The


comparisons weren’t encouraging,


however.


On Thursday, the Dow Jones In-


dustrial Average suffered its biggest


hit since Black Monday, Oct. 19, 1987,


falling almost 10%. The steep drop


effectively ended the bull market that


began at the major indexes’ nadir 11


years ago this month.


But unlike the reaction to the finan-


cial crisis of 2008-09, which elicited a


coordinated global policy effort, the


response to the spread of the corona-


virus has thus far been limited and


has underscored the breakdown in


cooperation among the major nations.


As a result, the U.S. may face the


steepest drop in economic activity in a


generation, as the lives of Americans


are fundamentally disrupted, with


shifts in work, school, leisure, and


even basic habits, such as greeting one


another.


The message of the markets—eq-


uity, credit, and commodities—has


been that these changes in our way of


life will have a severe impact on the


economy, even if only temporarily.


This would require a swift policy


response, which, for the most part,


has not been forthcoming. Only after


the paroxysms of the financial mar-


kets were policy makers moved to do


something.


President Donald Trump an-


nounced on Friday afternoon various


measures, including the declaration of


Drew Angerer/Getty Imagesa national emergency that permits $


fresh in the minds of virtually all


investors—even if they weren’t active


in the markets then—the recession of


four decades ago is probably a foggy


event in the history books to most.


But for those whose professional


careers extend back to the final years


of the Jimmy Carter administration,


the memories of those days are just


as vivid.


Real GDP contracted at an 8.0%


annual rate in the second quarter of


1980, only slightly less than the 8.4%


annualized decline in the fourth quar-


ter of 2008. The latter episode memo-


rably followed the failure of Lehman


Brothers and the ensuing crisis.


The sharp contraction of the second


quarter of 1980 coincided with the


announcement of credit controls,


which the public interpreted, mistak-


enly, as an order to stop using their


credit cards. That, Carson notes, re-


sulted in a massive, 8.7% annualized


drop in consumer spending, even


faster than the dip in overall GDP. In


the final quarter of 1980, consumer


spending fell only half as fast as GDP.


Carson sees Americans’ drastic


changes in work and living patterns—


including restrictions in gatherings,


cancellations of major sports events,


school closings, and large portions of


the labor force working from home—


as comparable to the cuts in credit use


in 1980. Moreover, he notes the effect


of disruption of supply chains on


business, as well as the loss in wealth


resulting from the plunge in the equity


market, totaling some $7.8 trillion just


since the Feb. 19 peak, according to


Wilshire Associates’ calculations.


Part of those losses were trimmed


on Friday by a sharp rebound of over


9% in the major equity market aver-


ages, virtually wiping out Thursday’s


steep drop. Much of those gains came


in the final hour of the session, after


Trump announced new steps to deal


with the coronavirus threat. In addi-


tion to increased testing, he an-


nounced the suspension of interest


payments on federal student loans and


the purchase of crude oil for the Stra-


tegic Petroleum Reserve. That move


bolstered oil prices that had been bat-


tered because of the price war be-


tween Saudi Arabia and Russia, two


major producers, which had sent fi-


nancial markets reeling at the begin-


ning of the week.


While helpful to counter the imme-


diate effects of the pandemic, the mea-


sures announced late Friday fell far


short of the fiscal policies being under-


taken by governments abroad. Trump


also dismissed legislation being negoti-


ated by his Treasury Secretary, Steven


Mnuchin, and House Speaker Nancy


Pelosi (D., Calif.), saying he doesn’t


believe House Democrats “are giving


enough,” without being specific. Ear-


lier, Pelosi said that the Democratic-


controlled House would approve a


coronavirus aid package that, she said,


would “put families first” by providing


direct relief to those affected.


In contrast to the piecemeal effort


of the federal and state governments


to deal with the spread of the corona-


virus, the United Kingdom announced


a comprehensive, coordinated package


of fiscal and monetary measures, in-


cluding refunding companies’ costs


for employees’ sick leave and a 12 bil-


lion pound ($14.8 billion) stimulus


package.


That followed a half-point cut in


the Bank of England’s key policy in-


terest rate to a record-low 0.25%.


Even Germany, which has put a


balanced budget ahead of consider-


ations of its economy and the effects of


the virus, said on Friday that it would


pledge unlimited cash to businesses


affected by the disease, a move its fi-


nance minister described as a “ba-


zooka” to avert a crisis.


The U.S. lacks a similar sense of


urgency. Mainstream economists’


forecasts have been trimmed relatively


slightly. Backward-looking data con-


tinue to show robust growth before


the outbreak of the virus, and the


Coming Up Short in


Response to the Crisis


The U.S. lacks a sense of urgency. Economists


predict a gradual recovery, ramping up as the


warm weather lets the virus pass. We’ll see.

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