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.