Government Lending

COVID-19 will cause a record-setting recession, economists say

“From full throttle to sudden stop,” Wells Fargo economists say

Economic forecasters are saying the recession caused by the COVID-19 pandemic is going to be record-setting, followed by a rebound in the final three months of 2020 that should result in the largest quarterly expansion in almost six years.

The rapid turn-around is because the economy was firing on all cylinders before America was hit with COVID-19, the most severe health crisis since the 1918 influenza pandemic. More than half of all Americans are in states with governors who ordered residents to stay at home, with the exception of essential workers such as nurses and necessary functions such as food shopping or pharmacy trips.

GDP probably will contract 15% in the second quarter, according to an estimate by Wells Fargo economists on Friday. That would be the biggest plunge ever recorded in more than 70 years of Bureau of Economic Analysis data. The third quarter probably will see a 6.3% contraction, meeting the classic definition of recession used by most economists: Two consecutive quarters of GDP decline.

That should be followed by a 4.1% expansion in the final three months of the year, according to the estimate.

“From full throttle to sudden stop,” is how the Wells Fargo economists explained it. “The economic carnage produced by the abrupt shutdown of economic activity across the country is readily apparent from the weekly unemployment claims.”

Initial claims for unemployment soared to 3.28 million people last week, an all-time high that was five times the peak during the financial crisis more than a decade ago, according to data released Thursday from the Labor Department.

“Across the world, governments are deliberately trying to lower GDP to deal with the coronavirus,” said Paul Donovan, global chief economist for UBS Wealth Management. Once people feel it’s safe to be in stores, there should be pent-up demand for goods that will lead to a rebound, he said.

The Federal Reserve’s pledge to buy unlimited amounts of bonds to support lending probably will drive the average 30-year fixed mortgage rate down to an all-time low of 2.9% in 2020’s second and third quarters, before rising to 2.95% in the final three months of the year, according to the Wells Fargo forecast.

Housing starts, measuring the number of homes contractors break ground on, probably will stay near last year’s level, the forecast said. For 2020, housing starts probably will total 1.25 million, compared with 1.29 million in 2019, the economists said. Construction activity in many states has been deemed “essential,” meaning those workers can show up on the job site.

The reason most consumers are staying home, as we should all know by now, is to keep hospitals from being overwhelmed by sick patients, as happened in Italy. That European nation, with a population a sixth the size of the U.S., had to ration care when ICU ventilators ran out, meaning doctors were forced to decide who would live and who would die.

American health officials are hoping that “social distancing,” as staying at home is now called, will prevent a tragic surge of patients with COVID-19. It will also give scientists time to find treatments and, eventually, a vaccine to prevent people from getting sick.

One of the most challenging aspects of dealing with the highly contagious COVID-19 disease is people can be spreading it without showing any symptoms. Nations doing widespread testing that includes people who don’t report feeling sick, like Iceland, have found about half the people who test positive for the disease are asymptomatic, yet are still contagious.

While President Donald Trump is calling for “packed churches” on Easter, just over two weeks away, it’s unlikely he can override the emergency orders put in place by state governors, including some from his own political party.

Those “Stay at Home” orders mean most people aren’t shopping for big-screen TVs, or the newest cell phone, or clothes. Some online retailers, like Amazon, are seeing a surge in business, though delivery times are slower than normal.

Still, not everything can come in a cardboard box. Some auto manufacturers, such as Ford, are running commercials urging Americans to shop online for a car and it will be delivered to their homes. But in times of economic uncertainty, people tend to hold off on big-ticket purchases, even if it can be delivered to their front doors.

Consumer spending accounts for about 70% of the U.S. economy. That’s why President George W. Bush famously said after the terrorist attacks on Sept. 11, 2001, once it was clearly safe for people to leave their homes, “Go out and shop.”

Barring a vaccine, or the ability for widespread testing and tracing of the contacts of infected people, as was done in South Korea, it’s not clear when Americans will feel it’s safe to hit the shopping malls again.

Stay-at-home orders “create a demand drop,” said UBS’ Donovan. But, once the pandemic is under control, “we will have an economic bounce back,” he said.

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