All of the forecasters I read now agree the US economy is indeed in a recession today. While we often don’t recognize a recession until it is almost over, we realize this one much earlier than usual because we’ve never experienced something of this magnitude and this quickly ever before. The question is, how bad will this recession get?
It goes without saying that no one saw this coming at the beginning of the year. This came on us like a raging freight train! Most forecasters now predict the US economy contracted by 3%-7% in the 1Q. Some predict far worse. We won’t get our first look at 1Q GDP until April 29 when the Commerce Department releases its advance estimate of growth in January-March.
US GDP growth was 2.1% (annual rate) in the 4Q of last year. For all of 2019, GDP rose by 2.3%. Coming into this year, most forecasters expected GDP to fall somewhat in the first half of this year, followed by a strong recovery in the second half of the year.
Those forecasts are, of course, out the window now. The coronavirus and the lockdown of much of the US economy has changed everything. Over 22 million working Americans have been laid off or furloughed and filed for unemployment benefits in the last month alone.
To put that in perspective, the US economy added 20 million new jobs from June 2009 to February of this year, in the longest economic expansion in history. Now we’ve more than wiped out all those jobs in just one month. It’s a disaster, and it’s not over yet!
Earlier this month, the Labor Department reported that the official unemployment rate for March spiked to 4.4%, up from 3.5% (a near 50-year low) in February – that’s nearly a full percentage point increase in one month. This is important as I will discuss below. Over 700,000 jobs were lost in March alone, and that figure is almost certain to be revised higher.
Since the 1970s, a half-point increase in the three-month average unemployment rate, relative to its low in the prior year, has occurred in the early months of every recession. This indicator is known by economists as the “Sahm rule.”
With the unemployment rate expected to continue rising for at least the next couple of months, that will mean the three-month average will easily exceed a full percentage point increase from the prior – thus signaling a recession. Or worse, if the new weekly unemployment claims continue to rise by six million or more as we’ve seen for the last three weeks.
My point is, while a recession is defined as two consecutive quarters with negative growth in GDP, we need not wait that long to confirm we are in a serious recession right now.
I again return to the question, how bad could it get? No one knows exactly, of course, but there’s mounting evidence this will be the worst economic contraction any of us have ever seen. There is also growing evidence that the real unemployment rate right now is in the 10% range, not the 4.4% the Labor Department reported earlier this month.
The Federal Reserve Bank of St. Louis recently projected that 47 million Americans could be laid off in the coming weeks and months. If true, that translates to a 32% unemployment rate. During the Great Depression, the official jobless rate peaked at 24.9%.
The St. Louis Fed did offer a couple of caveats to its projection of 47 million laid off. One, they didn’t try to account for workers who drop out of the labor force voluntarily, thus bringing down the unemployment rate somewhat. And two, they didn’t try to estimate the impact of recently passed government stimulus programs or others that may follow.
Those caveats don’t soften the severity of the Fed’s projection of 47 million lost jobs, if you ask me!
Nor did comments by St. Louis Fed President James Bullard in a recent interview with CNBC:
“[The jobless number] will be unparalleled, but don’t get discouraged. This is a special quarter, and once the virus goes away and if we play our cards right and keep everything intact, then everyone will go back to work and everything will be fine.”
Do you find those words comforting? I certainly don’t! FYI, the “special quarter” he was referring to is the current 2Q.
The bottom line is: Things are getting very ugly, very quick. The SBA and the banks need to expedite getting the $250 billion in stimulus to small businesses. Politicians in Washington need to stop bickering immediately and approve the additional $250 billion President Trump has requested for small businesses.
As a fiscal conservative and deficit hawk all my adult life, it is very hard for me to push for more stimulus spending. But in this case, I don’t see that we have much of a choice. I welcome your comments.
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