Page 8 - ISQ UK Aprl 2020

“ These [stimulus] efforts won't prevent the

economy from weakening, but should limit the
damage and help in the eventual recovery. ”

US Economic Impact

Scott J. Brown, PhD, Chief Economist,
Raymond James

COVID-19 is having a major impact on the US economy. The unemployment rate, 3.5% in February, could rise to 10%,
Economists have had to lower their outlook for growth almost on a 15%, or 20%.
day-to-day basis. In his telephone conference call following the
Federal Reserve’s (Fed) second emergency rate cut, Chair Jerome Credit problems have shown up shockingly early, threatening to
Powell said that the Fed’s economic forecasts “depend heavily on amplify the economic downturn. The US Treasury market, the
the spread of the virus, the measures taken to affect it, and how most liquid in the world, experienced trouble in the second week
long that goes on, and that’s just not something that is knowable.” of March. The Fed has responded with two emergency rate cuts,
leaving the target range for the federal funds rate at 0-0.25%. The
Testing for the virus has been woefully inadequate. That makes it Fed restarted large-scale asset purchases (quantitative easing)
impossible to accurately gauge how far the virus has spread and and then made that unlimited. It has encouraged banks to lend
whether mitigation efforts are working. In turn, the failure to test out of their capital and liquidity buffers. Day by day, the Fed has
adds considerable uncertainty to the economic outlook. While a introduced an alphabet soup of credit, liquidity, and funding
number of states have been under lockdown, social distancing facilities – and will likely do more to prevent a broad collapse in
has been more sporadic in many places (for example, spring credit. At no risk to US taxpayers, the Fed expanded swap lines to
break in Florida). other central banks to relieve global strains.

Initially, the virus appeared likely to have a sharp but brief impact Lawmakers in Washington have responded with a $2 trillion fiscal
on China’s economy. US firms would experience supply chain stimulus package, including increased health care spending,
disruptions and a temporary loss of sales into China. As it spread increased unemployment benefits, aid to damaged industries,
to other countries, supply chain disruptions would become more cash and credit for small businesses, and “recovery rebate”
significant and the outlook for global growth would be diminished. checks for individuals. These efforts won’t prevent the economy
However, the spread in the US and the efforts taken against it from weakening, but should limit the damage and help in the
have had a sharp, negative impact on the outlook for domestic eventual recovery.
growth and jobs.
The federal budget deficit, already at $1 trillion with the economy
Social distancing is the main tool to limit the spread of COVID-19 at full employment, will rise sharply, but that is not a concern.
with the goal of flattening the curve, providing more time to State and local governments have balanced budget requirements.
develop treatments and a possible vaccine. Sharp declines in Revenue declines were a significant issue in the 2008-09 financial
activity have occurred in a number of industries, including crisis and its recovery. The stimulus package has some relief for
restaurants, airlines, hotels, cruise lines, sporting and spectator the states, but not nearly enough. That will have to be addressed
events, and retail. Layoffs and the loss of income will have second- later on.
round effects on consumer spending. A weaker global economy
will hurt US exporters. Increased uncertainty will reduce business Americans want the economy to get back to normal, but ending
fixed investment. Real Gross Domestic Product could fall 5%, social distancing too soon could make things worse. Moreover,
10%, or more for the year as a whole (4Q20/4Q19). there are likely to be longer-lasting changes in consumer
behaviour and global trade once the virus passes.

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