The Coronavirus pandemic has impacted the economy: the stock market (DJIA) has fallen about 7,000 points; there’s been a huge spike in unemployment claims; and economists are predicting that the U.S. economy will have negative growth for at least the next two quarters — the technical definition of recession.
Both Democrats and Republicans worry about the recession. Congress is on the verge of passing a massive ($2 trillion) stimulus bill.
Meanwhile, Donald Trump is toying with the notion of declaring (premature) victory over the Coronavirus and broadcasting that “America is open for business.” On March 23rd, Texas Lieutenant Governor Dan Patrick (R) argued that social distancing measures against the Coronavirus should be lifted to let Americans go back to work, even if it means older people becoming infected with the illness. “Those of us who are 70+, we’ll take care of ourselves but don’t sacrifice the country… We all want to live with our grandchildren as long as we can. But the point is our biggest gift we give to our country and our children and our grandchildren is the legacy of our country, and right now, that is at risk.” (https://talkingpointsmemo.com/news/texas-dan-patrick-grandparents-sacrifice-lives-coronavirus-economy ) There’s an emerging conservative stance that values stock-market gains over American lives.
Meanwhile, three factors have pushed the economy into recession: unemployment produced by the Coronavirus pandemic; collapse of the oil market; and perforation of the corporate debt bubble.
1. Unemployment resulting from the pandemic. On March 23, St. Louis Federal Reserve president James Bullard warned that the U.S. unemployment rate could hit 30 percent in the second quarter. On March 26, the Department of Labor announced that a record 3.3 million Americans had registered for unemployment benefits (https://www.bbc.com/news/business-52050426).
Unemployment will play out differently throughout the country. On March 25, California Governor Newsom reported that, since March 13, one million Californians had applied for unemployment insurance. Golden State economists say the hardest hit economic sectors will be hospitality and food services, and transportation.
In terms of contribution to California’s GDP, the largest sector is “Finance, Insurance, and Real Estate;” this sector, and “Construction,” will be certainly impacted by the pandemic, and by the concomitant credit crisis. California’s “Manufacturing” and “Publication/Media” sector’s have already been affected. (in fact, all the sector’s will be impacted with the exception of “Government” and “Health Care/Social Assistance.”)
In Sonoma County, where I live, the biggest impact has been on the “Hospitality/Food Services” sector, which has, for the most part, shut down. (Hospitality is the largest industrial sector in the County; it includes hotels, motels, vacation rentals, restaurants, wine tasting rooms and brewpubs.) Outdoor recreation has also cratered. As a result, the unemployment rate in Sonoma County is likely to spike to 20% or more. (https://www.pressdemocrat.com/business/10837277-181/job-losses-mount-in-sonoma)
In my small community, we all know someone whose business has shut down or whose friend or relative has lost their job. Looking at the Bay Area, in general, we all know someone who was working a couple of jobs, in order to make ends meet — participants in the “gig” economy. Typically, one of those jobs is now gone — such as driving for Uber. For those who rented out a room or “granny unit” via Airbnb, this source of income has also dried up.
2. The collapse of the oil market. On December 30, the price of a barrel of oil was $63.05; on March 26, the price had fallen to $21.90. Forbes (https://www.forbes.com/sites/christopherhelman/2020/03/26/oil-headed-to-10-a-barrel-as-virus-lockdown-eradicates-fuel-demand/#28303fb26d00) reported that some analysts expect the price to fall to $10 per barrel.
This abrupt change has dramatically affected the “Energy” sector. While this has only a slight impact on the California economy, it has major consequences for Oklahoma, Texas, Wyoming, North Dakota, Alaska, and Louisiana. (A recent Brookings study indicated: “The most exposed metro area nationwide is the oil-and-gas town of Midland, Texas, with 42% of its workforce in high-risk industries. Other major energy producers such as Odessa and Laredo, Texas as well as Houma-Thibodaux, La. also land in the top 10 most affected.”)
In other words, in parallel with the pandemic impact on economic sectors such as Hospitality and Transportation, much of the fossil-fuel energy sector is likely to collapse.
3. The perforation of the corporate debt bubble. Recently the Financial Times (https://www.ft.com/content/27cf0690-5c9d-11ea-b0ab-339c2307bcd4) reported:
“The shock that coronavirus has wrought on markets across the world coincides with a dangerous financial backdrop marked by spiralling global debt. According to the Institute of International Finance, a trade group, the ratio of global debt to gross domestic product hit an all-time high of over 322 per cent in the third quarter of 2019, with total debt reaching close to $253tn… A comparison of today’s circumstances with the period before the  financial crisis is instructive… an important difference now is that the debt focus in the private sector is not on property and mortgage lending, but on loans to the corporate sector… The rise is most striking in the US, where the Fed estimates that corporate debt has risen from $3.3tn before the financial crisis to $6.5tn last year.”
Corporations with excessive debt include Ford, Halliburton, Kraft-Heinz, and Macy’s. Some banks are affected as are many corporations in the Energy sector.
What this means is that, aside from the impact of the pandemic, some U.S. companies will fail because of the collapse of the debt bubble.
Summary: On March 26, the Chairman of the Federal Reserve, Jerome Powell, said, “We may well be in a recession… The virus is going to dictate the timetable.”
On March 25, NYU Economics Professor Nouriel Roubini (https://www.theguardian.com/business/2020/mar/25/coronavirus-pandemic-has-delivered-the-fastest-deepest-economic-shock-in-history) spoke of the timetable:
“[E]very component of aggregate demand – consumption, capital spending, exports – is in unprecedented freefall… The contraction that is now under way looks to be neither V- nor U- nor L-shaped (a sharp downturn followed by stagnation). Rather, it looks like an I: a vertical line representing financial markets and the real economy plummeting….Not even during the Great Depression and the second world war did the bulk of economic activity literally shut down, as it has in China, the US and Europe today.”
Hold on tight, we’re entering rough water.