FT comment — is a recession coming?

Gavin Davies, the respected economic forecaster at the Financial Times, does not currently forecast two quarters of negative GDP growth for the US at this time, but thinks it is likely for many of the other Advanced Economies. This trend will be led by a decline in world growth from 3.5 percent to 2.3 percent, a downward revision of 1.2 points from recent forecasts, and well below the 4+ percent recent trend growth of the global economy (China is obviously leading the global downturn due to coronavirus economic impacts).

For the US, a decline in growth of about .6 percent to less than 1 percent is forecast.

What would be a signal that US growth might turn negative and a recession start? Davies says a quick increase in unemployment would be a good leading indicator. So headlines reporting layoffs would be the start of “something new.”

If parts of the US economy were to undergo “lock down” similar to what is occurring in northern Italy, then significant recessionary pressures would be unleashed.

What might be going on? A respected medical professor whose private opinion was shared with me thought that daily reported cases in France would increase by 30 percent per day. This trend is in fact being realized in France which has sufficient tests and testing in place to measure the increase. If a 30 percent daily increase holds for 30 days, then you multiply by 2600 to get the cumulative confirmed cases. For France, that would be about 2.6 million cases from today’s reported 1,000 cases. For the US with about 400 confirmed cases, that would mean by the end of the first week of April total cases would be trending towards 1 million. Deaths would be trending towards 2,000. One could see that deaths would soon exceed those experienced in the 9/11 tragedy. These are panic-inducing statistical trend lines.

So public health measures have to be able to break the 30 percent daily increase in reported cases to be able to contain the virus before it reaches truly pandemic proportions.

Today’s reports indicate the Trump administration quashed a CDC request to make a public appeal that the elderly avoid flying. Obviously if flying is not good for the elderly, the next step would be no one should fly. Hello major recession! How far is society from coming to this realization? Days? Weeks?

Now one understands why Italy did what it did yesterday in locking down Northern Italy, its most productive economic region.

If only a fraction of the above paragraphs occur, the economic contraction will still be substantial. Accordingly, I wrote this well-received comment to Davis’ column:

Paul A. Myers

A recession will be on its way in a matter of weeks as aggregate demand starts to decline if not collapse.

This will be a classic wet noodle recession. Lower interest rates will not push the soggy noodle across the boardroom table. Only direct federal expenditure into the domestic civilian economy will provide the increases to aggregate demand necessary to sustain growth.

The marginal effectiveness of lower interest rates will approach zero, its own form of liquidity trap.

This recession is going to end a generation of thinking that monetary policy can “do it all.” Markets care going to take the “voodoo” out of this generation’s elite thinking in service of elite self-interest.

Hasta la vista Trump. Hasta la vista old monetary policy. Time to get out those old editions of The General Theory!

A dialog for reporting comments
In reply to Paul A. Myers
We are, indeed, all Keynesian now…
Pregel comments 
In reply to Paul A. Myers
If Seattle rush hour traffic is anything to go by, then aggregate demand in the PNW evaporated last week. Sounders FC attendance last weeks season opener 41,026, yesterday 33,080, last year averaged 42K. OTH Costco is selling a lot of TP, paper towels, water and hunker down supplies.
Anglo Dutch
 In reply to Pregel
Hopefully it is short but going out for dinner in an eerily quiet Seattle last night, it’s clear the virus will trigger a sharp drop in business in any town it touches.



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