Pandemic Economics: ‘Much Worse, Very Quickly’

This crisis is global, and the torrid headlines keep coming. My family in the UK is under lockdown and they can only go out for a walk once a day. All of India is effectively in quarantine for three weeks. International travel from the US has been stopped and domestic travel has ground to a halt. Airlines are cancelling flights left and right. Cruises have stopped. With new state decrees, one in five Americans are being told to stay indoors, with lockdowns ordered in more and more US states, including New York, California, New Jersey, Connecticut, Minnesota, Wisconsin, New Mexico, Colorado, Maryland, and Illinois. And the economic damage is growing by the hour, as firm after firm is shuttering.

Last week, Goldman Sachs predicted that jobless claims could easily hit 2.25 million this week, which was seen by some as scaremongering—but turned out to be too optimistic. On Thursday, the Bureau of Labor Statistics released the latest data on initial jobless claims of nearly 3.3 million, up from 281,000 from the previous week. The highest number of new claims ever processed in a week previously was 695,000 in 1982. 

This enormous rise was no surprise: even a week ago, the state of New York received 200,000 calls before noon, compared to a normal volume of 10,000 a day. The unemployment rate, currently 3.5 percent, might go to 20 percent—as even Treasury Secretary Mnuchin has warned. That would entail the number of unemployed people going up from 5.8 million to 33 million.

There are lessons to be learned from the global financial crash of 2008. Sadly, policymakers had zero foresight. The slump started in the Florida housing market, just as the Great Crash of 1929 had done, it took a long time for them even to work out how bad things were and then to react. By September 2008, when Lehman Brothers failed, interest rate-setters at our central bank, the Federal Reserve, still had no idea that the US recession had started ten months earlier in December 2007. We mustn’t make that mistake again. If we do, the money won’t get to the people who need it quickly enough.

In the UK, the recession started in the second quarter of 2008. Initial estimates for GDP growth in that quarter came in from the government statistical office in July 2008 at +0.2 percent. It took a year for those numbers to be revised to negative; today, the official estimate for the quarterly drop is -0.6 percent. We will eventually find out that the official GDP data for many countries, including the US right now, is going to be much worse than anything we have seen since the Great Depression.

In emergency meetings over the last week or so, central banks around the world have cut rates to zero or even below, added money to the economy, and extended quantitative easing programs. The Fed and other central banks have broadened the scope of what they are buying, from treasuries and mortgage-backed securities to corporate bonds, exchange-traded funds (ETFs), municipal bonds, and more. In principle, central banks can buy absolutely anything—and they just might, as the steps they have already taken were unthinkable even a week ago. Panic is everywhere as collapsed stock markets continue to gyrate daily, with no end in sight. (On Tuesday, they jumped double digits in expectation of the $2 trillion fiscal stimulus deal subsequently agreed by Congress.)

Based on the data we have seen already, it is very plausible that GDP numbers may drop more than 10 percent in the second quarter of 2020 across many of the thirty-five OECD countries, where nearly 1.3 billion people live. The fall will be especially severe and sharp in the countries so far facing the most severe outbreaks of Covid-19 and having to respond with the most drastic measures: Italy, France, Spain, the UK, and the US. In addition, we should certainly not rule out that the third and fourth quarters may also be bad; a sharp V-shaped recovery looks increasingly unlikely.

Although this is extremely serious and will affect the lives of hundreds of millions of people, such calamitous drops are not unheard of—without even needing to go back to the Depression. During 2008, several, mainly smaller OECD countries saw vast drops in output in a single quarter: for example, Estonia -11.7 percent; Finland -6.8 percent; Iceland -8.8 percent; Latvia -5.7 percent; Romania -7.9 percent; and Slovakia –9.4 percent. 

By contrast, the worst fall recorded by the US in 2008 was of 2.2 percent in the fourth quarter. Car company executives came to Washington, D.C., for bailouts, as did their counterparts at banks and insurance companies like AIG; many Americans lost their homes and their savings, and the unemployment rate rose to 10 percent. Beaches, golf courses, schools, pubs, bars, clubs, and restaurants, though, remained open. This time is different. And worse.

What needs to be done right now to assess how bad things really are is to focus on what I call the “economics of walking about” (EWA)—which means we should pay attention to the news headlines, and listen to and learn from what people are actually saying and doing. This may sound blindingly obvious, but it is indisputable that if more policymakers had exercised some EWA diligence in the first half of 2008, much more could have been done to allay or forestall the severity of that crisis. Even a cursory survey today suggests that the economy is going to get very much worse, very quickly. In fact, there were lots of signals early that year that were ignored as the recession took hold—something I documented in a speech I gave in Edinburgh in April 2008, when I was a member of the Bank of England’s monetary policy committee, that warned something big and bad was coming and that both the UK and the US were already in recession.

For example, Harley-Davidson sold 14 percent fewer motorcycles in the US in the first three months of 2008 than it had in the same period in 2007. US automakers such as GM and Ford reported double-digit domestic sales declines in March 2008, as demand for trucks and sport utility vehicles plummeted, with consumers holding back because of concerns about gas prices, the housing slump, and tightening credit. Even McDonald’s, the world’s biggest restaurant corporation, saw US sales fall in March 2008, the first decline since March 2003. But nobody took much notice.

We’re seeing similar but even starker indications now. Last week, we heard that every major UK and European carmaker was cutting or stopping production. Tesla just said it is to suspend US car production. Detroit car makers GM, Ford, and Fiat Chrysler have all also announced shutdowns in the US, Mexico, and Canada. Edmunds, the authoritative industry news and sales site, sees a decline in sales of 35 percent in March alone, year on year.

A few other examples derived from practicing EWA are telling. My favorite restaurant sent out a notice saying it was closing in-house dining but had teamed up with the local pizza house for home deliveries. (There was an admittedly tiny upside as we had the chef’s famous fish stew home-delivered.) Then I also received an email yesterday from the owner of my local limo service that I have used for twenty years, saying:

There is no sense in beating about the bush. Our company is seriously in need of a serious infusion of working capital. We have been operating for the past two weeks at 20 percent capacity and our overhead remains fixed. We can continue at this level for maybe ten more days and then we will be non-operational. What we are asking is that each of our customers purchase a $100 prepaid credit toward services to be used during 2020 and 2021… We do not have months or weeks we have days. 

I did as asked. Meanwhile, OpenTable daily restaurant bookings have collapsed through the floor. Google Trends has seen a huge uptick in the number of searches for the word “unemployment.” Mortgage applications are down by nearly a third last week, the worst since 2009 and refinance applications were down similarly. A survey of purchasing managers for US services, known as PMI, reached a new series low, while the latest PMI in the eurozone showed the largest collapse in a month in business activity ever recorded.

My concern is what happens next week and the week after Easter Sunday; going back to work too soon, as President Trump has been recommending, would be reckless. Congress has announced a welcome $2 trillion wartime-like bailout, with a $367 billion loan program for small businesses, $130 billion for hospitals, and $1,200 checks for Americans normally earning up to $75,000 per year. This latter measure would boost unemployment insurance and eligibility, and offer workers an additional $600 a week for four months, on top of what state unemployment programs pay. The benefits program was sensibly extended to include freelancers, furloughed employees, and gig workers, such as Uber drivers. On top of that, the bill mandates a dramatic increase in food stamp benefits, reversing recent cuts. The challenge will be to get the money out quickly to workers, especially those now with no income to pay their mortgages or the rent.

This may prove to be only the opening bid in the long-term efforts that will be required to save the US economy from a depression. If the unemployment filings continue to rise—and EWA reveals more horror stories—then more action will be needed, and quickly. Over the last decade or so, the social safety net has been gutted—and now we are paying the price: we have vulnerable communities that simply do not have the resources to withstand such a nasty economic or health shock. This virus changes everything.