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Policy:

There will inevitably be an economic downturn as a consequence of global responses to the Corona virus but whether or not it will lead to a full blown recession in the US is unclear.  Some US experts believe a recession to be inevitable, due to potential downturns in consumption; worker layoffs; the already low federal loan rate; and the lack of essential parts from overseas where factories have closed.  Other economists believe that the strong economy, especially with regard to employment and the housing market, will act as a cushion against the most dramatic impact of the disease’s spread.

On Tuesday (March 3, 2020) the Federal Reserve made an “emergency” decrease in the federal loan rate of .5% after 3 drops last year. However this seems to have made little impact on markets which continue to react in extreme ways.

The fallout from declining stocks, initially down by 10.5%, is debated by economics.  The stock market is reflective of the interests of multinational corporations and its impact on the average consumer is not readily correlated with market activity.  Major corporations such as Apple, United Airlines, Mastercard, Microsoft, Pfizer have already issued warnings regarding reduced profits.  The global economy is predicted to be slowed by anywhere from one half to one and a half percent for 2020.  It currently has a growth rate of 2%.  Baby boomers (currently in their 50s and 60s) own over half of the stock and can have concerns over their retirement savings but there is mixed evidence regarding the impact on other demographics because so far consumption is solid and employment is steady though it may be that the relevant data is not yet available.

Policy Analysis:

A recession can be avoided if the cycle leading to one is avoided.  Typically, the cycle results from worker layoff which leads to decreases in income, less spending, which spills over to more layoffs.  Maintenance of the economy depends on a thriving consumer class as consumption is 70% of the economy.  If that remains intact the recession can be avoided though there are signals that it will not be completely avoided.  Trump’s trade war with China already established downturns in some areas such as manufacturing, agriculture, and transportation.  Shutdowns in China, and other sectors globally have caused an interruption in the supply of parts and goods exported by those countries.  One fear is that if Trump is re-elected he would resume a more aggressive trade war, which would have a negative impact on the US economy.

To create a full blown US recession some economists believe that the impact of a pandemic on the economy will need to move beyond affecting the industries directly involved, such as tourism, air travel, and transportation and they do not believe this will be the case.  At least they are somewhat optimistic that it won’t spill over.   Economists think the housing market will be unaffected, or potentially positively impacted, due to the lower interest rates and the availability of more modest homes.

Since the federal reserve has little flexibility in controlling the markets, due to its already low interest rate, an alternative to bolster the economy would be for the president to create a temporary deficit financed tax cut paired with increased government spending such as Obama pushed through the Senate to address the great recession of the last decade but there is little chance that this president would move in that direction.  The economists, while agreeing that there is severe global fallout from the virus, disagree as to the extent of its impact on the American economy.  The “truth” seems to lie in the presence of some worrisome trends regarding reactions to the threat of the virus, the extent of which is really unknown at this time.

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