Economics: Why The Coronavirus Won`t Cause A Recession In The US

(Drivebycuriosity) - There is a lot speculation that the coronavirus will cause a recession in the US. In most countries a recession is defined as two back-to-back negative gross domestic product (GDP) quarters. The US goes her own way, as usual. Here a board, the National Bureau of Economic Research (NBER), decides when a recession starts and when it ends. They focus on economic indicators such as real income, employment, industrial production and retail sales.

The first quarter of the year is almost over, there are just 25 days left. The US economy, which is based on services and driven by consumer spending, is still unharmed. New York City, where I live, shows business as usual. Streets, shops, restaurants, delis, pubs, gyms, public pools and other places are crowded as always. Starbucks, who got hit during the shutdowns in China, reported yesterday that their U.S. operations have been unaffected to date (seekingalpha). Apparently in the US there are no changes of economic behavior so far. Just Wall Street & Media respond hysterical as usual. The weekly initial jobless claims dropped last week to 216,000, close to an all-time low. In February the US Job market continued his healthy growth and created 273,000 new working place and the unemployment rate fell to 3.5%. The Federal Reserve of Atlanta, who uses published information like retail sales, unemployment rates & industrial production, calculates that the US GDP grows 3.1% in this quarter (frbatlanta).

I doubt that the US GDP will drop back-to-back in the coming two quarters - the traditional definition of a recession - or that real income, employment, industrial production and retail sales will shrink over some months. There is much lamentation that China´s radical anti-coronavirus measures (quarantines and factories shutdowns) harmed the global supply chains but Trump`s trade war is doing the same, without causing a recession. And China is already going back to work.

The US service sector, which accounts for more than three-quarters of economy, does not depend much on global trade. Consumer spending for renting should be immune, spending for health care might even rise.  People in the US might travel less, might go out less and visit fewer shops & restaurants, but they may shop more online and many might work from home. 

The blog Slate Star Codex writes (slatestarcodex ): "Getting fresh groceries delivered whenever you want seems like a pretty good alternative to stocking up on canned beans. You’d need faith that it won’t get so bad that Amazon’s logistics break down. I think that faith is mostly justified – The Chinese version of Amazon seems to still be making deliveries in Wuhan. And it’s hard to imagine anything – pandemic, nuclear war, demon apocalypse – getting between Jeff Bezos and his next billion dollars. Three cheers for capitalism!"

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There are already some strong impulses which will compensate the negative coronvirus effect   - at least partly. Oil prices are under pressure and gasoline costs much less (charts above). Cheaper energy works like a tax cut and is stimulating the economy because consumers have more money in their wallets and companies have lower costs.

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Interest rates are also dropping sharply - accelerating their long term trend - because hedge funds and other other professional investors are seeking financial safe heavens (10 Year Treasury Rate chart above). So there are two strong trends which are stimulating the economy. And the Fed cut her interest rates this week and the government announced to spend billion to fight the virus.

We learned from China that there more people are working, learning & shopping from home which is fostering digitization and so rising efficiency & productivity of the economy ( driveby ). I believe that the negative coronavirus impact on real income, employment, industrial production and retail sales will be constrained and short lived - shorter than a quarter - and will be be followed by a v-shaped recovery. The numbers from China where the new cases dropped sharply are encouraging. There won`t be a recession.