The US economy started the year on a strong note. The job market created 546,000 new jobs in January & February together, the unemployment rate dropped to 3.5%. The Weekly Initial Unemployment Claims, the most recent economic indicator, decreased to 211,000, close to an all-time low. And the US Energy Information Administration reported that domestic oil & gasoline demand increased early in March ( aaa). The Federal Reserve of Atlanta, who uses published information like retail sales, unemployment rates & industrial production, said on their website (estimate from March 6) that the US GDP grows 3.1% in this quarter (frbatlanta). The recent shutdowns, travel bans and other events will shrink this number, but the quarter is almost over and it is unlikely that some bad days pull the GDP growth rate below zero.
I doubt that this year`s second & third quarters will have a shrinking GDP back to back - which would meet the international definition of a recession - or that real income, employment, industrial production and retail sales will drop over months. I am aware that big events like the Coachella Valley Music and Arts Festival or the Austin Music & Arts Festival are cancelled or postponed and that airlines, hotels, cruise ship operators and others are suffering. On Saturday here in Manhattan, where I live, were streets, subways, shops still full and places, which serve local customers, crowded as always. And I noticed long lines at Trader Joe and similar shops. And this happens nationwide. According to the The Wall Street Journal retailers like Target where struggling to meet the spiking consumer demand ( seekingalpha). But Sunday afternoon the Union Market on Manhattan`s East Houston Avenue had fully stocked shelves with coffee & pasta from Italy and lots of sparkling water from Germany (Gerolsteiner). Apparently the panic buyers are pushing the retail sales now.
In China the crisis has already peaked - Apple reopened all shops there - and the Peoples Republic is going back to work. Korea also reports falling numbers of new corona cases. I think that quarantines, travel bans and cautious behavior (hand washing, fewer body contacts etc.) will constrain the epidemic. In a briefing to a House committee, Anthony Fauci, the head of the National Institute of Allergy and Infectious Diseases (NIAID), said he is "hopeful" that the first patient will receive a coronavirus vaccine in a few weeks (/seekingalpha). People below 50 have a very low risk, the younger the lower, kids even don`t get it.
Fortunately, there are already two very strong market movements which are compensating most of the perilous coronavirus influence on the general economy. Oil prices are in free fall! Brent Crude & WTi, the futures for global & American oil, dropped about 50% since begin of the year (charts below). Gasoline prices are following swiftly. Today gasoline & diesel at US pumps cost already about 10% less than a year ago. There are 3 reasons for that. There is rising oil glut, thanks to American fracking, the coronavirus is shrinking the oil demand (less traveling) and the Saudis started a price war on the oil market in order to wipe out their US competitors (as they did in 2016).
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Dropping costs for gasoline & natural gas work like a giant tax cut. The price war on the oil market is a gift for the global economy. Imploding oil prices are a huge stimulus program because consumers have more money to spend and corporations have less costs. Dropping prices for oil & gasoline work like a tax cut. Consumers worldwide have more money to spend for other goods & services. So cheaper energy prices stimulate consumer spending which accounts about 70% of the US economy. Dropping energy prices also translate into lower transport costs - thanks to cheaper diesel - which leads to lower prices for food and other goods. They also reduce the cost to produce steel, cement and many other energy intense goods. Many things which are made from oil, like cleaning fluids, laundry detergents, paint, pharmaceuticals, cosmetics, hygiene products, diapers & plastics, also get cheaper.
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Interest rates also have been falling sharply, caused by ongoing flight into safe haven and swiftly rate cuts by the Federal Reserve (chart above). The Fed and other central banks are also pumping billion of dollars into the ailing global economy. Lower costs for consumer credits & mortgages support investments & consumer spending. I assume that the double package of cheaper energy prices & sharply reduced credit costs will compensate large parts of the perilous impulse of the corona epidemic.
It it is highly unlikely that the whole nation will be shut down for months. It never does. The economic carnage might slow business investment in the coming days, people travel less, go out less and visit fewer shops & restaurants, but consumer spending for rentals should be immune to the virus and government spending is jumping (huge stimulating programs are in the making). Consumer spending for health services is also spiking - and so are online sales, binge watching on Netflix & Amazon Prime, listening Spotify, surfing Facebook & Twitter and businesses are running more & more on cloud computing.
Following the experience from China it is likely that April will have an economic air pocket (the panic buyers will consume their huge provisions they are amassing now), but in May we might already see some signs of recovery. It is possible that the virus - and measures against it like quarantines - alter the behavior. 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 - not more than a quarter - and will be be followed by a v-shaped economic recovery. Therefore the GDP in the next quarter might slow down - but not shrink - and it will re-accelerate in the third quarter of this year. No recession!
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