Economists Caution Against Promise of Q2 Turnaround

Representatives from the Kenan Institute Research at the University of North Carolina discuss the economic fallout from the coronavirus pandemic in a Tuesday webcast. Clockwise from left are Christian Lundblad, Elena Simintzi, MacKenzie Babb, Greg Brown and Saravanan Kesavan.

MANHATTAN (CN) — Inundated by negative indexes, reports and forecasts at a near-daily rate, markets have increasingly pegged hopes on the second half of 2020. Economists say it’s a bad bet.

“April’s going to go down as the worst month in U.S. economic history, [and] Q2 will likely be the worst quarter in U.S. economic history,” said Greg Brown, executive director at the Kenan Institute of Private Enterprise at the University of North Carolina, during a Tuesday webcast.

Given the long-term effects that the Covid-19 recession promises, Brown sees more distress on the horizon. “The dislocation has the potential to do very long-lasting damage to the foundation of the U.S. economy,” he said. 

By the closing bell Tuesday, the Dow Jones Industrial Average settled at 23,764 points, a 1.89% decrease for the day. The S&P 500 and Nasdaq had even greater losses, each falling more than 2%.

Among the ominous reports to sift through Tuesday was the consumer price index for April, which showed the largest monthly drop since the end of 2008. According to the Bureau of Labor Statistics, the CPI for non-food and energy items fell 0.4%, the steepest drop since the index was started in 1957. 

Energy indexes fell even further, with a 10% drop. The biggest reason for that drop was the 20.6% fall in the gasoline index. One bright spot was food indexes, which rose 1.5% in April, the largest monthly increase since 1974.

Optimism among small businesses has plummeted to historic lows, according to a survey by the National Federation of Independent Businesses. Optimism among small businesses fell 5.5 points in April, compounding the 8-point loss in March.

The survey found a 30-point drop in real sales expectations over the next six months, the lowest reading since the survey began in 1973. Most small business owners in the survey also believe the economy will continue to weaken in the short term. 

“The impact from this pandemic, including government stay-at-home orders and mandated non-essential business closures, has had a devastating impact on the small business economy,” NFIB chief economist William Dunkelberg said in a statement. 

Awash in such reports, however, Wall Street is still grappling with how to accurately calculate the devastation.

“Many of the statistical models that are employed … they’re struggling with the peculiarities of the current situation,” said Christian Lundblad, another voice in Tuesday’s webcast.

Director of research at University of North Carolina’s Kenan Institute, Lundblad noted a huge contrast among mainstream economic indicator surveys, which show “a massive degree in disagreement” between the most optimistic and the most pessimistic forecasts for GDP during the second half of 2020.  

Some chalk that up to Wall Street adopting an increasingly high threshold for short-term economic pain, with investors biding their time for the second half, when they expect things to improve.

“It is what things look like in coming months when most things are reopened that matter,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group, in an investors’ note. “This ‘spread’ between the now and the reopenings over the next month is why the market has had this ‘hall pass.’ That ‘hall pass’ though will expire sometime in coming months, I believe.”

Using a different metaphor for the coming months, Federal Reserve Vice Chair for Supervision Randal Quarles warned that, while “the first wave of acute financial stress has begun to ebb,” there may be squalls on the horizon. 

“The storm, however, is not over,” he said in written testimony before the Senate Banking Committee released early Tuesday morning. “As the response to these public health concerns continues to unfold, the strength of the U.S. financial sector will reflect and depend on the strength of the U.S. economy. That strength, in turn, will depend on the calibration and effectiveness of our public health response.”

Many have credited the Federal Reserve’s actions as the leading bulwark against the storm of recession. But the Fed’s actions also have some worried how long it will take to climb back out of the hole.

On Tuesday, the Fed began purchasing shares of U.S.-listed exchange traded funds, giving corporations another option to keep their liquidity flowing. The $75 billion funding the program is a drop in the bucket for the trillions already added to the Fed’s balance sheet.

“No matter what, the lingering effect of all that the federal government has done, as well as everything that the Fed has done as a central bank, I think that’s going to be with us for years,” Lundblad said. “We’re going to be living with the consequences of this for some time.”

Brown noted similarly that it took a decade to get GDP back to where it was before the 2008 financial crisis, and that the economic effect of the Covid-19 pandemic is “orders of magnitude bigger” and may take exponentially longer to fix. 

“The Fed never went back to its pre-financial crisis stance in terms of its balance sheet and operations,” Brown said, noting the central bank’s interest rates remained relatively low during the last ten years. “I think it’s reasonable to assume that it would take decades for monetary policy to return to anything that would look like pre-financial crisis or pre-pandemic monetary policy.”

More than 4.2 million people worldwide have been confirmed infected by Covid-19, according to data from researchers at Johns Hopkins University, and 289,000 have died. In the United States, more than 1.3 million people have contracted the novel coronavirus and more than 81,000 have died.

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