Economists: Worse than Great Recession; Maybe Depression

Because of the near seizure of the economy prompted by the coronavirus scare, the second quarter may see GDP shrink by 13 percent – far steeper than the 8.4 percent decline in the worst quarter of the 2008 financial crisis, according to an analysis by California Lutheran University’s economic team. What’s more, the upcoming second quarter may witness average losses of more than 2 million jobs each month, “more than twice as large as the worst quarter of the Great Recession,” wrote Matthew Fienup and Dan Hamilton of the Center for Economic Research and Forecasting, based in Westlake Village. In the first quarter of 2009, the United States lost an average of 776,000 jobs a month. “All told, we expect more than 10 million jobs to be lost before the end of the year, significantly more than the totality of jobs lost during the Great Recession,” the CERF economists wrote on their blog about the economy. CERF, a part of the management school at Cal Lutheran, does a good deal of economic modeling and last year became a contributor to the Wall Street Journal’s Economic Forecasting Survey. Fienup and Hamilton also produce the Valley Economic Forecast for the Business Journal, which this year was held in January. In a post Monday, the economists wrote: “Policy makers are not doing enough to address the plight of small businesses confronted with government-mandated closures. … If shelter-in-place orders last long enough to drive a large number of small businesses into insolvency, then we are in store for a very deep recession, one considerably more severe than the so-called Great Recession. Given the plight of hourly workers and lower-income families under this scenario, we may even experience what can rightly be called a Depression.” The economists created a “baseline” forecast in which they see the 13 percent decline in economic output in the second quarter. Even though that would be more severe than the worst quarter in the Great Recession, they believe the full-year contraction would not be as severe. They wrote: “The worst four consecutive quarters of the Great Recession saw economic growth of negative 3.3 percent. By comparison, CERF’s baseline forecast for economic growth during the current crisis calls for four consecutive quarters during which GDP contracts by only 2.9 percent. This highlights both the severity of our forecasted second quarter contraction as well as its relatively transitory nature as compared with the Great Recession.” They also came up with a more optimistic scenario along with a more pessimistic one. The optimistic scenario involves a downturn of similar magnitude to the baseline, but with a more rapid recovery. That would require a quick “flattening” of the disease transmission curve and a fast ramp-down of shelter-in-place orders, they said. The pessimistic scenario calls for a deeper and more enduring recession. It anticipates a second quarter GDP decline of greater than 20 percent and a more sustained contraction with a recession extending into next year. “The assumptions required for the pessimistic scenario to play out are not implausible,” they wrote. “The scenario merely requires the current shelter-in-place orders, and the resulting shuttering of American businesses, to extend long enough for large amounts of small businesses to fail.” Their reports are here: https://www.clucerf.org/2020/03/20/cerfs-virus-update-march-20-2020/ https://www.clucerf.org/2020/03/23/cerfs-coronavirus-update-march-23-2020/