Can the US Avoid a Technical Recession?

Can the US Avoid a Technical Recession?

Day by day the numbers are becoming increasingly grim.

Right now the US is coming to grips with the pandemic. Although you wouldn’t know that by looking at the major indices.

Overnight both the Dow Jones and S&P 500 jumped 7%.

Surely the market is telling us that the worst is over…

However, I fear the stock market is once again lagging behind.

Since the middle of January, both Jim and I noted the markets were properly pricing in the impact of a mostly shuttering Chinese economy.

Of course, a month after that we witnessed the beginning of a savage 30%-plus stock sell-off across major global markets…

The volatile up and down in stocks isn’t normal bull market behaviour. It could be that we are seeing investors sell into anything that looks like a rally to offset some of the hit their portfolios took over recent weeks.

As the world grapples with the sweeping destruction of COVID-19, it’s highly likely that Australia will face a technical recession being confirmed at the end of June.

In saying that, below Jim asks if it’s possible for the US to avoid a technical recession?

Perhaps a ‘quirk of the calendar’ could lead to this outcome…but it won’t really matter in the scheme of things.

In a brand-new report titled ‘The Looming Aussie Recession and How to Survive It’, Nick Hubble reveals why a recession in Australia is inevitable and three steps to recession-proof your wealth. Click here to receive your free report.

Is a Technical Recession Avoidable?

Jim Rickards

Two dramatic and historic developments have emerged to push politics out of the headlines. The first is the coronavirus (or COVID-19) pandemic. The second is the market meltdown and possible recession.

It’s critical to understand that all of these developments affect each other through dense connections. At a superficial level, the coronavirus emerged last autumn in China and would seem to be unrelated to the economy and the US presidential election. But that’s not how complex systems operate.

The proper response to the coronavirus in the absence of a vaccine (which we won’t have until 2021 at the earliest) is quarantine and mitigation. Quarantine means that infected individuals are isolated for 14 days (sometimes more) and everyone they came in contact with is also isolated.

This is of limited utility because those infected may not present symptoms for several weeks after they become infected.

This means they can spread the disease widely before symptoms emerge. At that point, scores or even hundreds of individuals may have been in contact. Identifying them all and getting them all into quarantine is almost impossible in some cases.

Mitigation involves behavioural changes short of quarantine designed to reduce the spread of the disease.

This includes shutting down entire cities (as in Wuhan, China), entire regions (as in Lombardy, Italy), and ultimately entire countries (as in the travel bans now in effect by the US, Europe, and many other countries and regions). It also means shutting down restaurants, schools, movie theatres, cruise ships, theme parks, concerts, and generally all gatherings of more than, say, 50 people or so.

Sacrificing the economy for your health

While these are recommended medical procedures, the economic effect is obvious. Consumption expenditure is about 70% of US GDP.

When you shut down a large portion of the consumption budget (meals, movies, retail, travel, etc.), you have shut down much of the US economy. It’s that simple. A recession is no longer just likelihood — it’s here. In fact, ‘depression’ is a better word for what’s going on.

Staying at home with your family may be a good way to stop the spread of coronavirus.

It’s also a good way to bring the world’s largest economy to a grinding halt. The issue is whether this will be a short period of hunkering down or a much longer period.

The other key issue is whether the lost consumption expenditure is permanently lost or is merely a timing difference.

On the first point, scientists simply don’t know. COVID-19 is a new form of coronavirus and we have no experience with it.

It may be the case that public health measures will stop the spread and that warmer weather will cause the virus to die out on its own. This typically happens with influenza viruses once the ‘flu season’ is over.

Still, we don’t know. Since humans don’t have immunity to this new virus, it may spread and infect new victims even in warmer weather. It could also return next winter even if the incidence of new infections is reduced in the spring.

On the second point, the answer is mixed. Some consumption losses will be permanent. If I decide not to go out to dinner and a movie this weekend because of the virus, I won’t go to two movies and have two dinners next weekend. This week’s consumption expenditure is permanently lost.

On the other hand, I might decide not to shop for a new car this weekend, but still intend to buy one. If I actually buy the car in June (assuming it’s safe to go outside), then the lost consumption in April is made up in June and the damage is just a timing difference.

Clearly the mix of permanent and temporary lost consumption is impossible to know in advance, but since over half of GDP consists of services rather than goods purchases, it is clear that the permanent losses will be enormous.

A technical recession?

The definition of a recession, as determined by the National Bureau of Economic Research (the private ‘scorekeeper’ of recessions), is two consecutive quarters of declining GDP with some account taken of other inputs such as rising unemployment.

Most of the effects of the coronavirus in the US began in March, and those effects may be over by May.

This means that the negative growth coming from the virus may be concentrated in March and April. Since March is in the first quarter (along with January and February) and April is in the second quarter (along with May and June), it is just possible that a technical recession can be avoided since the ‘bad months’ are spread among two quarters where they are bolstered by good months.

So, if we avoid a technical recession, it may just be due to this quirk of the calendar and the fact that lost consumption was temporary. Still, I wouldn’t bet on that outcome.

A severe recession in the coming months, with an official declaration of such before the election in November, seems likely.

And that brings us to the US presidential election connection.

In a future edition of The Daily Reckoning Australia, I’ll share my thoughts on how the election is likely to play out in light of the coronavirus. Stay tuned!

All the best,

Jim Rickards Signature

Jim Rickards,
Strategist, The Daily Reckoning Australia

PS: Market expert Shae Russell predicts five knock-on effects of the recent market crash that could be even bigger threats to the average investor’s wealth than the crash itself. Click here to find out more.