Economic Outlook Harrisonburg-Rockingham Chamber of Commerce April 1, 2020 Renee Haltom Vice President and Regional Executive The views and opinions expressed herein are those of the author. They do not represent an official position of the Federal Reserve Bank of Richmond or the Federal Reserve System.
What is the story? Where were we pre-virus? • Economic growth looked solid and that was expected to continue – Strengths: Consumer spending, residential investment, labor – Weaker: Business investment, and manufacturing was soft but rebounding Enter COVID-19. How bad could it get for the economy? The role for economic policy We need your help 2
National Economy, Pre COVID-19 3
The economy was chugging along Real Gross Domestic Product % Change, SAAR 6 4 2 0 -2 Q4: 2019 US: 2.1% -4 -6 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: Bureau of Economic Analysis, Federal Reserve Board /Haver Analytics 4
Economy was adding jobs consistently Total Nonfarm Employment Monthly Change February: 273 January: 273 December: 184 Source: Bureau of Labor Statistics/Haver Analytics 5
So not surprisingly, unemployment falling Civilian Unemployment Rate Unemployment Rate (Percent) 11 10 9 February 2020 US: 3.5% 8 7 6 5 4 3 2 1 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: Bureau of Labor Statistics, Federal Reserve Board of Governors/Haver Analytics 6
But business investment had been soft Non-residential fixed investment % Change, SAAR 20 15 10 5 0 -5 -10 -15 Q4: 2019 -2.3% -20 -25 -30 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Bureau of Economic Analysis via Haver Analytics 7
Manufacturing had been soft but rebounding Richmond Manufacturing Survey and ISM Manufacturing Survey 40 70 Manufacturing Composite Index (Left Axis) 30 65 ISM Manufacturing (Right Axis) 20 60 10 55 e g a r e v a 0 50 h t n o m - 3 -10 45 -20 40 -30 35 -40 30 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Federal Reserve Bank of Richmond/Institute of Supply Management/Haver Analytics 8
Enter COVID-19 9
COVID-19: Economic effects Direct impact • It’s a direct supply shock: Temporary reduction in labor • It’s a direct demand shock: For nondurables (e.g. travel, tourism, restaurants) • Knock-on demand effects: Still highly uncertain – Drops in some cases: Furloughed workers may consume less; certain businesses need fewer supplies; sentiment causes people to hold back big purchases • To what extent will this demand come back later? – Clucky shifts in others: Some declines “cancel out”, but maybe imperfectly • Restaurant supply chains not easily convertible to grocery • Larger online retailers struggling to staff warehouses and find transportation • Conditions continue to change rapidly 10
How bad could it get? Let’s try to scale things. For employment: • There are 150m workers in the economy. 1/5 of them are in sectors that are pretty directly hit: – 12m retail workers outside grocery stores (8% of total) – 12m food services – e.g. restaurants (8% of total) – 2m accommodation services – e.g. hotels (1.3% of total) – 2.5m arts, entertainment, recreation – (1.6% of total) We are seeing this in initial claims for unemployment insurance 11
United States initial claims for UI United States Unemployment Insurance Initial Claims United States Thousands 3500 February 15: 215,000 February 22: 220,000 3000 February 29: 217,000 March 7: 211,000 That’s not a March 14: 282,000 chart border… 2500 March 21: 3,283,000 it’s last week’s 2000 reading 1500 1000 500 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Virginia initial claims for UI 50000 Virginia Unemployment Insurance Initial Claims Virginia 45000 February 15: 2693 February 22: 2079 40000 February 29: 3267 March 7: 2527 35000 March 14: 2883 March 21: 46885 30000 25000 20000 15000 10000 5000 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
How bad could it get? Let’s try to scale things. For consumption: 14
How bad could it get? Let’s try to scale things. For consumption: • Why focus on consumption? It’s 70% of GDP • 55% of consumption (housing and utilities, medical services) might see more limited impact – Spending may even shift toward here (e.g. households spend more time at home, use more electricity, do home renovations, etc.) • 25% of consumption will suffer more direct hits – Transportation – Recreation and food services – Food services and accommodations • If that 25% falls by 2/3, total consumption will fall by 15% hit to GDP in the neighborhood of 10% 15
What should economic policy do? 3 guiding ideas: • Shock is blunt (affects everybody) and fairly uncomplicated. • Pandemic timing broadly known: initial spike then slow recede. • Economy’s ability to produce has not fundamentally changed. That said, three caveats could change that: – “Organizational capital” (business -specific know-how) has become more important in our economy. Longer shock potentially more of that lost – Workers may lose attachment to previous place of employment – Workers need something to return to businesses need to stay open or re-open Those three caveats suggest places for economic policy to focus. 16
Three policy “lanes” open now Health policy (most important by far) • Goal: bend the curve and get beyond the inflection point • Economic policies are then left to address economic effects of health response (e.g. social distancing) Fiscal policy: can be targeted • Prevent needless bankruptcies/breaks in economic relationships • Support directly to households Monetary policy: supports economy more broadly • Reduced interest rates to effectively zero • Help keep financial markets functioning by providing liquidity (i.e. lending) 17
A note on small businesses Helping small businesses has been a huge focus of this crisis • There are some 31m of them and they are 47% of employment • Many in the sectors hit hardest • Many are probably on this call Policy support • The big policy is the just-passed CARE Act, which (among many things) provides $349b to cover 8 weeks’ cash flow for a small business, which can be forgiven to the extent they keep employees and don’t cut salaries – Banks extend these funds, which the SBA guarantees • By comparison, in FY2019 the SBA guaranteed $28b in lending through 63k loans. So this is big. 18
Parting thoughts • Luckily, we came into this with a solid economy and a very healthy banking system • What’s next depends largely on health policy – When will it be safe to come back? – How do we come back? Phased approach, protocols? What I’m watching – where I need to hear from you: – Are economic policies hitting as intended? Where are gaps? – How are businesses like you planning – how do you bring back customers? To what extent can you make up revenue? – What unexpected things will gum up the recovery? 19
Please join our business surveys! Each month we ask for feedback from business executives located in our District. Respondents provide information on current business activity and expected changes for the next six months. These data paint a picture of industry trends and help the Federal Reserve Bank of Richmond to be better informed about business conditions in our District. (Washington, D.C., Maryland, W.Virginia, Virginia, N. Carolina, and S.Carolina) Your business is an integral part of our Fifth District community and we hope you will contribute. If you would like to sign up please contact: Roisin.McCord@rich.frb.org 804-697-8702 View our survey data and reports online: https://www.richmondfed.org/research/regional_ec onomy/surveys_of_business_conditions 20
Questions? Renee.Haltom@rich.frb.org … and thank you! The views and opinions expressed herein are those of the author. They do not represent an official position of the Federal Reserve Bank of Richmond or the Federal Reserve System.
Addendum 22
Summary of fiscal policy response 3/6: $8.3b to strengthen healthcare response 3/13: $100b for expanded sick pay 3/27: $2t CARE Act • Relief for individual, families, and businesses • Small business support • Assistance to severely distressed sectors • Health sector support 23
Summary of monetary policy response • Cut interest rates to effectively zero • Encouraged banks to lend • Extended 2008-era credit facilities to improve liquidity and functioning in certain asset markets – Including two new facilities to support credit to large firms and improve liquidity for secondary corporate bonds – with Treasury covering losses – And extending existing facilities to include municipalities • Purchases of treasuries and MBS that are open ended in size • Coming soon: Credit facility aimed toward small businesses 24
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