The U.S. economy is in recession.
Take a look outside your window and this reality is plain to see.
Businesses are closed, traffic is nonexistent. Efforts to contain the spread of the novel coronavirus have resulted in a forced stoppage of economic activity.
First quarter GDP data published Wednesday confirmed this slowdown. Economic growth contracted at an annualized rate of 4.8% in the first quarter of the year, a drop in activity that marks the largest since 2008.
Many economists expect revisions to this data will show an even sharper first quarter drop in the coming months. Second quarter GDP will be more shocking, with economists widely forecasting declines in growth in excess of 30% or 40%.
But unlike recessions that result from excesses in the economy, this recession is a choice.
“The forceful measures that we as a country are taking to control the spread of the virus have brought much of the economy to an abrupt halt,” said Federal Reserve chair Jerome Powell in a press conference on Wednesday.
“Many businesses have closed, people have been asked to stay home, and basic social interactions are greatly curtailed. People are putting their lives and livelihoods on hold, at significant economic and personal cost.”
“The steep drop in Q1 GDP is not a surprise,” said Neil Dutta at Renaissance Macro. “We can see that cratering the economy is having its desired result now: hospitalizations are falling.” Daily net hospitalizations in New York state, for example, have declined for more than two weeks straight. (New hospitalizations are unfortunately holding steady.)
And how well the economy rebounds from this downturn will also be a choice, one that rests in the hands of policymakers like Powell and his colleagues at Treasury and in Congress.
“As long as policymakers do not lose their nerves, or make a policy mistake such as not providing aid to reeling states and municipalities, there is no reason why the economy should suffer from a deep, extended downturn that meets the definition of a depression,” said RSM chief economist Joe Brusuelas in a note published Wednesday. “It is a choice, not fate.”
For its part, the Federal Reserve has been swift and forceful in trying to stimulate the economy and keep markets functioning.
Though as Powell said Wednesday, the Fed cannot provide all of the answers for the economy and singlehandedly ensure a robust, well-distributed rebound in the months and years ahead.
“This is the time to use the great fiscal power of the United States to do what we can do to support the economy and try to get through this with as little damage to the longer-run productive capacity of the economy as possible,” Powell said in a press conference on Wednesday.
But as Powell emphasized, the Fed’s authority enables it great lending power. It is Congress that approves the spending needed to see us through this crisis.
“Powell re-emphasized that the path of the virus and governmental responses will determine the trajectory for economic activity in the coming months,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.
“[Powell] strongly approved the ongoing large fiscal stimulus that provides financial support to affected households and businesses, and encouraged further federal spending. As he reasserted that the Fed has the power to lend funds to businesses and consumers, but Congress has the ‘spending powers’ to directly assist the private sector.”