Economic forecasters see a contraction in the second quarter following Monday’s market rout spurred by fears about the coronavirus outbreak, a development that threatens President Trump’s reelection bid.
“The second quarter is going to be negative,” said economist Robert Fry, a former senior economist at DuPont. “I’ve never been as uncertain about a quarter as I am about the third quarter because if the virus, with the summer weather, then maybe the third quarter could be the beginning of a bounce back. If it doesn’t, the third quarter could be the quarter that that the bottom drops out.”
U.S. stock markets plunged on Monday, with the Dow Jones Industrial Average finishing down over 7%, a loss of over 2,000 points.
Fry, who analyzed the global economy and its impact on DuPont and publishes a monthly newsletter Current Economic Conditions, added that, in the past month, he has reduced his forecast for the second quarter far more times than any other quarter.
“This is the quintessential ‘black swan,'” he told the Washington Examiner. A black swan, in investor vocabulary, is an unpredictable event with extreme consequences.
Economist Maria Fiorini Ramirez, who runs a global economic and financial consulting firm, similarly projected negative growth in the second quarter and warned that it was difficult to forecast the hit to third-quarter growth.
“It’s anybody’s guess to how bad it is going to be because we don’t know how long it’s going to take for turning [the virus] around, but, definitely, the second quarter is going to be significantly impacted,” she said. “But if anyone tells you what is going to happen in the third quarter, they’re pulling out of thin air because nobody really knows.“
Negative growth in the third quarter, to go along with a contraction in the second quarter, would be terrible timing for Trump, as it would entail job losses and economic pain right before the election. The third quarter ends on Oct. 31, and the general election is three days later, on Nov. 3.
A contraction is not guaranteed. Goldman Sachs projected on Monday that second-quarter growth would come in at a 0.7% annual rate — lower, but still positive.
Nevertheless, the OECD claimed in its March report, issued before Monday’s rout, that the “world economy is in its most precarious position since the global financial crisis.” It “expects a sharp slowdown in world growth in early 2020,” from 3% to 2.4%, which it states is lower than in any year since the financial crisis.
Mark Hamrick, senior economic analyst for Bankrate.com, told the Washington Examiner that market volatility will likely persist until the coronavirus is under control.
“Until there is some resolution, the markets will likely remain quite sensitive to the news,” he said, adding that “the market is behaving to some degree rationally because it’s discounting the possibility of an economic downturn if not a full-fledged recession.”
Sixty-nine percent of experts recently surveyed in Bankrate’s First-Quarter Economic Indicator poll said they expect a sizable economic impact from the coronavirus as global supply chains have been slowed or stopped.
“Disruptions to production are already occurring; manufacturers are facing shortages of parts and components, driving costs higher,” said Yelena Maleyev, associate economist at Grant Thornton. “Pandemics are a reality and could supplant trade tensions as the No.1 uncertainty for the economy.”
As investors flee the stock market for safer territory, bond rates dropped to record lows. Concerns over the coronavirus and the stock markets sent yields on 10-year Treasury bonds to a new low of 0.3469% on Monday.
Meanwhile, the Federal Reserve, having already implemented one emergency interest rate cut in response to the market turbulence, is now expected to lower its interest rate target all the way to zero, as it did in the wake of the financial crisis. The central bank’s monetary policy committee’s next scheduled meeting is March 18.
These indicators suggest that the country is potentially facing an economic downturn that could drive up the unemployment rate, which would present a major obstacle to Trump winning reelection. The economy added 273,000 jobs in February, a strong number, but if quarantines become more widespread, layoffs are likely to occur and drive up the unemployment rate.
“My guess is, in the not-too-distant future, we’ll start to see impacts on consumer confidence and new claims to unemployment benefits,” Hamrick said, adding that the coronavirus is a “healthcare crisis; it’s an economic crisis, and it may indeed be a political crisis.”
