An entrance to a closed McDonald’s Corp. restaurant is barricaded near the famous West Lake, usually a popular tourist attraction, in Hangzhou, China, on Tuesday, Feb. 11, 2020.
Qilai Shen | Bloomberg | Getty Images
The double-barreled approach of a $1 trillion proposed fiscal stimulus program and Federal Reserve policy could help soften the blow of an economic recession and head off a potential financial crisis.
The White House is seeking a stimulus package worth between $850 billion and $1 trillion that could result in emergency funds for individuals and assistance for small businesses and credit for industries hard hit by the reaction to the virus.
But even with proposed stimulus, the view of economic forecasters has become more dire in recent days as companies seeking cash strain credit markets and the shutdown of business activity sends shock waves across the economy
Treasury Secretary Steven Mnuchin said the administration’s plan could put cash directly in the pockets of Americans. And administration sources told CNBC said there could be $500 billion to $550 billion in direct payments or tax cuts; $200 billion to $300 billion in small business assistance and $50 billion to $100 billion in airline and industry relief.
As a big swath of the U.S. economy shuts down or retrenches to prevent spread of the virus through contact in large groups of people, economists have increasingly forecast a short recession instead of a short period of flat to negative growth. Many expect a rebound in the fourth quarter.
“Under any scenario, if we get a good stimulus package, I still think it’s a big hit. It’s hard to gauge but my guess is we’ll be down 2% to 3% in Q1 and around the same in Q2, assuming we get a lot of fiscal stimulus,” said Mark Zandi, chief economist at Moody’s Analytics. “It’s one of those things we won’t know for a year down the road.”
Zandi expects a flat third quarter and a return to growth of 1.5% in the fourth quarter.
New York and other states have shut down restaurants and bars, and San Francisco has told citizens to shelter in place, something New York is also considering.
“You see all these different measures being taken. That’s good to stop the virus, but it’s bad for economic activity,” said Shawn Snyder, head of investment strategy at Citi Private Wealth.
Congress will have to approve the proposed stimulus package. The Fed has already cut interest rates to zero, boosted liquidity in the repo market and launched a new $700 billion quantitative easing program.
It also announced a new facility early Tuesday to help the commercial paper market, which had stalled out. After the market close Tuesday, it announced a program for primary dealers.
“We know that monetary policy operates with a lag,” said Snyder. “It’s not going to instantly solve the problem but what it does is help deteriorating financial conditions and hopefully stems that … Fiscal policy could react quicker. But there’s a lot of questions.”
Snyder said it would help furloughed workers to receive $1,000 checks and other measures aimed at funding business would also help.
“To me, the question is when it comes to recession, is it about the second quarter? The question is what happens to the third quarter? Are we able to stop this soon enough to only get one bad quarter,” he said.
Diane Swonk, chief economist at Grant Thornton said she expects the second quarter to be really weak with a contraction in the nation’s gross domestic product of 6%, even with a stimulus package she estimated at $700 billion. The big drop in the second quarter comes after an expected half percentage point increase in first quarter growth. For the third quarter, she expects a decline of 2.7% before a return to growth of 2.9% in the fourth quarter.
“Frankly, it [fiscal stimulus] would go a lot further towards preserving future revenues and keeping this from morphing into something much more disastrous,” Swonk said. “You can’t stop the recession from happening, but you can put a floor on losses and stop a vicious cycle of hemorrhaging and layoffs, and you’re keeping consumers solvent so once they return to work, they still have a balance sheet. This is a health crisis, it shouldn’t be a financial crisis.”
Swonk expects to see a big jump in the unemployment rate to 6.3% from February’s 3.5%, as 4.8 million jobs are lost.
Zandi said the proposed stimulus will help, but even more action is needed to prevent a financial crisis.
“It helps households and small business with cash. It keeps the economy together for at least a while,” said Zandi. “To address the financial crisis, the Treasury is going to have to do more work and provide a facility to provide funding to all businesses. That’s the only way to address the liquidity crisis that’s looming.”