March 9, 2020

State of the Economy

“U.S. employers maintained a robust pace of hiring in February, giving the economy a strong boost heading into the coronavirus outbreak… Nonfarm payrolls increased by 273,000 jobs last month as unreasonably mild weather continued to boost hiring in weather-sensitive sectors.” Reuters

“In a surprise move, the Federal Reserve cut its benchmark interest rate by a sizable half-percentage point [last] Tuesday in an effort to support the economy in the face of the spreading coronavirus.” AP News

See past issues

From the Left

The left is focused on worrying economic trends and generally thinks that the Fed’s actions alone won’t have much of an impact.

“The jobs survey was taken in the middle of February, before coronavirus fears overtook Corporate America… Even though the US economy appears in good shape to absorb the shock the coronavirus outbreak is dealing to economies around the world, the jobs report -- like most economic data -- is backward-looking and doesn't allow a real-time assessment of the economy. So it might be time to pay more attention to shorter term employment data like weekly initial jobless claims going forward, said Joseph Brusuelas, chief economist at RSM.”
Anneken Tappe, CNN

“[The International Air Transport Association] is now predicting that, globally, [airline] carriers will lose between $63 billion and $113 billion in passenger revenue this year… declines in travel are a pretty reliable leading indicator that a downturn is on the way. It’s a sign that something is wrong (in this case, an almost-pandemic that’s keeping people home). And when people don’t fly, they don’t spend money on hotels, or rental cars, or restaurants in destination cities either, which deepens any economic pain.”
Jordan Weissmann, Slate

“Silicon Valley’s top investing firm has a stark message on coronavirus: prepare for the worst… Calling coronavirus ‘the black swan of 2020,’ Sequoia predicted that the global economy could be dislodged by the virus, and the firm told its portfolio companies, ‘We suggest you question every assumption about your business’… Specifically, Sequoia is telling its founders to question how much cash it has before running out of money ‘to avoid potentially painful future consequences.’”
Theodore Schleifer, Vox

“Many observers have emphasized the adverse impact of the virus on supply (especially in the global chains that play such a crucial role in manufacturing). The shock obviously has a supply element. But it seems clear that much of the impact of the virus is in the form of uncertainty, as households and businesses struggle with the question of where the disease will hit next, and how bad it will be when it does hit. This uncertainty is a drag on demand in the many communities throughout the country and world that have no cases of the virus. But that drag can be offset, as usual, by stimulus from the Fed and other policy makers

“Given the demand nature of the shock, the Fed can and should do more when it meets again in a couple of weeks… [And] Congress has to step up to show its willingness to systematically insulate the economy against aggregate demand shocks by, for example, using a combination of tax cuts and increases in infrastructure spending. Without a much clearer strategic commitment to fiscal policy support of the economy, we can expect further declines in long-run expectations about growth and inflation — and that will make the current aggregate demand shortfall even worse.”
Narayana Kocherlakota, Bloomberg

Others, however, point out that “Before [last week’s] rate cut, the Fed only had around 1.5 percent [of ammunition], leaving far less room to cut [than in 2000]. And the Fed’s counterparts abroad are in even worse shape: short-term interest rates in Europe are actually negative, so the European Central Bank has basically no room at all to cut further… When it comes to the underlying economics, we know two things. First, the coronavirus is looking more and more like a serious blow to the economy. Second… the Fed and its counterparts don’t have much room to respond. I’ve been saying for a while that I didn’t know when the economy would next face a serious bump in the road, but I did know that our shock absorbers were pretty much shot. Well, here comes the bump. Brace yourself.”
Paul Krugman, New York Times

“Nothing says ‘Don’t panic’ quite like an emergency interest rate cut by the Federal Reserve… The problem is, it’s really hard to tell from Powell’s comments exactly what motivated the cut, why the Open Market Committee decided to cut by half a percentage point instead of the usual quarter, how the rate cut is expected to ameliorate the situation, and how this meshes with the Fed’s statutory mandate to promote maximum employment and keep prices stable. The lack of clarity just makes it harder for people to decide which signals from Washington and the media to follow — the ones telling them to freak out, or the ones telling them not to?”
Jon Healey, Los Angeles Times

“We need to get ahead of the crisis through rewriting the rules of financial markets and making major investments in domestic manufacturing capacity. The coronavirus, [author and Open Markets Institute fellow Matt Stoller] argues, is making the argument for antitrust — single sources of supply for all kinds of suddenly essential medical needs are leading to shortages and could cause huge price jumps. In other words, the coronavirus is exposing a major foundational myth at the heart of Chicago School thinking: that efficiency, maximalist free trade policy, and the consumer welfare standard are stable systems. All lead to short term profits and long term risk. We should replace those with a more diverse and stable set of economic values: redundancy in supply chains, diversity in production locations, productive capacity, and universal programs…

“‘It’s not just tweaking trade policy, or doing some antitrust, or doing some federal spending. You need all of the above. You need another New Deal.’”
Zephyr Teachout, Jacobin Magazine

From the Right

The right celebrates the jobs report and is divided about the wisdom of cutting interest rates.

The right celebrates the jobs report and is divided about the wisdom of cutting interest rates.

“There’s a lot of speculation that the coronavirus outbreak will hurt the U.S. economy. That could be, but it would have to be a massive hit to even put a dent in the robust labor market. February’s jobs report is simply stunning. Normally, job growth slows at the end of an economic expansion. But that’s not the case 10 years after the recovery from the Great Recession began. Unemployment remained near 50-year lows, and wage growth continued to exceed inflation…

“Economists have been concerned about slowdowns for well over a year. Trump’s trade conflict with China was the primary culprit. Time and again, we heard experts say the trade war would impact the American economy any day now. Some sectors certainly were damaged, but the overall economy kept right on moving. The coronavirus effect might be different, but then again, it might not… right now, the economic data are as good as they can get for Trump.”
Henry Olsen, Washington Post

“The contrast between economic past and future has rarely been more stark than it was this week as the coronavirus panic contrasted with what has been a strong underlying economy… The best economic policy stimulus in this case is a successful public-health response that reduces the spread of disease. The economy will be poised to bounce back…

“Even if the good jobs news is backward looking, it still shouldn’t be dismissed. It means the real economy had a strong foundation to withstand the coronavirus impact. Construction added 42,000 jobs in the month, following 49,000 in January, as the housing market continues to pick up steam after a two-year slowdown. Lower mortgage interest rates should encourage more home buying, which will help growth even if business spending falls.”
Editorial Board, Wall Street Journal

“Based on the consensus forecast of economists, the first two months of this year should have seen a total of 335,000 jobs created. The actual number was 63% higher: 546,000…

“There’s more. To get a full picture of how much better than expected the Trump economy is performing, take a look at the forecast put out by the Congressional Budget Office just as Trump was taking office in January 2017. According to the CBO, which based its forecast on the assumption that the economic policies of the Obama administration remained in place, the economy should have created only 2 million new jobs by this point. The actual number: 6.9 million. GDP growth has outpaced the CBO’s prediction in each of the past three years, resulting in an economy that is $600 billion bigger than it was supposed to be.”
Editorial Board, Issues & Insights

Regarding the rate cut, some argue that “The problem with the coronavirus isn't a capital or credit crunch, but a material supply shock. The coronavirus has disrupted the global supply chain, first with the quarantining (both mandatory and self-imposed, of workers producing intermediate goods), and soon, in domestic markets worldwide. A vaccine could cure that problem. A rate cut won't

“For far too long, the Fed has irresponsibly cut rates in times of stable growth, thus sabotaging the traditional monetary policy tools that are intended to stimulate the economy in the case of an actual recession. Whereas the Fed could slash rates from more than 5% during the 2008 crisis, rates today are at less than 2%, even as unemployment continues to hover near half-century lows and growth and markets have remained (outside of this recent panic) relatively consistent.”
Tiana Lowe, Washington Examiner

“The half-a-point cut brought the rates at which banks can borrow from each other down to 1.25 percent, a rate that would indicate an economy already in deep recession and in need of a rescue. But it didn’t ‘work,’ in that the stock market continued to fall. By the end of the week, the Dow had shed another 1,200 points…

“A cut in interest rates is supposed to spur companies and people to borrow money and spend it. Mortgage rates are now at their lowest rate ever, just above 3 percent. But companies aren’t going to make big investments when their supply chains are broken. Drugmakers and toymakers alike can’t sell to the American consumer when Chinese workers can’t get to work to make the drugs and the toys. An interest-rate cut isn’t going to spur you to take that spontaneous trip to Italy right now. And if you are worried that the virus will cause you to miss work, you are unlikely to buy a house.”
Nicole Gelinas, New York Post

Others, however, posit, “It is true that the ongoing breakdown of global supply chains, the labor force, and trade — the result of the coronavirus — is a textbook case of a negative supply shock. The Fed cannot reverse that: Monetary policy will not open padlocked factories, heal the sick, or end travel restrictions. But the Fed can, and should, respond to the spillover effects that, left on their own, could become more destabilizing than the original supply shock…

“Three spillover effects — the decline in the neutral interest rate, the financial-market doom loop, and the amplifying power of dollar hegemony — all show that there is a place for the Fed to constructively fight the negative effects of the coronavirus on the economy. Indeed, if the Fed fails to act, its inaction will amount to a passive tightening of monetary policy, which will reduce aggregate demand.”
David Beckworth, National Review

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