Coronavirus Stock Market Crash: Recession 2020 Is Here, But $1.2 Trillion Is On The Way

 
Article by Jed Graham in "Investor's Business Daily":

The coronavirus stock market crash has ushered in recession 2020, as shutdowns of economic activity roll across Asia, Europe and now the U.S. Success in halting the spread of the virus will largely determine when normal economic activity can resume.

But fiscal and monetary policy will play critical roles in keeping the coronavirus recession from snowballing into a coronavirus depression. The White House is pushing to quickly enact a stimulus package that could approach $1.2 trillion, Bloomberg reported.

"We're looking at sending checks to Americans immediately," Treasury Secretary Steven Mnuchin said in a Tuesday news conference.

Is Fast Cash A Coronavirus Stock Market Crash Cure?

After initially pushing for a payroll tax cut, the Trump administration on Tuesday signaled that the debate is over. "Americans need cash now" and they should start to receive it within two weeks, Mnuchin said. The checks could reportedly add up to $250 billion.

Mnuchin acknowledged that a payroll tax cut wouldn't provide much help to workers in the worst-hit industries. Airlines, hotels, cruise lines, restaurants, automakers, and oil and gas companies are among industries reeling from economic shutdowns and the coronavirus stock market crash.

Million-dollar earners probably won't get anything, Mnuchin said. He didn't clarify how big the checks will be.

The liberal Economic Policy Institute favors monthly checks of $1,000 for every American adult and $500 for every child, until the crisis abates.

Mnuchin also said that Americans can defer tax payments "interest free and penalty free for 90 days." That covers payments of up to $1 million for individuals and $10 million for corporations. He encouraged Americans expecting tax refunds to file on time.

Coronavirus Recession 2020: How Bad Will It Get?

As the coronavirus stock market crash erased another 3,000 points from the Dow Jones on Monday, President Donald Trump didn't dodge a question over whether a U.S. recession has arrived. "Well it may be. We're not thinking in terms of recession. We're thinking in terms of the virus."

Economic forecasters agree. This week, Morgan Stanley, Pimco and S&P Global, among others, predicted a period of negative growth for the U.S. and for the world. The real questions are how negative it will get and for how long.

The latest data from China were far worse than feared. Although China didn't ramp up restrictions on movement until late January, combined data for the first two months of 2020 showed industrial production sank 12.3% from a year ago. Meanwhile, retail sales tumbled 20.5% and fixed-asset investment 24.5%.

Goldman Sachs estimates that first quarter China GDP sank 9% from a year ago, implying it cratered roughly 13% vs. fourth-quarter levels.

The outlook is now getting brighter in China. Once the epicenter of the coronavirus pandemic, China reported just 21 new cases on Monday. Wuhan, where the virus first emerged, had just one new case.

Economic activity has resumed in China with the virus on the wane. Yet the gradual return to normal in China shows economic effects may linger in the rest of the world, wrote Paul Gruenwald, chief global economist at S&P Global. "Restrictions could be lifted more slowly than originally thought as public health concerns persist."

Still, Goldman and S&P Global think China's economy can grow about 3% this year, roughly half last year's pace. The key downside risk is if the coronavirus recession 2020 proves deep and hard to shake in the rest of the world.

Coronavirus Recession 2020 Is Here

Whether the U.S. will get two consecutive quarters of negative growth — the layman's definition of a recession — isn't yet clear. But by any other measure, a recession is underway.

Goldman predicts roughly flat growth in the first quarter, followed in the second quarter by a 5% contraction at annual rate. S&P Global sees a 6% annualized Q2 contraction.

If anything, those second-quarter numbers look optimistic, given the much harder China GDP fall in Q1.

February's 0.5% U.S. retail sales drop may have been nicked by coronavirus concerns. But the first clear evidence of recession 2020 in U.S. data showed up in Monday's regional manufacturing survey from the New York Fed. The Empire State survey saw the largest monthly drop on record, contracting at the sharpest rate since 2009.

Even if Goldman's forecast proves accurate, that implies an outright economic contraction of 1.25% over the first six months of 2020. The Economic Policy Institute estimates that would cost 3 million jobs, "even with moderate fiscal stimulus."

A return to growth in the U.S. could happen in the third quarter, if coronavirus cases peak and then tail off as quickly as they have in China. But there are wild cards. One is whether the virus proves seasonal or requires governments to maintain a war footing. Another is whether China suffers a relapse as it ramps up economic activity.

The stakes are huge. The coronavirus stock market crash already has priced in a recession. But history suggests a severe recession, like the one that began in late 2007, would take a greater toll on stocks.

Fed Blasts QE Amid Coronavirus Stock Market Crash

With the U.S. deficit already running above $1 trillion, a massive stimulus and recession could conceivably push that figure close to $3 trillion. Who will buy all of those Treasuries? It's a good bet that the Fed will do a lot of the heavy lifting.

On Sunday night, the Fed slashed its benchmark rate close to zero and announced "at least" $700 billion in quantitative easing asset purchases. That includes $500 billion in Treasuries and $200 billion in government-backed mortgage securities.

While the Fed said those purchases would happen "over coming months," it's blasting out $80 billion in QE Treasury buys over the first two days.

The Fed jumped into action after Treasury market stresses last week led to a backup in the 10-year Treasury yield from a record low close of 0.5% on March 9 to 0.95% on March 13. Supposedly safe-haven Treasuries saw yields jump even amid a two-day, 3,800-point Dow Jones rout.

Fed chief Jerome Powell said that properly functioning markets will abet an economic recovery, but they're hardly sufficient. The health care response to the coronavirus pandemic is most important, followed by fiscal policy.

Yet the Federal Reserve's vow to buy whatever it takes to ensure the "smooth functioning" of the Treasury market implies that QE will prove critical in facilitating a massive stimulus as the deficit reaches unimaginable levels.

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