Mark Zandi, United States, Chief Economist discussed on Today, Explained
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How will it compare to the last one in two thousand eight right now? The early economic data suggest it will be much worse at least at its peak than what we had in two thousand eight which is not something. I thought I would be saying anytime soon. Two dozen it was supposed to be a once in a generation economic flood. And now we're looking at something that is not even possible so if you look at early unemployment filings. They potentially went up to three million over the past week. We've just never seen a number like that if you look at what Goldman Sachs and some other economic forecasters are forecasting for the GDP. Drop in the second quarter of the year. They're now up to twenty. Four percentage point drop. That would be the single worst quarter in the history of GDP statistics US Treasury Secretary. Steve Mnuchin said that unemployment could go up to twenty percent before he walked out back but then over the weekend. The President of the Federal Reserve Bank of Saint. Louis said he thought thirty percent was possible at least for a minute. So we're looking at something that at the very least at it's worst could be unbelievably bad and one reason could be unbelievably bad is this is really different in its dynamics and not just two thousand eight but really any recession. We can think of in memory we. It's almost not correct to think about this as a recession. This is a combination of a recession a financial crisis potentially a war and in natural disaster. Great Great and this is just the opening salvo of this recession crisis. War Natural Disaster. Yeah I spoke to mark Zandi. Who is the chief economist at Moody's analytics so he's a very well? Respected economic forecaster and as part of. Moody's they get a lot of incoming economic data survey data actual data all the time so they tend to know the economy is going just about before anyone else. I've spoken to sandy a lot over the years. And he was ending almost apocalyptic here but to be more specific. What he said. We're GONNA see four waves of economic pain. The first wave is the sudden stop of the economy. That's what we're in right now right. I can't go into work the way I normally would. The restaurants in my town are closed and non essential businesses are closed. People are sheltering in place wave to which is already here as well is unemployment. People are laying off workers because they have no sales coming in PIBOR. Cutting back hours among workers mariette furloughed. A huge amount of their staff. So mass unemployment is just beginning but already we're seeing numbers like nothing we've ever seen before. Then the third wave is what he called the wealth effect. So there are all these people who have 401k's they have money saved in the market for the retirement. This is true. Everybody was particularly true for older people who are towards the end or Paseo end of their earnings. And now they're seeing those savings wiped out and so there's a lot of spending this group is going to disappear and then the fourth wave is business investment. So you think of corporations or even small businesses that were thinking of opening up a second location upgrading to better office. Space a media organization is going to start publication. Whatever it might be. That's all going to go on. Hold so all that spending those going to upgrade machines create new capital create new products. A lot of that is gonNA disappear from the economy for a while. So of Sandy's four waves were living at least the first two already. The ECONOMY STOPS UNEMPLOYMENT. Soars the next to our imminent if not already here. People can't retire and realize their dreams and industry has to scaled-back. Is there a way out? So those four waves. Zandi said they're definitely going to happen like they are already happening. But there's a question. Now is the kind of recession we have. What's called a v-shaped recession where the economy plummets in? Let's call it quarter to maybe quarter three and then rebound super powerfully in potentially quarter three quarter four and then into twenty twenty one in that case. This will be bad but not that bad. What Sandy said and this is I think. Clearly true is two things could happen. That could disrupt that and this is particularly going to happen. If we don't get the disease under control quickly. The first thing that could happen. Is We set a financial crisis financial panic somewhere so already seeing very scary things happening in debt. Markets in bond markets in currency markets are a lot of both countries and companies that need a lot of US dollars and they're having trouble getting them. The Fed is out a huge amount of new programs. Right now to try to deal with this but it's pretty scary so if we have two thousand eight in reverse a problem in the real economy that creates contagion in the financial economy. That's GonNa be very very hard to fix. That's GONNA be years dig out of the second which is also I think very very present as danger is a mass wave of business failures. More than fifty percent of small businesses cannot survive more than a couple of months without sales. They just don't have a big nest egg. Small businesses tend to be reasonably low margin. Except you even a lot of big businesses can't survive very long in a very down economy if their receipts have gone down. Fifty percent seventy five percent and so if you have mass closures then not only when the economy does come back. Do you have to rebuild those businesses or something like them you know? And that's hard right. You need to figure out leases. P- places need to rebuild. They need to hire New People. But also it's not like they're workers can just come right back on. They have to find new jobs. There's matching costs. It's hard to search. There's a lot of uncertainty in that and so if you have a huge wave of business failures it's very hard to come back. Because you've lost a lot of the structure in which the economic growth could have happened once you got back on your feet so preventing those two things a financial crisis and a mass wave business failures. That's really really important and Congress's hoping that's why this stimulus will do but what if it doesn't that's the best case scenario. What's the worst? The worst case in our right now is primarily economic. I mean the worst case scenario is an unchecked pandemic with millions of deaths hugely overwhelmed health systems creating behind it a total economic catastrophe in some ways the worst case scenario to be is one that we are beginning to flirt with because the worst case scenario is that we lose our nerve here at the Front End. There is an enormous return to acting quickly. You prevent many more cases if you are able to stop one person from passing on the disease to after that person has passed it on to ten people. If you're trying to stop ten people from passing it on we are already seeing at the highest levels of our political leadership a blink. My message is that Let's get back to work. Let's get back to living. Let's be smart about it And those of us who are seventy plus. We'll we'll take care of ourselves but don't sacrifice the country don't do that. Our country wants to go back to work and again to cure. It's it's like this. Cure is is worse than the problem again. People many people in my opinion more people are going to die if we allow this to continue. There's this fantasy of an economy out there that you could somehow just have the economy operating at full potential. Even disease is killing and hospitalizing millions of people. All at once right nine eleven's every day in this country and I think the raw right now. The curve of new cases in America's vertical we are rising faster than Italy was at this point. That's very scary. Because this is an exponential curve as you rise faster then rise even faster and so if what happens is we let off the pressure when it is currently completely uncontrolled but I think is going to happen. Is it three months from now or even two months from now? Maybe even just three weeks from now when our health system is overwhelmed. There's going to be an enormous demand for quarantine an enormous demand to get this under control and that will happen when the economy is now gotten much worse so Jason Furman Who was Obama's former chief economist? But he's been writing about this. A lot on twitter and elsewhere made this good point that he thinks the correct way to understand the choice. Here is between social distancing right now and a bad economy six months from now or two months of nothing and then two months of even more extreme social distancing followed by a much worse economy after that and so the nightmare scenario for me is one where we've let the disease get completely out of control and that also spins the economy.