The strength of the U.S. prior to the outbreak will help it recover faster
By Patrick Duffy
I recently read what I thought was an apt analogy linking the immune system’s response to the novel COVID-19 virus to the economic impacts from shutting down much of American daily life. Like the human body’s ‘cytokine storm’ which can damage both virus particles and healthy tissue, reactions such as quarantines, travel restrictions, businesses temporarily closing and citizens isolating at home will certainly impact economic growth.
Unlike the virus’ worrisome fatality rate for older patients, the U.S. economy will recover, but lessons will be learned as systemic weaknesses are revealed by a bit of genetic code whose only agenda is to multiply. America’s economy will likely recover faster and stronger than in many other countries, but the housing crisis facing its citizens will still be there waiting for the building industry to address as things eventually return to normal.
With the Federal Reserve lowering its benchmark interest rate to essentially zero, the federal government’s other remaining option is fiscal stimulus, most likely in the form of support for beleaguered industries, payroll tax holidays, immediate unemployment insurance benefits, and perhaps even cash payments to consumers. The International Monetary Fund (IMF) is providing similar measures including an offer to lend up to $1 trillion to governments as well as recommendations to further expand fiscal stimulus, lower interest rates, and temporarily relax financial regulations.
Although previous virus outbreaks related to MERS and SARS in Asia are instructive, economists just don’t have a perfect analog to inform their forecasts, which traditionally rely on historic data and the ebbs and flows of business cycles. To counter this, the UCLA Anderson Forecast recently applied the experience from the American 1957–58 H2N2 influenza pandemic to today’s economy.
In that case, the forecast predicted the virus’ impact to slow first-quarter economic growth to a rate of 0.4 percent after a solid start to the year, followed by a decline of 6.5 percent in the second quarter and 1.9 percent in the third quarter. However, assuming the pandemic ends by this summer and supply chains are quickly restored, the forecast predicts a bit of a v-shaped recovery, with economic growth bouncing back to 4.0 percent by the fourth quarter.
For its part, Bloomberg Economics also developed four different scenarios estimating the impact to GDP growth for the U.S. and other major countries for 2020. Fortunately for the U.S., even its worst-case scenario of a global pandemic means a recession, which pales in comparison to the declines estimated for Russia, Western Europe and Japan.
Still, if there is a concern, it’s regarding corporate exposure to mounting debt levels as companies binged on cheap money over the last decade. In a hypothetical stress test half as severe as the 2008 global financial crisis, the IMF found that up to 40 percent of $19 trillion in corporate bonds issued in the world’s largest economies would be under duress as companies struggled to make payments.
Such credit defaults could worsen the economic impact of the contagion, especially in sectors including energy, airlines, car rentals, movie theaters and casinos. Even with financial support from governments, however, it’s still possible that debt-laden companies will still have to temporarily cut back on both investment and staff.
Nonetheless, when this viral outbreak has been contained and the economic shocks have played out, we’ll still be left with a housing shortage to address. In December 2018, a national FreddieMac analysis concluded that there was a housing shortage of 2.5 million units, but a more recent analysis based on individual states has increased that housing shortage estimate to 3.3 million units.
Of the 50 states, 29 have a housing shortage — which is highest in those states which have been loosening zoning restrictions and encouraging density bonuses — but it will still take years to catch up. There are more than 400,000 “missing households” headed by 25 to 34-year-olds, or households that would have formed except for higher housing costs. At 2019’s rate of 1.256 million new housing units being completed, overcoming this 3.3-million unit deficit would take 13 years, and that does not account for new housing growth.
In contrast to the Great Recession, any slowdown this year is not caused by a specific financial shock, but rather the economic consequences of our society’s immune system reacting to an uncertain health threat. As a result, expect a pause of uncertain duration, to be followed by a rebound which will likely help prepare the world more for the next global crisis, no matter what form it takes.
Patrick Duffy is a Principal with MetroIntelligence Real Estate Advisors and contributes to BuilderBytes. He may be reached at email@example.com or at 310-666-8288.