‘Tip of the iceberg’: Economy likely shrank, but worst to come

• By Scott Horsley/NPR

The coronavirus pandemic is likely to trigger the sharpest recession in the United States since the Great Depression. An early signal of that will come Wednesday morning, when the Commerce Department delivers a preliminary appraisal of economic activity during the first three months of the year.

For the first 2 1/2 of those months, the economy was chugging along at a steady, if not spectacular pace. But the plug was suddenly pulled in mid-March — when bars, restaurants and retail shops were abruptly closed and tens of millions of Americans were ordered to stay home in an effort to slow the spread of the deadly disease.

More than 26 million people suddenly out of work have filed unemployment claims in recent weeks.

“Prior to the coronavirus shock, the economy was doing relatively well,” said Gregory Daco, chief U.S. economist for Oxford Economics. “The shock that we experienced in the second half of March actually has led to a sudden stop in spending on a lot of services and even spending on some goods.”

Forecasters say even though that shock affected only the last few weeks of the quarter, it was more than enough to erase the gains of the previous 2 1/2 months. Daco estimates the nation’s gross domestic product — the broadest measure of economic activity — shrank an an annual rate of more than 5% during the quarter. That would be the first quarterly contraction since 2014.

Unfortunately, he said, that’s “only the tip of the iceberg.”

The bulk of the pandemic’s economic impact will be felt in the current quarter — April through June. By the end of June, Daco estimates the economy will be 12% smaller than it was at the beginning of the year.

“To put that into perspective, that [drop] would be three times as large as what we experienced in the global financial crisis,” Daco said. It would be comparable to what the economy experienced at the end of World War II, when factories abruptly stopped churning out tanks and warplanes but had not yet shifted to making civilian goods.

Other forecasters also expect to see a sharp reversal in economic growth.

“Whenever you have the entire country changing behavior at one time in a way that reduces spending, it’s certainly enough to wipe out any of the gains that we saw earlier in the year,” said Ben Herzon, an economist at IHS Markit.

He noted that since the coronavirus took hold, air travel and restaurant reservations have all but completely evaporated.

“For now, we’re expecting the economy to more or less stabilize in the third quarter and then begin to recover in the fourth quarter,” Herzon said. But he acknowledged there’s considerable uncertainty in that outlook.

“That all depends on how quickly new infections can be driven down and how quickly consumers and businesses will feel confident enough to begin spending,” he said.

Daco also expects the economic recovery may be slow and uneven.

“We don’t expect this rebounding activity to be akin to turning on a light switch but instead more like a dimmer, where gradually, we start to see more activity through the second half of 2020 and into 2021,” he said. “We really expect the acceleration in terms of rebounding activity to really take place more in the fall and into the winter, rather than in the summer.”

Any recovery could be further hampered by widespread business failures or an acceleration of the pandemic that requires a second round of lockdown orders.

Both Congress and the Federal Reserve have tried to keep businesses afloat with a flurry of emergency lending programs. Fed Chairman Jerome Powell is expected to discuss those measures Wednesday afternoon, at the conclusion of the central bank’s two-day meeting.

“I think that Chair Powell is going to highlight the fact that there is tremendous uncertainty,” Daco said. Much will depend on whether people “respect the lockdown and abide by the rules, which would permit a greater control of … the health crisis and perhaps a stronger rebound from this coronavirus shock.”