Pub. 1 2020 Issue 5

www.cbak.com 10 In Touch SHORT, SHARP, AND SPOTTY: WHAT TO EXPECT FROM THE CORONAVIRUS RECESSION AND HOW COMMUNITY BANKS CAN HELP BY NOAH YOSIF I t's official — the U.S. economy is in full-swing recession. While formal confirmation by the National Bureau of Economic Research is always appreciated, the signs were pretty obvious: social distancing grinding business activity to a near halt, skyrocketing weekly unemployment claims at both a state and national level, and, of course, market volatility erasing three years’ worth of gains in a matter of weeks. In fact, the NBER estimates this recession first started in February, making this newly reported contraction four months old. With irrefutable evidence that the United States is in a recession, zealous market watchers are now searching for clues as to its size and scope. At ICBA, we took the liberty of crunching the numbers in search of some answers, and our conclusions point to a short, sharp, and spotty recession. Figure 1 shows our forecast for economic growth in the near- term, indicating a V-shaped trajectory for recovery. While we expect the second-quarter GDP to contract by a record margin at 27.3%, we also anticipate a quick recovery that will enable the U.S. economy to expand once again by 2021. These patterns are much different than what we saw in 2008, and in many recent financial crises to date, but for good reason. This recession, borne from the coronavirus pandemic, constituted an exogenous shock causing widespread financial disruption within every sector of the U.S. economy, as opposed to concentrated imbalances. As public health authorities continue to relax social distancing measures in the upcoming months, the U.S. economy is likely to rebound, with businesses and consumers once again free to operate with fewer restrictions. Figure 1: ICBA’s U.S. Economic Growth Forecast (Source: ICBA) The unique causal dynamics of this recession provide much credence to our calculations indicating a short recession and quick recovery, but they also hint at the probability of a more severe contraction as well. Because social distancing measures have pressured revenues via decreased business activity, employment has become the primary concern and consequence of this pandemic as companies seek to shore up additional capital. Figure 2 demonstrates the severity of this recession as weekly unemployment claims filed within the first three months were 12 times higher than during the 2008 financial crisis. Because the coronavirus recession has caused financial disruptions in every sector of the economy, we can expect more severe declines in household income and consumer spending given its acute effect on employment. Figure 2: Weekly Unemployment Claims Between the 2008 Financial Crisis and Coronavirus Recession (Source: U.S. Department of Labor) The expected extent of this pain is still ambiguous, in keeping with this year’s theme of economic uncertainty, but will be unevenly distributed among localities, inducing a spotty recovery that varies between states and counties in timing, speed, and effect. Two factors that will have an outsized influence on their recovery will be the ongoing public health threat posed by the coronavirus and localities’ financial position prior to the recession. Counties and states that had a healthy circulation of income between consumers and businesses prior to the recession will be well-positioned to weather a protracted crisis and recover at a quicker pace.