NAFCU: Recession a 'Distinct Possibility'

NAFCU Chief Economist Curt Long said a “recession is a distinct possibility” as the worst economic effects of the spreading coronavirus are felt in the second and third quarters this year.

Long’s comments were part of a three-page brief dated March 12 and released Monday, the day after the Fed lowered rates to near zero and the stock market plummeted.

The brief provides no clear update to his last forecast from Feb. 25, when concerns about the coronavirus were enough for him to reduce his expectation of real growth in U.S. gross domestic product to 1.7% for 2020. He had previously forecast GDP growth of 2% this year, down from actual growth of 2.3% in 2019 and 2.9% in 2018.

“In the near term, NAFCU expects a sharp slowdown to the economy in the second and third quarters, at a minimum. Recession is a distinct possibility,” Long wrote in the March 12 brief.

“It remains an open question whether we should expect a rapid recovery once the worst is over,” he wrote. “While that would be typical of a natural disaster, those events do not typically hang in the psyche of the consumer.”

The day before Long’s brief, WHO declared the coronavirus a pandemic. Chief Economist Steven Rick of CUNA Mutual Group lowered his expectation for U.S growth to 0.5% to 1% for 2020, while Chief Economist Mike Schenk of CUNA said he expected the forecast for the year to drop to about 1%.

The two Madison, Wis.-based groups had settled on a 1.8% growth forecast for 2020 in February. They will meet again later this month.

Long citesdmany of the factors that fed into NAFCU’s brighter forecasts of earlier days: Low unemployment, a more dovish Fed and February’s uptick in housing construction and sales.

“The U.S. economy was in a great place prior to the virus,” he wrote. “While real GDP growth remained modest right up until the virus hit, there were legitimate reasons to feel as confident in the economy as at any time in the recovery.”

“Tougher times ahead are likely,” he wrote. “Yet, the strength of yesterday’s economy is not all for naught. The fact that we will face the coming challenges with substantial forward momentum should help the U.S. economy weather the storms better than it would otherwise.”

Meanwhile, the social distancing measures needed to contain the virus are taking a toll on the economy: Airlines cancelling flights, businesses cancelling conferences, promoters cancelling festivals, hotel vacancies surging and manufacturing production falling.

As a result, households will suffer.

“One of the largest sources of hiring in the blowout February employment report was restaurants, but hourly employees are going to be the most vulnerable to layoffs,” he wrote. “The services sector looks especially vulnerable to prolonged damage from changes in social interaction.”

Business investment, already weak, will be dragged down further by the uncertainty around the pandemic.

“Despite a strong labor market, tax breaks and robust profits, businesses simply have not engaged in long-term capital investing. Whatever uncertainties were weighing on corporate America are surely higher now.”

Consumer spending, which had been strong, could be easily dented. “Particularly problematic is that low-income households – those most vulnerable to income and job loss – traditionally spend more as a share of their income.”