HomeThe Threat of Permanent Economic Damage Grows in the US

The Threat of Permanent Economic Damage Grows in the US

18 May 2020 By Mircea Vasiu

Although we are living in unprecedented times, we will likely only find out in the years to come the true winners and losers of this crisis in economic terms. One thing we all must consider, is that life, as we knew it, has changed.

Over the last two decades (or more), the US Unemployment Rate and the number of companies filing for bankruptcy, moved in a correlated pattern. A rule of thumb says that when the Unemployment Rate is rising, the number of companies filing for bankruptcy rises too. This time is no different, if we use the same metric, it looks like a terrible economic scenario ahead of us.

In other words the risk here is that the economic damage created by the pandemic will become permanent, should the correlation between the Unemployment Rate and the number of companies declaring bankruptcy continue. What may have looked like a “temporary” shutdown might quickly transform into an economic nightmare.

The running estimate of real GDP growth based on available data for the current quarter shows an incredible -42.8%. The number reflects the mathematical results of the model. In plain English – it only considers data available at this point, without forecasting future impact COVID-19 might have.

Somehow, society will have to cope with a 50% decline in the GDP output. The Fed did its part and stands ready to do more, but it may just not be enough.

Over the weekend, Fed’s Chair Jerome Powell stated that the Fed stands ready to even buy individual stocks. After all, it started buying ETFs last week, so this is just a step further. Moreover, after the Bank of England’s chief economist suggested the central bank looks into negative interest rates, it is unlikely that the Fed will ignore this path, should the worst-case scenario become a reality.

All in all, if there is one entity that knows the actual impact of the health crisis on the economy, that is the Fed. Powell has stated that it would take a while for the economy to get back, but in the longer term, the economy will recover. How much longer, no one knows.

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