Recession 2020—Deep but Short

Alan Levenson, Chief U.S. Economist

Tracking the COVID‑19 shock.

Key Insights

  • I’m anticipating a contraction in economic activity over the first two quarters of 2020 that roughly matches the longer decline over the financial crisis.
  • When shuttered industries and shut‑in workers can start the transition back to normal life—probably sometime in May—growth should resume.
  • Solid pre‑virus underpinnings in the business and household sectors and the unprecedented policy response should help short‑circuit a prolonged recession.

Severe restrictions have been imposed on roughly half of the country, and government‑enforced social distancing measures, including stay‑at‑home orders, are likely to proliferate in the near term. I currently anticipate that the breadth of measures in place—and their drag on economic activity—will reach maximum intensity during the first half of April.

From that point, output should have nowhere to go but up, at least as far as the coronavirus’s impact is concerned. From this perspective, recovery will begin once virus mitigation has progressed to a point that social distancing restrictions can be moderated. I’m assuming that this gradual return to work will begin sometime in May.

Opening Quote I would stress that the uncharted territory in which we find ourselves means that any outlook is exceptionally uncertain. Closing Quote

Unprecedented Quarterly Declines, but Concentrated in March and April

The impact of this sudden halt in economic activity on second‑quarter growth is likely to be unprecedented. The consensus forecast1 of a 10.8% decline in real GDP growth (at a seasonally adjusted annual rate) would be the sharpest one‑quarter decline in the 72‑year history of the series.

I would stress that the uncharted territory in which we find ourselves means that any outlook is exceptionally uncertain. With that caveat, I see downside risk to the consensus forecast, arriving at a 15% second‑quarter contraction based on the following assumptions:

  • I would expect activity to contract by about half from February to April in transportation and warehousing, education, arts, entertainment, and accommodation and food services. Recovery would then start with 10% monthly increases in activity in these sectors in May and June.

  • Other sectors should fare better. Manufacturing activity might shrink around 20% in the second quarter, while health care services activity will probably expand by 30% in March and hold that level through June. Government spending should increase 10% in March and also hold that level through June.

If these ballpark assumptions hold true, the cumulative result would be a 4% first‑half contraction, roughly on par with the 2008–2009 recession, which stretched over six quarters.

Longer‑Term Recession Drivers Appear Absent

Recessions typically entail the correction of imbalances, often associated with excessive demand—whether in fixed investment or consumer spending, or both—that has undermined private sector finances. In contrast, as is well understood by now, the current downturn is being driven substantially by an enforced pullback in activity in the name of social distancing and virus mitigation. The unique nature of this downturn suggests it will be more dramatic but shorter than usual.

Business Capital Spending: No Obvious Overhang

The unfolding reduction in output will surely be echoed in falling business capital expenditures (capex), at least in the very near term. But the pullback is not coming from a high level, in large measure because of last year’s manufacturing recession, which was ending when the coronavirus emerged. Net investment fell sharply over the course of last year and likely slipped in the current quarter. This adjustment appears to have slowed annualized growth in the business capital stock last year to the low end of its recent range, or about 1.8%, as in 2016–2017. Even before the impact of the coronavirus, the capital stock was poised to grow by little more than 1.5% in 2020—the slowest pace since 2011.

The relatively slow recent growth in the capital stock argues against the notion that business capex has run ahead of the economy’s underlying needs. Neither has capex gotten ahead of the business sector’s financial capacity. Approaching the previous two recessions, the business sector’s financial balance—undistributed profits less capital spending—was deteriorating and becoming increasingly negative. In contrast, the financial balance was close to zero as of late 2019, not indicative of a need to slash capex.

To be sure, capex in sectors taking the most direct hit from the pandemic—including education, arts and entertainment, recreation, accommodation, and food services—may grind toward a halt in April. Yet we should also recognize the possible offset from increased capex in chemical manufacturing, which includes the pharmaceutical industry, and health care services. The former set of industries account for 10.1% of total business capex, while the latter account for 10.4%.

Housing: Nothing to Cut

Housing starts and sales maintained their recent upward trend through February, but sharp recent declines in indexes of mortgage applications signal a near‑term drag on housing activity as a result of enforced social distancing. Still, there is relatively little fuel for downside momentum if the labor market correction subsides once the coronavirus is contained. The recent expansion remains exceptional in the absence of housing supply (new home starts) outpacing demand (household formations).

Interrupting the Typical Recession Dynamic

Despite sturdy initial conditions in private investment sectors, a more typical recession dynamic could be propagated from near‑term layoffs and subsequent consumer spending cutbacks. A record 3,283,000 Americans filed jobless claims in the week ended March 21, and many more are claims are undoubtedly coming as more restaurants and other consumer services businesses shut down.

The newly unemployed buy less of everything, including products of industries not at all directly affected by the virus. Those industries, facing less demand, reduce capacity, including through headcount. Nevertheless, I anticipate that this secondary drag on growth will be handily offset by the primary contribution from the post‑virus containment return to work.

Opening Quote Monetary and fiscal policy have both responded promptly and forcefully to cushion the blow from mandated reductions in economic activity. Closing Quote

Unprecedented Monetary and Fiscal Response

Monetary and fiscal policy have both responded promptly and forcefully to cushion the blow from mandated reductions in economic activity. The Fed has gone beyond its 2008–2009 playbook, with open‑ended purchases of Treasury, residential and commercial mortgage‑backed securities, liquidity support for the investment grade corporate bond market, and plans for a Main Street Business Lending Program. A USD 1.5 trillion package of tax relief and government spending is larger than the 2009 stimulus (7.1% of GDP vs. 5.5%), and funds should begin to flow by the third week in April.

1 The median of 9 forecasts issued since March 16 in a Bloomberg survey.

Important Information

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.

Australia—Issued in Australia by T. Rowe Price Australia Limited (ABN: 13 620 668 895 and AFSL: 503741), Level 50, Governor Phillip Tower, 1 Farrer Place, Suite 50B, Sydney, NSW 2000, Australia. For Wholesale Clients only.

Brunei—This material can only be delivered to certain specific institutional investors for informational purpose upon request only. The strategy and/or any products associated with the strategy has not been authorised for distribution in Brunei. No distribution of this material to any member of the public in Brunei is permitted.

Canada—Issued in Canada by T. Rowe Price (Canada), Inc. T. Rowe Price (Canada), Inc.’s investment management services are only available to Accredited Investors as defined under National Instrument 45‑106. T. Rowe Price (Canada), Inc. enters into written delegation agreements with affiliates to provide investment management services.

China—This material is provided to specific qualified domestic institutional investor or sovereign wealth fund on a one‑on‑one basis. No invitation to offer, or offer for, or sale of, the shares will be made in the People’s Republic of China (“PRC”) (which, for such purpose, does not include the Hong Kong or Macau Special Administrative Regions or Taiwan) or by any means that would be deemed public under the laws of the PRC. The information relating to the strategy contained in this material has not been submitted to or approved by the China Securities Regulatory Commission or any other relevant governmental authority in the PRC. The strategy and/or any product associated with the strategy may only be offered or sold to investors in the PRC that are expressly authorized under the laws and regulations of the PRC to buy and sell securities denominated in a currency other than the Renminbi (or RMB), which is the official currency of the PRC. Potential investors who are resident in the PRC are responsible for obtaining the required approvals from all relevant government authorities in the PRC, including, but not limited to, the State Administration of Foreign Exchange, before purchasing the shares. This document further does not constitute any securities or investment advice to citizens of the PRC, or nationals with permanent residence in the PRC, or to any corporation, partnership, or other entity incorporated or established in the PRC.

DIFC—Issued in the Dubai International Financial Centre by T. Rowe Price International Ltd. This material is communicated on behalf of T. Rowe Price International Ltd. by its representative office which is regulated by the Dubai Financial Services Authority. For Professional Clients only.

EEA ex‑UK—Unless indicated otherwise this material is issued and approved by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L‑1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier. For Professional Clients only.

Hong Kong—Issued in Hong Kong by T. Rowe Price Hong Kong Limited, 6/F, Chater House, 8 Connaught Road Central, Hong Kong. T. Rowe Price Hong Kong Limited is licensed and regulated by the Securities & Futures Commission. For Professional Investors only.

Indonesia—This material is intended to be used only by the designated recipient to whom T. Rowe Price delivered; it is for institutional use only. Under no circumstances should the material, in whole or in part, be copied, redistributed or shared, in any medium, without prior written consent from T. Rowe Price. No distribution of this material to members of the public in any jurisdiction is permitted.

Korea—This material is intended only to Qualified Professional Investors upon specific and unsolicited request and may not be reproduced in whole or in part nor can they be transmitted to any other person in the Republic of Korea.

Malaysia—This material can only be delivered to specific institutional investor upon specific and unsolicited request. The strategy and/or any products associated with the strategy has not been authorised for distribution in Malaysia. This material is solely for institutional use and for informational purposes only. This material does not provide investment advice or an offering to make, or an inducement or attempted inducement of any person to enter into or to offer to enter into, an agreement for or with a view to acquiring, disposing of, subscribing for or underwriting securities. Nothing in this material shall be considered a making available of, solicitation to buy, an offering for subscription or purchase or an invitation to subscribe for or purchase any securities, or any other product or service, to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the laws of Malaysia.

New Zealand—Issued in New Zealand by T. Rowe Price Australia Limited (ABN: 13 620 668 895 and AFSL: 503741), Level 50, Governor Phillip Tower, 1 Farrer Place, Suite 50B, Sydney, NSW 2000, Australia. No Interests are offered to the public. Accordingly, the Interests may not, directly or indirectly, be offered, sold or delivered in New Zealand, nor may any offering document or advertisement in relation to any offer of the Interests be distributed in New Zealand, other than in circumstances where there is no contravention of the Financial Markets Conduct Act 2013.

Philippines—THE STRATEGY AND/ OR ANY SECURITIES ASSOCIATED WITH THE STRATEGY BEING OFFERED OR SOLD HEREIN HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES REGULATION CODE. ANY FUTURE OFFER OR SALE OF THE STRATEGY AND/ OR ANY SECURITIES IS SUBJECT TO REGISTRATION REQUIREMENTS UNDER THE CODE, UNLESS SUCH OFFER OR SALE QUALIFIES AS AN EXEMPT TRANSACTION.

Singapore—Issued in Singapore by T. Rowe Price Singapore Private Ltd., No. 501 Orchard Rd, #10‑02 Wheelock Place, Singapore 238880. T. Rowe Price Singapore Private Ltd. is licensed and regulated by the Monetary Authority of Singapore. For Institutional and Accredited Investors only.

South Africa—T. Rowe Price International Ltd (“TRPIL”) is an authorised financial services provider under the Financial Advisory and Intermediary Services Act, 2002 (FSP Licence Number 31935), authorised to provide “intermediary services” to South African investors.

Switzerland—Issued in Switzerland by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland. For Qualified Investors only.

Taiwan—This does not provide investment advice or recommendations. Nothing in this material shall be considered a solicitation to buy, or an offer to sell, a security, or any other product or service, to any person in the Republic of China.

Thailand—This material has not been and will not be filed with or approved by the Securities Exchange Commission of Thailand or any other regulatory authority in Thailand. The material is provided solely to “institutional investors” as defined under relevant Thai laws and regulations. No distribution of this material to any member of the public in Thailand is permitted. Nothing in this material shall be considered a provision of service, or a solicitation to buy, or an offer to sell, a security, or any other product or service, to any person where such provision, offer, solicitation, purchase or sale would be unlawful under relevant Thai laws and regulations.

UK—This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.

202003‑1131415

Download

Latest Date Range
Audience for the document: Share Class: Language of the document:
Download Cancel

Download

Share Class: Language of the document:
Download Cancel
Sign in to manage subscriptions for products, insights and email updates.
Continue with sign in?
To complete sign in and be redirected to your registered country, please select continue. Select cancel to remain on the current site.
Continue Cancel
Once registered, you'll be able to start subscribing.

Change Details

If you need to change your email address please contact us.
Subscriptions
OK
You are ready to start subscribing.
Get started by going to our products or insights section to follow what you're interested in.

Products Insights

GIPS® Information

T. Rowe Price ("TRP") claims compliance with the Global Investment Performance Standards (GIPS®). TRP has been independently verified for the twenty one- year period ended June 30, 2017 by KPMG LLP. The verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.

TRP is a U.S. investment management firm with various investment advisers registered with the U.S. Securities and Exchange Commission, the U.K. Financial Conduct Authority, and other regulatory bodies in various countries and holds itself out as such to potential clients for GIPS purposes. TRP further defines itself under GIPS as a discretionary investment manager providing services primarily to institutional clients with regard to various mandates, which include U.S, international, and global strategies but excluding the services of the Private Asset Management group.

A complete list and description of all of the Firm's composites and/or a presentation that adheres to the GIPS® standards are available upon request. Additional information regarding the firm's policies and procedures for calculating and reporting performance results is available upon request

Other Literature

You have successfully subscribed.

Notify me by email when
regular data and commentary is available
exceptional commentary is available
new articles become available

Thank you for your continued interest