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Economic Research: A U.S. Recession Takes Hold As Fallout From The Coronavirus Spreads


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Economic Research: A U.S. Recession Takes Hold As Fallout From The Coronavirus Spreads

Look at any empty restaurant or coffee shop (if anyone ventured out and the shop wasn't closed), and it's hard to deny that the toll on the U.S. economy from COVID-19 has been severe.

While the economic data for March has not been released, social distancing is likely to lead to a steep drop in consumer spending, which will have knockdown effects on business investment. As a result, S&P Global Economics believes that the U.S. is entering recession--if not already in one. Compared with our forecasts before the virus, the first half of the year will be weighed down by a combination of:

  • The effects of the spread of the virus;
  • The suspension of Boeing 737 MAX production and exports; and
  • The recent Saudi Arabia-Russia standoff, with its drop in oil prices and knock-on effects on energy investments.

Based on government sources and public data, our economic forecast now assumes that the U.S. coronavirus outbreak peaks in May. The current trajectory of COVID-19 has led us to now project GDP growth will be down by 1% in the first quarter, with healthy growth earlier in the quarter providing some support. We expect a sharp contraction for the second quarter, around -6%.

We continue to expect a U-shaped recovery in the second half of the year, though only the path of the outbreak will dictate when the recovery will start. 2020 GDP growth will be zero (versus our 1.9% pre-virus estimate in December).

It has become increasingly clear to us that COVID-19 will be a major headwind to U.S. growth in the near term, though the inevitable impact on the U.S. economy depends largely on how long the virus lasts in America. We recognize that the path of the outbreak is very uncertain. If the virus is not contained, which is a material risk, the U.S. economic impact--and the credit implications--could be much more severe in 2020.

The Impact Of Social Distancing On U.S. Growth

The COVID-19 pandemic has brought about a sudden stop in consumer spending that will last at least through mid-May, maybe longer. This is based on the current public projections of the path of the virus, news of government closures of restaurants, bars, and schools, and voluntary closures elsewhere, as well as the Centers for Disease Control and Prevention's strong U.S. recommendation to postpone or cancel meetings with 50 people or more for the next eight weeks.

And while official restrictions may be lifted in eight weeks (a big IF), continued reluctance to enter public spaces after that period may keep the recovery slow. With that in mind, and with few economic releases on the subject, we did a bottoms-up analysis on the impact to growth.

Social distancing will likely weigh dramatically on consumer spending in 2020, with spending on services experiencing the biggest hit. We expect that the current containment and mitigation efforts put in place will directly put at risk 14% of consumer spending. Social distancing-related services such as public transportation, recreation, and leisure activity (tourism, restaurants, and bars) will be at a standstill through most of May. (See the Appendix for more detail on the hypothetical impact of social distancing on consumer spending and GDP.)

Table 1

Impact Of Social Distancing On Consumer Spending (An Illustration Of Our Assumptions)
--March-only effect on Q1 growth-- --April and May effect on Q2 growth--
Consumer spending major categories Share of consumer spending Share of GDP Hypothetical potential impact weekly average for six weeks (versus pre-virus actual) Consumer spending GDP Consumer spending GDP
(In real terms, %)
Durable goods 14 9.5 (40) (0.9) (0.6) (2.7) (1.9)
Non-durable goods 23 15.8 (25) (0.9) (0.7) (2.8) (2.0)
Services: at risk from social distancing 14 9.8 (75) (1.5) (1.2) (4.6) (3.7)
Services: other (excluding social) 50 35.0 (1) (0.1) (0.1) (0.2) (0.2)
Total 100.0 70.0 (3.5) (2.6) (10.4) (7.7)
Note: Our "social distancing" measure includes public transportation services, recreation services, food services and accommodation, personal care and clothing services, social services (e.g., child care), and religious activities. March impact is calculated based on two weeks of severe spending pullback, April impact is based on four weeks, and May impact on two weeks in the beginning of May. Sources: Bureau of Economic Analysis and S&P Global Economics.

Durable goods and non-durable goods consumption is also likely to be cut back as people avoid public spaces. There is a slip side to it as well. For example, demand for food delivery service has picked up, and households have front-loaded on stocks of essentials. Amazon announced it plans to hire an additional 100,000 employees in the U.S. as millions of people turn to online deliveries. Nondiscretionary services such as housing, utilities, and medical expenses should remain stable.

The impact from social distancing is now likely creating a bigger drag on growth for the U.S. economy, which is largely domestically driven--consumers make up more than two-thirds of overall growth. Ironically, consumer spending, which was once the U.S. economy's savior and we had considered to be the main support to U.S. growth in December, helping to offset the economic pain felt from the trade war, is now the culprit.

Overall, consumer spending in the first quarter will cut 1.2% from GDP, with sharp declines in March spending activity wiping out gains earlier in the quarter. In the second quarter, consumer spending is likely to be hit even harder. April and May by themselves are likely to take out a massive 7.7% from GDP growth (-10.4% from consumer spending growth). We assume that June is going to see a pickup in spending, though tempered due to the lingering effects of the damage to confidence. Most of the damage in the quarter would already have been done in April and May.

Despite a peak in the virus that we assume will happen sometime in the second quarter, based on outside assessments, U.S. households may be reluctant to go out in full swing, worried that the coast is still not clear. This suggests that the economic recovery in the second half of the year will be moderate at best. All told, not all that is lost will be recovered, and for now, we estimate a permanent loss of $84 billion from just the consumer channel by 2023.


The market meltdown, which further weighs on consumer spending and growth, should not surprise us. After all, it is discounting all current and future bad news. Besides the unknown unknowns, there are several known unknowns that have become front and center. In the near term, we do not know:

  • How much more the infection is going to spread;
  • How wide travel restrictions will be;
  • Whether the virus returns next fall;
  • Degrees of quarantines;
  • How many more massive cancellations of large gatherings including schools, work, and more generally large events (sports, musicals, etc.); and
  • The strain on the U.S. economy and global markets.

More long term, the market is also discounting possibly lasting effects from supply-chain disruptions leading to a shift of upstream suppliers (already front and center from the U.S. trade spat).

In a scenario of a 10%-20% sustained pullback in the stock market, we will likely see 30 basis points-60 basis points shaved off consumer spending growth, which translates to about 0.2 percentage point-0.4 percentage point off baseline growth.

Breaking it down, effects are higher for housing wealth versus stock market wealth, effects are higher for discretionary spending (travel, hotels, home improvement, and furnishing, for example) versus nondiscretionary, effects appear with a lag, and effects are asymmetric with a larger impact during a down market than when markets are rising.

It's hard to separate the two factors, but we suspect that social distance likely supersedes the wealth effect. If the markets were down because of other reasons than consumers, then the wealth effect would be an amplifier, shaving off growth. But this time around, the virus has led to social distancing, which has created a negative feedback loop with the financial market.

Accounting For Other Key Domestic Factors Puts The Economy In A Deeper Hole

The drop in consumer spending from social distancing in March alone leaves us with 0.5% GDP growth in the first quarter. Once we include a contractionary quarter (fourth consecutive) for private nonresidential fixed business investment (14% of GDP), even that small positive is now a negative.

Business investment in the first half of the year is expected to be weakened by several factors. Demand from U.S. households will slow significantly as social distancing reduces foot traffic in stores, restaurants, and bars. Supply chain disruptions will continue to hurt U.S. growth, given the virus has spread globally, including in the U.S.

Moreover, the fall in energy prices, now at $29, due to lost demand from the virus as well as the Saudi Arabia-Russia oil price war, will now likely result in a sharp drop in energy sector spending for the first quarter and beyond, depending on how long the Saudis and Russians hold their ground. Supporting manufacturing and service sector investments will also suffer. Finally, the suspension of Boeing 737 MAX production and exports is not likely to be resolved until July at the earliest, further complicating the picture. We expect sharp declines for both business equipment investment and structures in the first half of the year.

Table 2

U.S. Economic Growth Update (Seasonally Adjusted Annual Rate)
(In real terms, %) Q1 Q2 Q3 Q4 2020
GDP pre-virus 2.2 1.9 1.8 2.3 1.9
GDP post-virus (1.0) (6.0) 3.0 5.0 0.0
Major domestic private sector
Consumer spending (1.2) (8.0) 3.0 5.5 0.03
Non-residential fixed business investment (1.0) (8.4) (6.0) 5.6 (3.0)
Residential investment 9.4 (5.0) 4.0 2.8 3.5
Note: Interim forecasts as of March 16, 2020. Pre-virus forecasts published Dec. 4, 2019.

Offsetting Factors Are Highly Uncertain

Based on assumptions by S&P Global Economics, which now sees recession across most parts of the globe, with a far slower recovery in the Chinese economy, international economic activity will be sluggish at best. At this point, net exports may be largely neutral to growth because, while exports in goods and services (13% of GDP) are going to be down, imports (17% of GDP) are also going to be down given higher elasticity of U.S. imports to overall growth.

One could argue that the economy may end up with a close to flat growth reading in the first quarter, thanks to a contribution to growth from government spending (17% of GDP), depending on how fast the additional government spending is able to materialize before the end of the first quarter. We expect it's more likely that the U.S. government stimulus will help make what would otherwise be an extreme ugly second-quarter reading less ugly.

The Fed's surprising 100-basis-point cut in interest rates this Sunday, after an earlier 50-basis-point cut on March 3, may help provide a cushion to revenue-strapped businesses. Still, not surprisingly, the Sunday rate action seems to have not quelled the markets, as the S&P 500 dropped another 12% on Monday. At this point, we expect the Fed to keep the federal funds rate at near-zero through 2021. The Fed may be forced to take additional accommodative measures over the near future, depending on the data. Stay tuned.

The drop in interest rates may help support residential investment (3% of GDP), but not by much. Housing starts, which were already running at a pretty high clip, are bound to slow in March given worker supply disruptions and less buyer foot traffic as fearful households avoid the hunt, at least for now. The pace of inventory accumulation is likely to be softer as well given supply chain disruptions during the first quarter. At this point in time, straight-up GDP accounting doesn't favor a positive growth outlook in the first quarter.

Overall, it is highly unlikely that other parts of the economy besides the government sector are going to materially offset the second-quarter drag from the private sector either. How much growth contracts really hinges on when and how strongly consumer demand comes back to life, which, in turn, depends on the duration of containment-mitigation policies.

We do not know the extent of the duration of the virus or what hitches we may hit along the way. As such, this forecast update is based on our evolving belief that the headwind to U.S. economic growth has significantly worsened and will likely extend into the second quarter and be worse than our earlier estimate. We will update our economic forecast as data becomes available to ascertain both the spread and timing of the peak of COVID-19 as well as the prognosis for U.S. growth.


Table 3

Illustration Of A Hypothetical Impact Of Social Distancing On Consumer Spending And GDP
--Potential impact of social distancing (versus estimated average of Jan. and Feb. level)--
(Real--chain-weighted 2012--bil. $ seasonally adjusted annual) Q4 2019 Q1: Jan. and Feb. average Total impact in 2020 (%) Total impact in 2020 (bil. $) Of which in Q1 Of which in Q2
25% 75%
Spending category
Services: social 1,876 1,893 (206) (51.6) (154.8)
Social distancing underlying detail category
Public transportation services (includes air, water, ground) 158 158 (12.5) (20)
Recreation services 514 518 (12.5) (65)
Amusement parks and campgrounds 60 61
Admission to specified spectator amusement: movie theatre, live entertainment, spectator sports 68 67
Museums and libraries 9 9
Casino gambling 102 104
Package tours 12 12
Other 262 265
Food services and accommodations 867 878 (10.0) (88)
Personal care and clothing services 152 153 (10.0) (15)
Social services (e.g. child care) and religious activities 186 187 (10.0) (19)
Note: Q4 and January numbers were published by the BEA. February numbers were estimated based on normal consumer behavior using average monthly change in the last 12 months. Total full-year impact in 2020 represents hit to two months of social spending. Given annualized numbers, percentage hit was assumed to be a fraction of maximum 16.6% (8.3% per month). For example, public transportation services is assumed to lose more or less 75% of maximum 16.6%, which makes overall loss 12.5% over the two-month period.  

The views expressed here are the independent opinions of S&P Global's economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.

This report does not constitute a rating action.

U.S. Chief Economist:Beth Ann Bovino, New York (1) 212-438-1652;
U.S. Senior Economist:Satyam Panday, New York + 1 (212) 438 6009;

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