The economic toll of COVID-19 continues to accelerate, as the public and private sectors approach a total shutdown in order to slow the spread of the coronavirus. An economy is at its core social interaction measured in dollars. Social distancing leads to economic distancing, and, as personal consumption accounts for 68% of Gross Domestic Product, it seems clear that the U.S. is headed into a sharp recession, if not already there.
The rapid onset of this crisis means that our usual battery of economic data does not yet capture the pain. However, we got our first indication Monday, March 16, 2020, in the form of the Empire State Manufacturing Survey,1 which dropped from an index level of 12.9 in February to -21.5 in March, the sharpest monthly decline on record. The index was lower in the fourth quarter of 2008 and first quarter of 2009, but this steep decline is certain to be echoed in other data over the next weeks and months.
Over the past few days, the Federal Reserve has initiated a range of measures it last deployed during the Global Financial Crisis. On Thursday of last week, the Fed announced additional repurchase operations totaling $1.5 trillion in an attempt to ensure adequate liquidity for financial markets. On Sunday afternoon, the Fed pre-empted its policy meeting scheduled for later this week to slash interest rates to zero, and at the same time disclosed a planned $700 billion purchase of Treasuries and mortgage-backed securities. Zero interest rate policy and quantitative easing are right from the 2008-2009 playbook.
Markets have not responded well, but the same held true in 2008-2009. Panic is a powerful emotion. Prices are divorced from reality, but the unprecedented nature of this crisis makes reality seem divorced from reality as well.
With monetary policy at full tilt, attention this week is likely to revert to fiscal policy. States are ahead of the federal government in closing businesses and accelerating testing, and watch for Washington to play catch up over the next few days. Just as the Fed dusted off the playbook from the Global Financial Crisis, look for Washington to do the same. This could take the form of tax relief, postponed deadlines, regulatory relief and so forth.
Markets are stressed, to say the least. Investors hate uncertainty, and present circumstances impose a different degree and kind of uncertainty as compared to previous market panics. We are confident that, on the other side of this uncertainty and crisis, our focus on owning durable and resilient businesses will pay off for investors with patience and fortitude. Prices do not reflect that confidence at present, but we believe that values do.
1The monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. This is a proxy for the health of the manufacturing sector.
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