Will the Coronavirus Cause a Recession? Keep Your Eye on the Barbershops

The United States will not be immune. Goldman Sachs estimated over the weekend that the outbreak would reduce economic growth by a full percentage point in 2020.

The economy was growing at an annual rate of only around 2 percent before the virus hit. So if the outbreak worsens, it isn’t hard to imagine that gross domestic product might fall outright.

But a recession is more than just a dip in gross domestic product. As most economists think of it, a recession involves a cycle that feeds on itself: Job cuts lead to less income, which leads to less spending, which leads to more job cuts. (Of course, that doesn’t go on indefinitely, especially if central banks and governments intervene forcefully to kick-start growth.)

“Consumer spending being 70 percent of the economy, you are going to have to see it on the consumer side for this to take the U.S. economy down,” said Claudia Sahm, a former Fed official who is now director of macroeconomic policy for the Center for Equitable Growth, a progressive think tank. She noted that some researchers had studied how shocks spread through the economy, using methods originally developed to model the spread of disease.

Think about hurricanes or earthquakes. A bad natural disaster can easily cause output to decline in one part of the country, as stores close, shipments are delayed and people stay in their homes or shelters. A really bad one might even cause a dip in G.D.P.

But barring other factors, the economy should snap back once the water recedes or the ground stops shaking. In fact, natural disasters are often followed by a temporary increase in economic activity, as people rebuild. In that way, disasters are different from financial crises, for example, which don’t just reduce spending and investment in the short term but also make people and companies less willing or able to spend for months or years.

Article source: https://www.nytimes.com/2020/03/03/business/economy/coronavirus-recession.html