Everyone's Guessing, Even the Fed: How Deep the Recession?


Fed minutes show "severely constrained" markets. Separately, the Richmond Fed president asks some interesting questions.

Fed Minutes

The Minutes of the Latest FOMC Meeting are out. For a change they are interesting, and also very long.

Eight Key Points

  1. Treasury market functioning was severely impaired. Market depth was extremely thin, and bid-ask spreads widened sharply.
  2. Financing conditions for nonfinancial firms were strained.
  3. Corporate bond issuance came to a near standstill around late February. Speculative-grade issuance and leveraged loan issuance virtually stopped.
  4. Financing conditions in the commercial real estate (CRE) sector worsened late in the intermeeting period, as issuance of CMBS slowed and spreads widened notably to around levels seen in 2016.
  5. Real GDP was forecast to decline and the unemployment rate to rise, on net, in the first half of this year.
  6. A stronger dollar, weaker demand, and lower oil prices were factors likely to put downward pressure on inflation in the period ahead and observed that this meant that the return of inflation to the Committee's 2 percent longer-run objective would likely be further delayed.
  7. A few participants also remarked that lowering the target range to the Effective Lower Bound (ELB) could increase the likelihood that some market interest rates would turn negative, or foster investor expectations of negative policy rates.
  8. Such expectations would run counter to participants' previously expressed views that they would prefer to use other monetary policy tools to provide further accommodation at the ELB.

PIMCO Estimates 30% GDP Decline

If you are looking for guesses, here's another one: U.S. GDP will contract 30% in second quarter, 5% in 2020

The forced closure of businesses across the United States and surge in unemployment due to the coronavirus pandemic will force U.S. growth to contract by 30% in the second quarter and 5% overall in 2020, Pacific Investment Management Co (PIMCO) wrote on Wednesday.

Richmond Fed on Restoring Consumer Confidence after COVID-19

Richmond Fed president Tom Barkin discusses Restoring Consumer Confidence after COVID-19.

This pandemic is new for all of us, creating unprecedented uncertainty. First and foremost, families are asking how best to protect their health and safety. But Americans are also asking about the health of the economy. How deep will this downturn be? How long will it last? How fast will we recover?

The answer to the first question is now clear: it will be deep. The service sector is 70 percent of the US economy and broad swaths of it are shut down, including travel, non-food in-store retail, restaurants, sports and entertainment. Last week’s initial unemployment claims exceeded 6 million, nearly doubling the previous week’s 3.3 million. The previous high had been 695,000 in 1982.

The duration is of course not fully knowable, but — absent a remission or treatment of the virus — it is hard to imagine social distancing moderating until there is a significant slowdown in new cases.

With rates at zero and fiscal support at historic scale, there is significant financial stimulus to help bring the economy back. But that will only meet its full potential when customers are ready to spend. Businesses and governments will need to innovate to make them comfortable doing so.

Barkin Misses the Fundamental Setup

We do not know the recession duration. But the fundamental setup is easy to see.

Consumer balance sheets were generally poor heading into this crisis. Too many people were already living paycheck to paycheck.

Barkin does have some interesting questions worth reviewing.

  • Could restaurants offer explicit deep cleaning protocols for their tables, less server contact or less dense seating to allay health concerns when eating out?
  • Should airlines fly with middle seats empty and boarding/deplaning protocols that preserve social distance?
  • Should personal services pivot to an at-home delivery model?
  • Is there a screening protocol for anyone who enters a hotel or a restaurant or a bar?

If any of those are done, to any extent, it means less profit for business.

Importantly, even if none of those things are done, the likelihood things quickly return to normal are nonexistent.

Sure, there will be a sudden wave of eating out once people can, simply to get the hell out of the house.

But following that initial surge, what then? Will people resume pre-virus habits?

Boomers vs Millennials

  1. Boomers had a quarter of their retirement blow up in a month.
  2. Millennials have seen two economic crises in 10 years, at the beginnings of their careers.

Things will not quickly return to normal and stay there even if there is some initial appearance of a recovery.

How High Will the Unemployment Rate Rise in April?

Tiffany Wilding, a North American economist at PIMCO, said today "evidence from recent jobs reports suggests the unemployment rate may rise as high as 20%."

That is essentially my base forecast.

On April 6, I asked (and answered) How High Will the Unemployment Rate Rise in April?

I estimate 20-22% a couple ways. I do not know Wilding's rationale, but I look at high risk job categories and put percentages on them.

The scars of 20% unemployment will last a long, long time. And even when employment returns, hours worked remains another issue.

Car Sales, Airline Travel, Eating Out

With the stock market down and consumer savings wiped out, will car sales quickly recover?

The same question applies to eating out and airline travel.

Will business meetings be in person or will corporations reduce costs with more teleconferencing?

For a 20-point discussion of what to expect, please see Nothing is Working Now: What's Next for America?

No V-Shaped Recovery

Add it all up and you should quickly arrive at the correct viewpoint: The Covid-19 Recession Will Be Deeper Than the Great Financial Crisis.

Simply put, a quick return to business as usual is not in the cards.

Mike "Mish" Shedlock

Comments (72)
No. 1-19

Well - stock market is back to normal.. almost 50% of the drop is regained and optimism is flying in the air... Never fight the FED


A come to Jesus moment for anyone who was barely employable 3 months ago in the most overrated "strong economy" in history, and for anyone over 60 who was looking at barely-workable retirement cash flow projections 3 months ago.


Will Biden be the Herbert Hoover of the 20th century? More than anyone in the country he represents the conservative banking community and the FIRE economy. He certainly isn't an FDR.

If Trump loses (I don't think that's a guarantee), Biden will be responsible for building a new way of life. Few people today understand that FDR did just that. The old factories would never work they way they did in the '20's. So he basically created the infrastructure to create suburbia. FNMA, infrastructure projects, federal financing of local infrastructure were all designed to build suburbia on a mass scale which would employ millions in home-building, auto manufacturing, road construction, etc...

I see a global depression. Biden being in way over his head as the unemployed begin to rise up, and a Sanders type following. Though Bernie himself will be too old.


Infrastructure spending reviving the economy?

As someone involved in the construction world, I have been busy these last few weeks (building luxury apartments is essential, doncha know?).

For some reason I fail to see how a gigantic infrastructure package would benefit those other than who already have been working through the shutdown--namely construction workers and construction companies.

It's the service economy that is being hit the worst (70% of he economy!) Because they aren't working, there is less money that they can spend.

But until people are assured that participating in a service economy won't result in a serious chance of a death-tempting illness, it won't be revived.


the front page of CNN Money is full of disastrous news yet the stock market is going up nearly every day Why? Is it QE or what? Please explain.


It's not only people living check to check. Apparently many large corps are as well. Many can not pay their rent.


The government promised $10k in grant money in the EIDL in the original Care Act. Now that is being reduced to $1k per employee. In addition, no (or very little) money has actually been paid out. Many small businesses were depending on this money to keep them afloat until May (when things might reopen). Now the rug is being pulled out from them between this and the fact that the actual PPP loan amounts tend to be a lot smaller than what any of these companies actually require.

Expect MASSIVE bankruptcies among small businesses over the next three month. Small business represents 57% of the labor force. Half to 3/4 of those folks will lose their jobs over the next 3 months as well. This is on top of all the layoffs the big boys will be doing over the next 6 months.

At best the 3rd quarter recovery everyone is talking about will be a 60-70% improvement off the bottom. (IE...30% lower than pre-Covid-19...still depression level numbers.)

Government aid will be too little and too late to do any good for many.


This is the final BINGE on the credit card they have no intention of ever making a single future payment on.

And they will continue to run it up until the rest of the world says "No more Reserve Currency status for you!"

Actually, the rest of the world may have already said that, and that is why we're binging.


FT reports that Chase has temporarily stopped accepting applications for small business loans outside the government’s Paycheck Protection Program.

Yeah, small businesses are toast!!!


No worries, Dow at 30,000 by year's end :)


Who cares? Pass massive spending bills. Skip the oversight. Someone else will pick up the tab.

"(CNN)The recently resigned acting Navy Secretary Thomas Modly's Monday trip to Guam where he addressed the crew of the USS Theodore Roosevelt and slammed their former commander, cost the Defense Department an estimated $243,000, according to a Navy official."

Now THAT is what you call STUPID.


"Should airlines fly with middle seats empty and boarding/deplaning protocols that preserve social distance?"

What about airplane ventilation systems?

"Could restaurants offer explicit deep cleaning protocols for their tables, less server contact or less dense seating to allay health concerns when eating out?"

Restaurant profits are so marginal, there is little room to cut back. Robot servers won't be here soon enough for smaller restaurants. In a couple of years there will probably be certificates of vaccination or past COVID19 infections.

Restaurants that survive the virus will be those that own their property (not renting) and aren't in debt.

The restaurant industry has also benefited from Americans buying cheap goods from Asia and spending the savings at restaurants. That's going away.

  1. Get as many credit cards as possible.
  2. Max out credit cards buying physical gold and silver.
  3. Join the MMT-Debt Jubilee Crowd.

Are we going to fight the FED? Think we are at 10,000,000,000,000 bailout so far. Still more to come. Last bail out was just shy of a trillion but the banks participated for years after multiplying this amount. And we got the present bubble now this corona bubble has the potential to dwarf the last one.

Look at Japan it's not good but they have survived massive debt. We still have a long way to go in comparison.

They will not leave a dollar "un-loaned" on the table in an effort to keep the current system going!

Find me someone in government that cares about debit?


"Boomers had a quarter of their retirement blow up in a month."

My retirement was blown up a long time ago. How about we go back to 1987. I have virtually ZERO trust in Wall Street.

Martin Armstrong goes on about how this has been the most hated bull market in history. I see it as being the most fraudulent bull market in history. As Mises said, the final outcome of a debt fueled boom, is that the debt collapses or the value of the money does. Either you don't have money to buy anything or the money is so worthless that it doesn't buy anything. Take your pick.

Zero Hedge headline: "UK Unleashes Helicopter Money: In Historic Move, BOE Becomes First Central Bank To Openly Monetize Deficit"


Fed's buying junk bonds. As I said, they will eventually OWN everything.


Just before all this happened, we were planning to do a bit of remodeling. We just nixed that permanently. I'm sure we aren't alone in our change of sentiment. A wave of buy less and save more will take a long time to fade again. This is especially true among those that can't afford food for the first time. My parents both grew up in the depression, and were quite frugal. My dad talked about shadow soup. It got its name because you could see your shadow in the bottom of the bowl. Hunger leaves an impression.


Less contact with servers? I had nothing to eat driving from Oregon to Florida for 8 days except Dominoes because that was the only place delivering where i stopped. In a few places they put the pizza on the floor (or sidewalk EWWWWWWWW) before they knocked. That is going too far. They can hand over the box without making contact, in fact in my whole life I have accepted hundredss of pizzas without ever making contact with the delivery person. Fortunately I am now so sick of pizza that I am unlikely to ever order it again anyway.

Look, when the Fed is buying everything including junk bonds it is time to panic. Wall Street seems to believe that they need to buy at any price because 2-3-5-10 years from now 20k plus n the Dow will look dirt cheap because of the inflation this will stimulate. That is the only possible rational explanation for recent market activity. What they don't seem to understand is that with this new additional money/credit in the system that is NOT going to get into the hands of Joe Sixpack beyond a pitiful $1,200 one time shot something like 60% of the nation is going to die financially.

As to Gen X and younger people getting snookered out of their retirements, well, boomers like me faced 30% plus unemployment and gasoline rationing along with double digit inflation for years. The the crash of 87, the recession of 93, then Y2K and the DotCom crash, then 911 and the GFC, now this. With no time left to rebuild. At least younger people can learn a lesson about who and what to trust and have decades to rebuild. Right now their biggest worry should be that when Covid is over the elderly that got wiped out will be back in the job market as a matter of survival. Not all of them of course, but millions and they will be willing to work for less. This disease is going to wipe out a lot of the middle class.

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