Economist on Effects of Coronavirus: “Comes like a freight train, but expect it to go away quickly”
The traditional definition of a recession is two consecutive quarters of negative GDP growth — but the worldwide shock of the Coronavirus has forced that model to stand on its head.
According to economist Elliot Eisenberg, president of Graphs and Laughs, LLC, and wildly popular presenter at CU Direct’s annual conference over the last few years, the “shelter in place” edicts issued by many government bodies have plunged the U.S. economy directly into a recession.
“Household consumption has fallen off a cliff,” he said during a recent webinar presented by Origence (a CU Direct brand). “A hurricane stops all production and consumption, but it only lasts a few days. This goes on and on for weeks.”
Reason for Optimism
With that said, Dr. Eisenberg pointed to two pieces of relatively good news. First, based on the experience of China and South Korea ? two countries that were hit hard in the early days of the outbreak — Coronavirus seems to take about 40 days to run its course.
“We do not know exactly how long Coronavirus will be with us, but we have seen China and South Korea experience relief from the virus. It comes on like a freight train, but goes away relatively quickly.”
There is a second reason for optimism. While consumer spending has been sharply curtailed, and there is almost nothing going on with imports and exports, government spending is “going up and will go up like a rocket,” Dr. Eisenberg said, pointing to efforts to send stimulus checks directly to some consumers, plus numerous programs to provide aid to businesses large and small.
“Unlike in 2008, when the government sat on its hands for about a year, the government is throwing everything but the kitchen sink at this crisis,” he declared. “The more active they are, the faster we get out of the recession once the virus goes away. But whatever happens, you can?t blame government policies.”
Because the pandemic struck the United States several weeks after it affected such countries as Italy and Spain, the U.S. has yet to hit peak infections. Eisenberg said the key figure to watch is the rate at which infections spread, not the total numbers, adding some American cities will see conditions get worse before they get better.
Learn more about how COVID-19 has impacted the economy during the Economic & Lending Trends webcast featuring Elliot Eisenburg on May 1st.Register here
The fiscal impact of the virus will vary by city, region and even type of job, Eisenberg explained. Because the leisure and hospitality industries have been almost completely shut down, tourism-dependent cities such as Orlando and Las Vegas will be disproportionately affected, along with West Texas and other energy-rich regions slapped down by the plunging price of oil.
The consensus of several economic forecasts is the numbers from Q1 will be mildly negative, followed by a steep drop in Q2, and then hopefully a small recovery in Q3. Eisenberg said he expects a “whopping bad” second quarter, however…
“Don?t let the negative numbers in Q2 perturb you, because it will all be over by the end of Q3. It will not be a four-quarter or five-quarter recession. We should get out of this quickly.”
Effects on the Auto Lending Marketplace
Of particular note to credit unions, Eisenberg again sounded an alarm on what he termed ?dangerously long? durations of auto loans. He noted 33% of loans exceed 72 months, up from 10% a decade ago. “That is too long when something bad happens, such as the current crisis,” he said, adding one-third of trade-ins have negative equity.
Thanks to prompt government intervention, Eisenberg expects loan delinquencies to remain relatively in check. Inflation is nearly zero and will remain low for the foreseeable future, he predicted. Central banks all over the globe have slashed interest rates to nearly zero, so credit unions can cut rates on loans.
New vehicle sales had been 17 million per year over the past few years, about 1.4 million per month. Eisenberg anticipated just 500,000 new vehicles will be sold in April because so many people will be in their houses with no income. “May should see slight recovery. Altogether, I see a projected 13 million in new sales for 2020.”
Sales of single-family houses are expected to fall by one-third in 2020 compared to 2019, Eisenberg said. Home prices should only fall slightly, he predicted, because sellers are not that desperate to sell. “We cannot use the last recession as an indicator because that recession was precipitated by the housing crisis. The 1990 recession saw only a small decline in prices.”
Auto lending growth had almost recovered, and consumer confidence had reached a 20-year high?before the Coronavirus hit American shores. People are nervous, Eisenberg said, as evidenced by hotel occupancy rates plummeting, along with movie ticket sales, restaurants and air travel.
“Hospitality, leisure, transportation have taken a huge hit. We need to keep those sectors alive while the economy is in a coma, so we can hopefully have a v-shaped recovery, not a u-shaped recovery,” he said, noting the former refers to the economy getting back on its feet just as quickly as it was knocked down.
Although he is “nervous” about the effects the pandemic will have on the U.S. and global economies, Eisenberg noted that because the fundamentals of the economy were solid prior to this health crisis, and because intervention from the Treasury Department and Congress has been swift, he believes, “we will get out of this quickly.”