Recession Model Update (April 2020)
Friends - recognizing that most of you probably have followed the ongoing pandemic and its economic impact, I will try to keep this update brief.
Unsurprisingly, model recession probabilities have jumped upwards.
Notably, the 6-month probability (45.9%) has risen to levels that have historically always resulted in a recession shortly thereafter (data going back to 1976).
The general consensus now expects a deep recession, with forecasters arguing over the duration of the expected recession.
Not yet a financial crisis? Compared to 2007-2008, large banks are better capitalized, the Fed is reacting quicker - backstopping a variety of credit markets - and Congress also seems to be moving more swiftly with fiscal stimulus.
Fiscal / monetary support is likely to meet the "law of diminishing returns" eventually, so the biggest variable seems to be the speed and style of a gradual "re-opening" of public life in America and the world.
This article ("Coronavirus: The Hammer and the Dance") argues that widespread testing and contact tracing, along with expanding hospital capacity and stockpiling equipment, will enable a return to normalcy after the initial lockdown period ("the hammer"). All before a vaccine. Long article, but the argument is well-presented.
Current Predictions (as of April 7, 2020)
Economic Shutdown Causes Harm Too
Statisticians can argue over details, but innately it's easy to theorize how unemployment is associated (to a degree) with higher suicide rates, drug abuse, etc. "The Human Toll of an Economic Pandemic" presents this argument by citing numerous studies. He also discusses how popular opinion may turn against prolonging the current lockdown into the summer.
The current optimistic case seems to be that (i) widespread testing, (ii) stockpiling medical supplies, and (iii) increasing hospital capacity will enable a gradual return to normal life in the U.S. starting as early as May, regardless of whether a vaccine is available or not.
Until Next Time
Terrence | terrencez.com
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