The U.S. economy has entered recession as the COVID-19 outbreak and public health efforts to combat it have led to a sharp contraction in economic activity, according to PNC economists.
The PNC financial services group led by chief economist Gus Faucher released a market expectation survey on Monday.
Restrictions on movement throughout the country have led consumers to pull back on their spending, with restaurants, hotels, movie theaters, entertainment venues, sports leagues, and many retail establishments closed. The airlines are rapidly cutting capacity, and U.S. auto manufacturers have stopped production. Initial claims for unemployment insurance jumped by 80,000 in the week ending March 14, to 281,000, the highest level since September 2017, in the aftermath of Hurricanes Harvey and Irma. And according to preliminary numbers from various states, claims are set to surge much higher for the week ending March 21, to be released on Thursday, March 26.
The Federal Reserve has taken multiple emergency steps to make sure that credit continues to flow as COVID-19 pushes the economy into a deep recession. The Fed is “pulling out all the stops” to prevent a health crisis from becoming a financial illiquidity crisis. In addition to cutting its funds rate target to near zero, the central bank took steps last week to support the Treasury and mortgage back securities markets with purchases of securities of all maturities; to support the commercial paper market, which is a key source of short-term funding for big companies; to support the money market industry, which is vital in keeping short-term credit flowing; to support the municipal bond market, which provides funding for state and local governments and other governmental entities; and to encourage the banking industry to lend to large and small businesses to cover near term funding for continued operations.
n March 23, the Fed announced additional steps, including increasing its purchases of U.S. Treasury and MBS securities in “amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions”. The Fed will purchase $625 billion this week alone, more than the entire QE2 program. The Fed also will directly purchase investment grade corporate bonds and the Fed reestablished the Term Asset-Backed Securities Loan Facility, or TALF, a financial crisis-era facility that allows issuers of highly-rated asset-backed securities to borrow against them from the Fed.
Congress and the Trump administration continue to work on a fiscal stimulus package to support the U.S. economy as it deals with COVID-19. This would eventually limit the depth and duration of the current recession and set the stage for a “U-shaped” economic and jobs recovery in the latter half of 2020. Any package is expected to total close to $2 trillion and is likely to include an expansion of unemployment insurance benefits; direct payments to households; aid to state and local governments; and aid to businesses hurt by the outbreak, including aid to small businesses and affected industries.