Courtesy of the Foreign Policy Research Institute
By Chris Carey
For months, the United States’ economy steadily chugged along. Typical economic indicators such as GDP, which measures how much is produced; inflation, which measures the value of money; and interest rates, which determine loans and investment, have been seemingly so good that continued growth has been a near expectation. For the doubters, however, there are currently very real threats facing the US economy that may cause a serious recession in the coming months.
These threats all fall under one banner that is on the tip of everyone’s tongue – coronavirus. With the world essentially at a standstill and with no real end in sight, businesses are closed, consumers are buying less, investment is low, and unemployment rates are bound to increase.
The Trump administration has made claims that the economy will make a swift rebound following this health crisis; however, substantial evidence says otherwise.
Businesses are closed and consumers are buying less; therefore, production in the United States will be exceptionally low. This means that Gross Domestic Product, or GDP, will be minimal in the 2nd, 3rd, and likely 4th quarters of the government’s fiscal year, which begins in October
Furthermore, the Fed, the governing central bank of the United States, has made decisions in light of the coronavirus to put more money into circulation y and to lower interest rates to .25%. By putting more money into circulation, the Fed gives itself the power to lend more out to banking institutions across the country in order to try to limit the financial effects on individuals across the country. This decision is very similar to those made as an attempt to help ease the US out of the 2008 financial market crash.
Although the stock market has been on its most steady downward trend in a significant amount of time, the market saw an upward jump on Thursday where the S&P 500, DOW, and NASDAQ all saw jumps around 6%. These jumps are due to the $2 trillion COVID-19 aid bill that went through Congress and is expected to help stimulate a multitude of struggling businesses in the coming weeks.
If simply these three outcomes occur, the market will have stumbled momentarily and will simply rebound in a few months. Unfortunately, Americsns have to consider two other very important factors, the first of these being unemployment.
Preliminary unemployment numbers show considerable increases due to the closing of many businesses and significantly less demand for products, especially the service industry, in light of COVID-19. If the economy rebounds following this crisis and all these individuals can regain employment, there will be no issue. However, the general consensus remains that this situation is highly unlikely. Following the coronavirus pandemic, unemployment is expected to remain high.
This high unemployment rate, in many ways, will be intertwined with the second significant problem— small businesses. Small businesses and small business owners typically rely on week-to-week income to continue paying for the costs of running the business. Now with many shopfronts closed and reduced clientele, it is questionable as to whether or not many small businesses will be able to reopen after the crisis.
This reduction in the number of firms in the market, as well as the number of jobs, may lead to the largest effect on the economy to come. Furthermore, when people are not at work, people buy fewer things. This trend could lead to a long term recession where there is simply less demand. If demand is down, so is production, and more people lose their jobs.
Unfortunately, economics is called “the dismal science” for a reason. As the adage goes, if you were wrong as often as an economist, you would be depressed too. Economists across the nation and the world hope they are wrong about this one, but only the future can tell.