University of Oregon Economic Indicators – Crisis Update 3/27/20

Crisis Update – March 27, 2020

The economy is currently experiencing the impact of a sudden stop of economic activity. While we will continue issuing our usual monthly reports as data allows (some local level data will be delayed as a result of the widespread shutdowns), we will also be issuing data updates during this crisis period. Although many traditional leading indicators will provide a preview of the direction of the economy, they are still released with a lag. Consequently, until recently incoming data largely reports pre-virus trends. Only this week have we begun to see data that has caught up to the reality on the ground.

Full report with charts here!

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Are We In a Recession?

From the Portland Business Journal:

University of Oregon economics professor Tim Duy is a frequent commenter on economic policy. As the coronavirus outbreak fuels more ecomic damage and stock market gyrations, he spoke with the Business Journal by phone about whether or not we’re in a recession and what government stimulus could be on the way.

Questions and answers have been edited for brevity and clarity.

What is a recession? The popular press conception of a recession is two quarters of negative gross domestic product growth. A more general definition is a broad-based downturn in economic activity that is of substantial breadth in depth and duration. The idea is that there’s a significant disruption to economic activity that impacts a wide swath of the economy for a sustained period of time….

Continued at Portland Business Journal…

Update On Federal Reserve Actions

Crossposted with Tim Duy’s Fed Watch

In an effort to keep financial markets from spiraling out of control, the Federal Reserve came out with the big guns Sunday afternoon.This will not prevent the economic downturn that is already upon us. It will, however, create more accommodative financial conditions that will help support the eventual recovery. In the near term, however, the Fed’s action will – hopefully – support smooth functioning in financial markets and ensure that the problems on Wall Street do not feed back onto Main Street. The Federal Reserve has now passed the ball to fiscal policy makers, at least for the time being. This doesn’t mean the Fed is done; Powell & Co. have more ammunition if needed later.

Quick summary of the Fed’s actions today:

  1. Cut policy rates to 0%-0.25%. Back to the zero bound all at once. It was the Fed’s only choice.
  2. Forward guidance. The Fed committed to holding rates near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
  3. Quantitative easing. Federal Reserve Chair Powell didn’t call it quantitative easing, saying instead the label doesn’t matter as long as it gets the job done. Fed will be buying $500 billion of Treasuries (presumably across the curve as the New York Fed signaled last week) and $200 billion of mortgage backed securities.
  4. Discount rate cut to 0.25%. This is kind of a big deal, basically drops the discount rate to the overnight rate to take the stigma out of using the discount window (they really want this stigma gone). Plus, banks can borrow from the window for up to 90 days.
  5. Intraday Credit. Fed wants banks to use its intraday credit programs.
  6. Loan guidance. Fed signals that banks should use their liquidity and capital buffers to lend to household and firms. The Fed is telling banks this is the time to use those buffers.
  7. Reserve requirements. Fed eliminates reserve requirements, which were pretty much irrelevant in a system of ample reserves.

Powell made very clear in the press conference that the Fed’s objective is to support the smooth functioning of financial markets. In particular, the Fed is reacting to the liquidity problems that crept up in the Treasury and MBS markets last week. Powell explained that the Treasury market is the foundation of the global economic financial system and keeping it functioning was the Fed’s primary objective. The MBS market is critical to keep credit flowing to households.

Powell said he expected the second quarter to be very weak but had little confidence in forecasts beyond that. It depends on how the virus evolves. He rightly noted that the rate cuts would not have an immediate impact on the economy, but will support the rebound in activity on the other side. He highlighted the role of fiscal policy in moving targeted aid to individuals and firms directly impacted by social distancing measures. To my ears, he wasn’t yet convinced of the need for a bigger fiscal stimulus, though I think this was because he wasn’t yet confident the downturn would last more than a quarter.

With regards to his own health, he has not been tested for the virus, he feels healthy, and he is doing some teleworking.

The will not be meeting again this week as originally planned. There will not be a Summary of Economic Projections. Powell said the forecasts would be pretty useless right now. And thankfully we then aren’t faced with the prospect of any “hawkish” dots in the 2021 rate forecasts.

Inexplicably, Cleveland Federal Reserve President Loretta Mester dissented against the rate cut, preferring instead just a 50 basis point cut. I await her explanation; I hope it isn’t about “saving ammunition,” which would be pointless argument now. I don’t see much percentage in trying to emulate a Richard Fisher or Thomas Hoenig in this crisis.

The Fed shot a lot of bullets today, but they are not yet out of ammunition. Most of today’s policy moves were designed to support market functioning, not the economy directly. They can do more on both fronts. For example, regarding market functioning, they can expand the size of asset purchases or, if needed, develop 13(3) emergency lending programs. Note that the asset purchases were of a fixed amount. The Fed could switch back to an opened commitment and link it via forward guidance to explicit economic objectives. They can follow up with yield curve control. Then there is the possibility of regime change toward average inflation targeting, etc. That said, in the near term we really need fiscal stimulus. The Fed has paved the way, but they can’t make Congress and President follow their lead.

Financial markets did not exactly cheer the Fed’s move; equity futures limited down, setting the stage for another difficult day on Wall Street.This should not be unexpected. I don’t see the possibility of any near-term stabilization in financial markets until we get more clarity on the challenges we face. This week reality will be settling in as much of the economy is going to be shut down. Testing will expand and the confirmed cases will grow. So too will the number of deaths. I don’t see where the Fed can do much more than keep financial markets functioning in this environment. This is important to sustaining the free flow of credit; crippled credit markets would only make the downside worse. But until we get enough testing, mitigation, and containment to bend the curve, market action will retain that distinctly bearish mood.

Bottom Line: The Fed realized this was a “go big or go home” moment, and it rightly decided to “go big.” The Fed basically signaled as clear as it could that it was ready to backstop the financial markets. I am thinking Powell is not going to let another Lehman Brothers happen on his watch. The Fed can’t, however, keep the economy from diving into a hole in the second quarter. Market sentiment now is probably going be driven by the prospects for fiscal stimulus.

January 2020 Oregon Statewide Economic Outlook

This is the University of Oregon State of Oregon Economic Indicators for January 2020. The release date March 13, 2020. Special thanks to our sponsor, KeyBank

Link to full report (with charts!) here.

The Oregon Measure of Economic Activity rose in December to 0.69 compared to a The Oregon Measure of Economic Activity slipped below zero on the back of still volatile but generally softer employment growth compared to earlier in the expansion. The moving average measure of growth, which smooths out the volatility, remains in positive territory and indicates above average growth in Oregon. The University of Oregon Index of Economic Indicators rebounded in January after a decline in December.

The combination of measures in this report suggests ongoing economic expansion albeit at a slower pace of growth compared relative to earlier in the economic cycle. The growing threat of the novel coronavirus, however, has greatly clouded the economic outlook. Incoming data, both nationally and local, reflect pre-virus economic activity and hence are not well-suited for judging the path of the economy going forward.

Financial markets, which are often an early indicator of changing economic conditions, are showing clear signs of economic stress through falling equity prices and interest rates.

The coronavirus outbreak exemplifies a pure economic shock with the potential to so quickly disrupt economic behavior that typical forward-looking indicators lag too much to be useful in assessing the risk of recession.

There is likely to be a substantial near-term disruption to the economy; the initial impact will be particularly heavy on tourism and travel industries. Growth will be slow over the next two quarters in particular with high odds of a recession.

Firms should prepare for that possibility by taking sensible planning actions such as reviewing supply chains, identifying options for new opportunities if some lines of business slow, and securing access to credit.

Media Contacts:
Tim Duy – 541.346.4660 (w)