WASHINGTON - The fallout from the deadly coronavirus continues to weigh on the U.S. economy, which contracted at a 4.8% pace from January through March, the deepest decline since the financial crisis, prompting the Federal Reserve to continue sweeping emergency measures for the foreseeable future.
The Federal Reserve said Wednesday that the U.S. economy is in "sharp decline" and that the central bank is committed to using its "full range of tools to support the U.S. economy in this challenging time."
"We will continue to use these powers forcefully proactively and aggressively until we are confident that we are solidly on the road to recovery," Fed Chair Jerome Powell said in a video news conference. "These are lending powers and not spending powers."
The U.S. economy is in the midst of its worst crisis since the Great Depression. The new economic data shows consumer and business spending nose-diving in the first quarter, further confirmation that the economy was tanking in March, as much of the nation went into lockdown to stem the spread of the global pandemic.
The Fed said it will keep interest rates at zero "until it is confident that the economy has weathered recent events" to make it easy for companies and households to borrow money. The central bank will also continue its bond-buying spree that has made it easier for large companies and cash-strapped states to get critical loans. Significantly, on Wednesday, Powell warned that the Fed believes the U.S. economy faces a couple of different kinds of risks over the next year or longer. He talked about a slow recovery starting in coming months, as some parts of the economy reopen. But he also warned that chances are consumer spending won't go back to pre-pandemic levels anytime soon.
"Until [consumers] are confident the virus is well and truly under control, they will be somewhat reluctant to undertake certain kinds of activity," Powell said.
So far, the Fed has pumped $2.3 trillion into the economy in the past six weeks, and analysts expect the Fed to bump that up to at least $5 trillion in aid by the end of the year. The amount is unprecedented and dwarfs the relief that Congress and the White House have provided so far.
The Fed statement came hours after a Commerce Department report signaling that consumer spending tumbled 7.6%, and business investment shrank 8.6%. The report on gross domestic product is the first comprehensive look at how painful the economic fallout from the pandemic has been. Although Americans flooded grocery stores to buy food and supplies, it was not nearly enough to offset lost spending on dining out, car sales, entertainment and more.
The worst is yet to come, many analysts say. The second quarter is likely to show a decline of more than 30% - a level not seen since the Great Depression - as much of the economy entered a deep lockdown to encourage people to stay home to stop the spread of the virus.
"There's really no question about it. We are in a recession, and it's going to be a sharp recession," said economist Alicia Modestino, associate director of the Dukakis Center for Urban and Regional Policy.
More than 26 million Americans have already lost their jobs and had to seek unemployment aid. And many businesses are on the verge of going bankrupt since they do not have enough money to sustain weeks without any customers or revenue.
This is a "Depression-like shock," said Joseph Brusuelas, chief economist at audit firm RSM. "Policymakers should be prepared to support other rounds of aid and stimulus for an economy that is going to be reeling for some time."
Even the White House agrees this is the worst decline for the U.S. economy in decades. The question is how long the pain will linger for the millions of Americans who have lost their jobs and for small-business owners on the verge bankruptcy.
"We are faced with the biggest shock that has hit this economy since the Great Depression, and you have to be frank with the American people about that," Kevin Hassett, a senior economic adviser to President Trump, told reporters this week.
An official recession occurs when the economy experiences two consecutive quarters of negative growth. A depression is a sustained period of contraction and job loss that lasts for several years. Trump and many on Wall Street hope the government's historic levels of aid can avert a depression.
The economic fate of the nation largely hinges on how quickly the United States can find a vaccine and do widespread testing for covid-19, economists and health experts say. In the meantime, the federal government has approved more than $2 trillion in aid to try to help jobless people and shuttered businesses survive.
More spending will be needed, economists across the political spectrum say.
"This is the worst catastrophe in generations," said Kenneth Rogoff, a Harvard University professor and former chief economist at the International Monetary Fund. "It could take us 10 years to get back to where we started. That's not out of the question at this point."
It took three years to climb out of the Great Recession and more than a decade to recover from the Great Depression of the 1930s. Economists say the government was too slow to act and too stingy with aid in the past, mistakes that should not be repeated now.
Economists across the political spectrum are urging the federal government to give more money to states, cities and counties to avoid deep layoffs and keep critical services going. They also foresee a need for more testing and more help for people out of work.
"We know Main Street recovers less quickly than Wall Street," Modestino said. "It will take years to get back to where we were before with such low unemployment."
Fed Chair Powell has repeatedly said he will use the "full range of tools" he has to help revive the economy and ensure the health crisis does not turn into a financial crisis. The Fed's swift interventions are widely credited with causing a stock market rally in April and returning many parts of the bond market to normal after they froze up in March.
"Powell's mantra is do whatever it takes for as long as it takes," said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. "There was a late reaction from Congress and the administration to the unfolding crisis. Powell sized up very quickly that the Fed needed to provide support."
The Fed is expected to keep interest rates at zero for years to come, making it cheap to borrow money to buy a home or car or to start a company.
"We have also committed to keeping rates at this low level until we are confident that the economy has weathered the storm and is on track to achieve our maximum-employment and price-stability goals," Powell said in early April.
While the U.S. economy started off the year on solid footing, the situation deteriorated rapidly in March after Trump declared a national emergency and said no more than 10 people could gather at once. The decision aimed at protecting the nation's health prompted millions of restaurants, gyms, stores, coffee shops and other businesses to shutter.
Annie Clark has owned Get Noticed Boutique in Richardson, Texas, for 15 years and has never seen anything like this. Most of her sales are done in the store. Shutting that down was a huge blow to sales.
"I've been through a lot of ups and downs, but this is definitely uncharted territory," said Clark. "What do you do? You sit on inventory and sit on big bills.... I can only just pray and hope the community I live in is going to support me when we reopen."
Clark has had to borrow money on credit cards and from family to stay afloat, since getting a loan from a bank or the Small Business Administration has been difficult. But like many small-business owners, she can only survive for so long.
"I hope I don't have to close," she said. "I've gotten little sleep with the unknown."
One of the biggest concerns for business owners is whether customers will come back quickly once governors and mayors say it is all right to reopen, or whether shoppers will be fearful to venture out. Early evidence from China and states such as Georgia that are trying to reopen is that caution abounds and spending remains way down.
"If consumers and workers remain housebound into the third quarter, or if the pandemic fades and then reemerges, the recession could last throughout 2020," said Gus Faucher, chief economist of the PNC Financial Services Group. "The longer consumers are stuck at home and workers can't get to their jobs, the greater the structural damage to the U.S. economy."
For its role in propping up the economy, the Fed has mainly purchased U.S. government bonds and mortgage-backed securities, much as it did during the 2008-09 financial crisis. But given that the pandemic has caused most of the economy to shut down for an extended period of time, there's been a massive rush to borrow money as businesses and households struggle.
Given what's happening, the Fed has pledged to buy corporate debt, state and local debt and make loans to midsized companies.
Many on Wall Street and in the business community are eager to know when the Fed will begin its "Main Street Lending Program" that's supposed to give loans to companies with about 500 to 10,000 employees. The Fed announced the program but has not begun lending yet.
Large businesses are also waiting for the Fed to start directly buying corporate bonds. The central bank is doing this for the first time and is expected to buy up to $500 billion worth of corporate debt, a much needed lifeline for companies that have lost significant revenue this spring. Retail and oil companies are especially in need of aid, but it's unclear if these "fallen angels" will be high on the Fed's wish list to buy.
Nobel-prize-winning economist Paul Romer is urging the U.S. government to spend $100 billion to test nearly everyone in the nation to put people at ease that the virus is under control and that it is truly safe to reemerge. But so far, only about 2% of the nation has been tested.
“It’s totally in our control to fix this,” Romer said in a phone interview. “We should be spending $100 billion on the testing. We should just get it going. It’s just not that hard.”