A U.S. recession is almost a sure thing to start next month as a result of the coronavirus epidemic, according to Jeff Schulze, investment strategist with ClearBridge Investments, a Legg Mason affiliate.
How bad it might be will depend in large part on how quickly government money can be delivered to small businesses that are being forced to close because of the coronavirus outbreak, Schulze said during a webinar today.
The money to small businesses would be used to retain staff during a shutdown. That would mean employees would not have to look for new jobs when the economy picks up and a return to normal could happen more quickly, he added.
“Congress is looking at providing $300 billion for small businesses,” Schulze said. “But during the recessions of 2001 and 2008, it took three and a half months to get the first checks out the door. Small businesses cannot wait that long. They can only last a couple of weeks if they are shut down.”
“A potential recession also depends on how long the United States can stop large parts of its economy. China is under quarantine for two months. That same action would have a significant effect on GDP if it were done in the United States,” he said. Schulze’s analysis came on the same day New York Gov. Mario Cuomo ordered all nonessential businesses in New York closed. Other states are following suit.
ClearBridge uses technology to show what is happening to the economy and the markets. The technology has a color code that assigns red to a recession. Schulze said he anticipates it will shift from yellow, where it now is, to red in April. Recessions are usually defined as a decline in GDP for two quarters, but it can be defined as a recession after only one quarter in extreme circumstances. Increasing unemployment and bankruptcies and interruptions in supply chains are factors that can contribute to a recession.
Schulze argued that a stimulus package of $1 trillion to $1.3 trillion now being debated by Congress is not enough money. He and other economic experts predict the stimulus package will have to go to at least $1.5 trillion and maybe as much as $2 trillion to stave off or mitigate a recession,
Another part of the stimulus package would give money to individuals, which, if people are still staying home, may not be as big of a boost to the economy as some might hope, he said.
“In order to know where the market might bottom out, we need to see what kind of stimulus package is passed,” he added.
In the meantime, asset managers are going to see outflows of funds from them that might not come back for a couple of years, he said.