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March 26, 2020

A Modern Pandemic

In 2020, the world was hit by the coronavirus, or covid-19, pandemic. One by one, whole nations around the globe began the extraordinary move of transportation stoppages, mass quarantines and mass business shutdowns. In 2020, a tightly knit global economy became unwound.

The economic impact will be severe.

Timing and Severity of Economic Downturn

The point of steepest descent appears to be March and April 2020. Global mass transportation and shipping stoppages that began in February 2020 accelerated in March. Mass quarantines that began in January accelerated in February and March. Whole countries have put themselves in isolation to slow the spread of the coronavirus.

Developed economies are defined by the movement of people and goods. In March 2020, that stopped. With a significant portion of the global population under lock-down (possibly one third), the production and distribution of goods and services will come to a crawl.

How do you quantify a downturn of this size? At this point, estimations are rough and on an order of magnitude. Let's say China lost 20% of it's economic output. Italy lost half. Germany will lose 10%. The global economy? Maybe 20%.

The United States? The U.S. is looking at event larger than the 2008-2009 recession and possiby on the order of the 1930-33 depression. The 1930's depression saw a loss of about 15-20%. It's possible the U.S. will see a 15% economic downturn.

Shutdown and Re-start

At the end of March 2020, the world is still in the process of shutting down. After the shutdown, there will be a period of stasis where economies stay at a lower rate of activity. After the stasis, there will be a period of re-start. The shutdowns will probably start to taper off around April 1st.

How long will the statis period be? Possibly one or two months.

How long will the re-start period be? I personally believe the rate at which the world's economies restart will be slower than people imagine. You cannot restart an economy the size of China or the United States overnight. I believe the re-start period will be many, many months or possibly 1-2 years.

Initial Indications of Severity

The collapse in crude oil prices is the first indicator of the severity. Crude oil prices are down about 60% since December 2019.

The second indicator is from March 28, 2020. Initial claims for unemployment insurance in the U.S. came in at 5.8 million people. The worst week for the 2008-2009 recession was 0.96 million initial claims. Current unemployment claims are 6x those of the worst week in 2009. State employment offices are overwhelmed with requests for unemployment help.

As of March 28, 2020, there has been a 91.5% reduction in the number of people passing through TSA (U.S.) checkpoints.

On March 27, 2020, U.S. finished motor gasoline supplied dropped to 6.66 million barrels per day. This number is typically 9.7 million barrels per day. On April 3rd, This number dropped to 5.1 million barrels per day, or a 47% drop so far, and the lowest level since 1972.

What Next?

At this point we have to take an almost fatalistic approach of just wait and see how bad it gets even with government stimulus interventions. I believe we will start to see light at the end of the tunnel over the summer of 2020. In the meantime, keep you and your families safe and well.

By Kyle Atkinson, President, Financial Forecast Center LLC.

Updated: April 8, 2020