CHAMPAIGN, Ill. — University of Illinois (UI) Professor of Finance and Economics Larry DeBrock said in a webinar Wednesday afternoon that technically “we are not in a recession.”
However, he added that it doesn’t mean the economy is out of trouble.
The professor, who also serves as the Dean Emeritus for the UI Gies College of Business and received his Ph.D. from Cornell University, said it’s “unprecedented what’s happening to the economy now.” DeBrock examined three possible theories that might explain why the economy has contracted in recent months: whether equity markets are naturally underperforming, the oil price wars had an effect on the Gross Domestic Production (GDP) or if only COVID-19 is making an economic impact.
He began his webinar comparing Standard and Poor (S&P) stock market index graphs of all of 2019 and the starting months of 2020. According to DeBrock, a 28 percent growth was reported in 2019, and it “epitomizes a really strong 2019 for the economy.” Yet, while viewing the same S&P graph ranging from Feb. 19 through this Tuesday, he noted the United States lost all gains it had received from the previous year in that timeframe.
DeBrock also noted that through almost the end of January, economists observed the longest economic expansion in US history, which lasted 126 months. “That’s good,” he said, “but was there some indication this is going to be the time for a recession?”
According to DeBrock, recessions happen on average every 5.1.-5.2 years, so he said that the gap was “pretty impressive.” He then referred to how a normal yield curve that slopes upward, indicates an economy is expanding because of increasing yields on longer-term bonds. “Every now and then you get phenomena where the yield curve goes down or becomes inverted,” DeBrock said. “Back in August, we had one.”
“The last seven recessions in America were preceded by inverted yield curves. “
DeBrock said the recent oil price wars were a “spectacular event” as they can have an effect on the health of any country’s economy. He noted that since Jan. 6, the price of oil had dropped almost $40, to about $24 now. DeBroeck said people might ask if that would lower gas prices and help consumers. However, he also said some economists are wondering if it will instead slow the US economy.
DeBrock said a drop in oil prices was good when our country was mostly importing that resource. “We’re a net exporter now,” he said. “With the drop in that oil price, there are estimates out there that this could be a three-tenths of one percent reduction in GDP.”
Regardless of whether a recession has been formally declared, DeBrock said that the economy is still in trouble. His research showed that there was a “staggering” rise in jobless claims this week: 15 states reported to the federal government that these claims rose from 281,000 to almost 630,000 in the last month.
“Typically when you have a recession, new jobless claims don’t happen until the recession has already gotten some legs,” he said, noting jobless claims actually began rising at the end of 2007, prior to the 2008 financial crash.
He then discussed the two types of policies governments typically use to respond to recessions: monetary policy and fiscal policy. DeBrock said recently this past week, the Federal Reserve dropped interest rates even further, “almost down to zero.”
“That’s the type of monetary policy that should help people and corporations get their hands on cash,” he said. “The fed also put a lot of money towards businesses and corporations that are in a credit crunch. That helps them make payroll.”
On the topic of fiscal policy, he brought up how the Troubled Asset Relief Program that became law in 2008 gave out hundreds of billions of dollars in block grants to help to build infrastructure, like schools or bridges. Illinois received $50 million, according to the professor. As for President Donald Trump’s stimulus package that passed the US Senate Wednesday, DeBrock said, “Already there are economists saying this is not enough. We should go big, go early, do what we can do to try to get this economy to grow. “
According to DeBrock, the current downturn is different than the Great Recession. “What’s happened here because of COVID-19 is that we have governments that are shutting down our own economy.”
He said governments are responding to COVID-19 with either one of two options: suppression or mitigation. DeBrock said the point of suppression is that “we have to beat the virus before we can get out of this recession.” States like Illinois are currently undergoing suppression tactics, with all non-essential businesses being mandated to shut down or work from home by the state. He said New York has had their medical community observe COVID-19 cases doubling in just three days and that “they will not have enough beds very soon.” Those untreated may instead just go back home and try to successfully wait it out, and risk infecting more people.
DeBrock said the suppression tactic will also be extremely painful to “those millions who have lost their jobs and to small businesses, restaurants, and bars.”
“Stimulus packages are helpful but government production and infrastructure projects directed at public health and hospital capacity are needed immediately.”
As for the policy of mitigation, this would focus more on responding to those most threatened by COVID-19, such as people over 70 or those with pre-existing health conditions. DeBrock said some countries initially tried mitigation but switched to suppression. Others are still undergoing mitigation.
“They’re two different approaches. and economics can tell you the impacts of those two. We can’t tell you what’s right.”