While the COVID-19 outbreak has led to some heavy handed approaches to public health, many Americans may also feel the effects of the economy’s invisible hand. The Dow Jones Industrial Average fell by more than 5,000 points since the outbreak took off, and the S&P 500 fell by 8% on Monday alone. These were the biggest drops since the 2008 recession.
Meanwhile, a major drop in oil prices came after two of the three world’s biggest oil producers, Saudi Arabia and Russia, battled over how to stimulate their economies amid the international coronavirus lockdowns.
On Monday, President Trump announced measures to bolster the economy, including a proposal to issue loans to small businesses affected by the COVID-19 scare. During the White House press conference, Trump also proposed payroll tax cuts, which did not go over well with House Democrats who would need to pass the measure.
Perhaps the biggest measure taken to shore up the economy came from the Federal Reserve last week. During a rare unscheduled meeting, the Fed dropped the standard borrowing rate by about 0.5% to about 1.09%.
President Trump has been focusing on low interest rates for years. He first criticized low rates under the Obama administration, but since taking office has demanded they return to rates at or near zero.
The problem with record-low interest rates, says Marquette University Economist Stephen Cole, is that lowering interest rates is some of the only “conventional ammo” that government and banks have to avoid recession.
“We’ve been in a record-long expansion in the U.S. over 10 years,” says Cole. “Before the coronavirus outbreak, [there was] good GDP growth, relatively close inflation to our targets.” But that isn't to say that a recession still isn’t in the cards.
Even before the coronavirus hit consumer confidence, there have been warnings that the economic growth since 2008 can’t be sustained despite record employment. But not-so-fast wage growth combined with a revamped tax code points to a widening deficit, which could make managing a recession even more difficult.
“If a recession hits, there might not be as much of an appetite to pass more stimulus plans," says Cole.
Low oil prices may provide an unintended stimulus on the American economy as well, Cole adds, but it’s difficult to predict how sustained that relief can be given the outsized role foreign governments have on quickly changing oil prices.
The stock market responded to low oil prices and Trumps' proposals in the short term, at least. By Tuesday, the Dow reported an 1,100-point rebound.
