Despite coronavirus, U.S. economy ready to bounce back

Only a month ago, I seriously considered raising my economic and market forecasts for this year, including my forecasts for the plastics industry.

After a rather sluggish performance in 2019, the U.S. economy was showing signs of renewed vigor. The members of the Federal Reserve persistently stated they were "on hold" with changes to the Fed Funds Rate for the foreseeable future. The major source of uncertainty in the market was generated by the outcomes of the primaries for the Democrats.

The data released so far this year indicated the U.S. economy, including the important manufacturing and housing sectors, performed nicely through February. Most importantly, the crucial U.S. employment statistics got off to a stronger-than-expected start for 2020.

All of this was reflected in most of the major stock market indicators, which were steadily hitting all-time highs with strong upward momentum.

The next few days will see the release of some of my favorite economic indicators, for the month of February. These include retail sales, industrial production, housing starts and construction spending. I am concerned the natural reaction to this data will be one of apathy or even poignance. Something like, "That was then, but now things appear much worse and I should plan accordingly."

There already is strong evidence of this response in the data from the U.S. bond market. Every day the U.S. Treasury Department publishes the yields on the securities it issues based on the daily market price for those securities. When plotted on a chart, the yields for the various maturities of these securities creates what is called "the yield curve."

On the chart, I have plotted three yield curves: one from last week, one from last month, and one from last year. These are instructive because the yield curve is a good indicator of the market's appetite for risk at any given time. U.S. treasuries are considered to be the safest of investments, and demand for them increases when the prevailing economic conditions start to deteriorate. When demand for treasuries increase, the yield curve goes down.

As the chart indicates, the latest yield curve is quite low. In fact, it is the lowest it has ever been in the history of the data. When you factor in the rate of inflation, you come up with a real interest rate on these securities that is actually negative. There was even one day this month when the yield for all maturities, including the 30-year bond, was below 1 percent. Not only has that never happened before, I would have predicted that it would never happen. Even in the depths of the Great Recession, 11 years ago, the yield on the 30-year bond only dipped as low as 2.5 percent.

There is a multitude of reasons why the curve has fallen so far, and some of them have little to do with the prospects for the U.S. economy. In other words, things are not as bad as this low curve might suggest. Things are certainly not as bad as they were during the last recession. Nevertheless, I do not expect the yield curve to rise dramatically anytime soon. But I do not think it is wise to dismiss the pre-virus data completely. The U.S. economy was not wobbly or infirm when it was hit with the shock of the coronavirus. It was strong.

The multitude of ways this will affect both the supply and demand of goods and services in America is still being revealed, but it is increasingly clear to me that the biggest economic impact will not be the direct medical costs of dealing with the patients who contract the virus. These costs will be significant, and I do not, in any way, want to understate the pain and suffering this disease may cause to the many victims and their families. But I am choosing to confine my comments to the economic costs of this current situation, not out of any disrespect, but because that is the least bit I am qualified to do.

Therefore, I believe the most likely outcome is that the economy will return to full vigor in the second half of this year. As of this moment, my forecast does not have a recession in 2020. My base case outlook calls for slow growth in the second quarter of this year—perhaps even negative growth—followed by increasingly positive growth in quarters three and four.

The key to this forecast will be the performance of the employment data and the credit markets. The labor market was tight before the shock, and because of this, employers will not likely be quick to respond with a large wave of layoffs. The low interest rates should ensure that credit conditions do not become constrictive. And Congress may even provide some useful funding to those families and businesses who are disrupted. In short, I currently believe our economy will weather this disruption pretty well.

I am not a medical expert, and make no mistake, advances in medical knowledge are precisely what we need at this moment to get our economy back on track. But I have great confidence this is the country where the best diagnostic procedures, vaccines and remedies will be developed. Ignore the noise created by all of the political rhetoric for just a moment and remember that nobody responds to a crisis better than Americans.

Readers of this magazine should also take heart in the role that plastics will play in the ultimate defeat of this disease. I will devote a column in the not-too-distant future regarding how the trend in the data for medical supplies and equipment is being affected by all of this, but for now I take great comfort in seeing all of the many ways in which plastic products are being put in service.