8 Signs That Coronavirus Will Cause a Recession in 2020

The economy was strong, unemployment was extremely low, and then… boom! Worldwide pandemic! The COVID-19 pandemic has turned nearly everything upside down, and most economists agree that we are in the midst of a devastating recession caused by the coronavirus.

Although all signs currently point to a recession, we won’t know for sure — or how bad it might be — for a few months because of the way a recession is defined. Some economists say that a recession is when your country’s GDP shrinks for two quarters in a row, while others, like the National Bureau of Economic Research (NBER), say a recession is a “significant decline in economic activity spread across the economy, lasting more than a few months.”

No matter how it’s defined, we will have to wait for at least a few more weeks to know for sure that we are in a recession and what the true economic impact of the coronavirus is. In the meantime, here are some signs to watch out for that might indicate what’s coming.

1. Consumer confidence

Consumer confidence is a major indication of how much the economy will suffer in the wake of the pandemic, and data shows that the consumer-sentiment index has taken a massive plunge recently. In April, the University of Michigan’s consumer-sentiment index dropped by 19.4% month-over-month, its largest-ever monthly drop.

Jeremy Cupp, a top-selling real estate agent in Fayetteville, Arkansas, with seven years of experience, says that some of his buyers have held off looking for a home because “they’re worried about the virus.” Some of his sellers, too, have become more cautious because “they don’t want people walking through their house right now.” According to the National Association of Realtors, housing market activity in March 2020 fell 8.5% from February 2020.

Still, Cupp’s market in Fayetteville, Arkansas, is home to some major employers, such as Wal-Mart, that are growing to keep up with demand caused by the pandemic. As a result, “I have a lot of buyers still looking,” he says.

Whether or not consumer confidence bounces back later this year will be a big indicator as to whether this is a bump-in-the-road recession or something longer-term.

2. Unemployment

The economic fallout from the coronavirus has been swift and deep, and nothing illustrates that more than the unprecedented unemployment numbers that are trickling in week after week. As of April 23, 2020, more than 26 million people filed for unemployment in the five weeks since the pandemic began.

Economists estimate that the unemployment rate is 20%  — and likely to rise. To put that in perspective, during the Great Depression, unemployment reached nearly 25%.

“At this point it would take a miracle to keep this recession from turning into the Great Depression II,” Chris Rupkey, chief economist at MUFG in New York, told Reuters. “The economy is digging itself such a big, deep hole that it will become harder and harder to climb back out of it.”

While things look bleak, we won’t know the true long-term impact on unemployment until businesses begin opening back up again. Chances are good that when that happens, unemployment numbers will drop, though by how much is unclear.

3. Mortgage rates

Mortgage rates have been at historic lows, but they might not stay there, and if rates go up, it could dampen the housing market somewhat.

That’s not likely to happen, though, economists say. According to Kiplinger, although average 30-year mortgage rates have not fallen as much as would be expected, because lots of people are refinancing right now, they are “likely headed down to around 3.0% eventually because of the low 10-year Treasury rate.”

“Interest rates are still historically low. They’re still fantastic,” says Brad Klimek, a top 1% buyer’s agent in Cleveland, Ohio.

“Rates are still in the 4% range. Fifteen years ago, if you got a 7% interest rate, it was great. So, the interest rates are very competitive, and I think that will drive the economy.”

Cupp seconds Klimek’s rosy outlook on interest rates. “The rates are still low and not affecting my buyers,” he says. “Right now, I have a dozen homes under contract.”

4. Mortgage forbearance

In the weeks since the coronavirus swept through the country, shuttering the economy and putting people out of work, millions of homeowners have requested forbearance on their mortgage payments, essentially delaying the payment of their loans.

But Klimek warns homeowners to proceed with caution because, in some cases, banks are requiring homeowners to make balloon payments when their forbearance period is up.

“Let’s say you have a $1,500 mortgage payment,” explains Klimek. “If the bank grants you a three-month forbearance, come the end of those three months, you owe three payments, which is $4,500, plus another $1,500 payment. If you can’t pay your mortgage during this period, how are you going to come up with $6,000 when forbearance ends?”

According to the Federal Trade Commission (FTC), federal lenders and some private lenders are offering consumers temporary help, like stopping or delaying foreclosure or modifying the mortgage, but the measures don’t apply to everyone. The FTC recommends contacting your lender and asking what your options are. If you are offered forbearance, ask your servicer what happens when your forbearance ends.

It’s not clear exactly how many people are forbearing their mortgages right now, but during the week ending April 12, the share of loans in forbearance jumped 60% over the week prior, CNN reports. That’s important because if some people accept mortgage forbearance without knowing they’ll be required to make a balloon payment later, it could lead to an increase in foreclosures, which could push the economy toward a recession when those payments are due.

5. Mortgage purchasing activity

Otherwise known as the secondary mortgage market, mortgage purchasers have put a big pause on their activity, which means that lenders have tightened up standards for originating a loan.

Klimek explains: “When you take a loan out from a lender there are often a group of investors that buy that loan, so the lender isn’t holding the debt.” This allows the lender to turn around and make another mortgage loan.

But in times of economic uncertainty, buying loans can be dangerous for investors. “Let’s say you bought a $200,000 house and you only put down 3.5%; that’s only $7,000 down,” explains Klimek. “Those investors give the lender $193,000 to buy your loan. What happens if we hit a recession and that home is suddenly only worth $150,000? If the house is foreclosed on, the investors lose $43,000.”

As a result, investors are tightening standards and choosing to focus on low-risk loans. “They’re saying, I’m not [purchasing the mortgage] unless the buyers have an awesome credit score and put 20% down,” says Klimek. “If the buyers have a great credit score, they’re less likely to default. If they put 20% down, investors only [buy the loan] for $160,000, so it’s less risky.”

6. Small business confidence

Small businesses have been pummeled during the coronavirus shutdown. While the federal government has issued the CARES Act, which initially contained $376 billion in relief for small businesses and subsequently granted an additional $380 billion, we don’t know if the support for small businesses is going to be sufficient to help them weather the storm.

According to a poll conducted by the U.S. Chamber of Commerce and MetLife in early April, nearly 25%  of small businesses reported being two months or less from closing permanently.

Undoubtedly, some small businesses won’t make it. But watching how small business relief continues to roll out, as well as how some small businesses are able to creatively make it through to “business as usual,” will give us some indication of how wide-reaching the recession will be.

7. The supply chain

The engine of the economy relies on a functioning supply chain to keep it churning. If one piece of the supply chain suddenly slows down or shuts completely, it can cause a chain reaction, impacting everything down the line. This is especially true in a pandemic situation, when replacement supplies are unlikely to be widely available.

Because we live in a global economy, many of the things that keep our essential services running (personal protective equipment used in hospitals is a timely example) are manufactured in other parts of the world. This is true, too, for all kinds of materials used in construction. When companies can’t get the materials they need to do their jobs, it puts a damper on the economy because it slows all progress down.

Fortune reports that the current supply chain disruption is impacting consumer demand, labor, materials and delivery. In a recent survey of finance leaders in the U.S. and Mexico, 31% said that supply chain issues were one of the top three concerns related to the pandemic.

As a result, confidence among U.S. construction industry leaders has dropped significantly since the pandemic began, according to the Associated Builders and Contractors’ Construction Confidence Index, falling below the threshold of 50 for the first time in history.

8. The rest of the world

It’s not just the global supply chain that we rely on here in the United States. America doesn’t exist in a bubble, and we know other countries have been hit pretty hard by COVID-19. The disease is still spreading, and more countries are likely to be severely impacted in the months to come.

Even if the economy in the U.S. were to escape the pandemic unscathed (which is unlikely; JP Morgan is predicting the U.S. economy will contract by 40% in the second quarter of 2020), we will still be impacted by the economic downturns experienced in other parts of the world.

China was the first country to experience the virus, and the economic impact of COVID-19 is just beginning to become apparent there. Time reports that recently released economic data out of China reveals that their economy contracted 6.8% in the first quarter of 2020 — a number that most analysts agree is “extremely optimistic.”

Around the world, the outlook is not positive. The International Monetary Fund (IMF), an organization of 189 countries that fosters global monetary cooperation, secures financial stability, and facilitates international trade, among other things, says that “it is very likely that this year the global economy will experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago.”

Whether the coronavirus is going to spark a global recession, and just how bad the impact will be, is still uncertain. Keeping your eyes on these signs can help you understand what’s likely to happen.

Header Image Source: (Анатолий Головченко / Unsplash)