Bank of America Follows Media's Lead, Jumps the Gun and Tells Clients America Is in a Recession
In Middle of COVID Panic, Bank of America Stokes More Fear With Outrageous Announcement
By C. Douglas Golden
Published March 23, 2020 at 12:33pm
Is the economic news grim in these days of coronavirus? Absolutely. As of Monday morning, the Dow Jones futures had been down hundreds of points, and then up hundreds of points on the news the Federal Reserve was authorizing limitless asset purchases.
That wasnt good enough for some market watchers.
While the Feds actions are an enormous help, the only way the markets are going to find sustainable improvement is when the economy is allowed to come back to life, or at least there is a real path in place for how that is going to happen, Paul Hickey of Bespoke Investment Group said of the Feds news, according to CNBC.
Also, as we have seen repeatedly over the last month, where the market is one minute can be wildly different from where it was a few minutes before.
The Dow Jones is down. Businesses are closed. Workers are home.
Does it mean that were in a recession? No.
A recession can be defined as one of two ways: two quarters of negative economic growth, or the National Bureau of Economic Researchs definition, which is less specific (well get there in a bit) but still involves a significant period of economic hardship.
Were not there yet, considering the COVID-19 crisis didnt really begin until mid-January. But that doesnt mean there hasnt been a constant drumbeat of people saying were in a recession.
Case in point: Bank of America, which told its investors that America was in the midst of a recession.
We are officially declaring that the economy has fallen into a recession
joining the rest of the world, and it is a deep plunge, Bank of America U.S. economist Michelle Meyer said in a note to investors last Thursday, according to CNBC.
Jobs will be lost, wealth will be destroyed and confidence depressed. The second quarter will see an economic collapse, she said, with a 12 percent contraction. The whole year would see a GDP down 0.8 percent.
Meyer said they foresee the low point being in April and a very slow return to growth thereafter with the economy feeling somewhat more normal by July.
Although the decline is severe, we believe it will be fairly short-lived, she added.
Which doesnt make it a recession particularly since the economy grew in the fourth quarter of last year and is expected to either grow (albeit at a slower rate) or not contract in the first quarter of this year.
According to the Business Standard, Goldman Sachs forecasted a 0 percent gross domestic product growth rate for the first quarter of this year in a March 15 note to investors, It had originally forecast a 0.7 percent growth rate.
Goldman also expects a 0.5 percent contraction in the second quarter but revised its estimates for the third quarter up to 3 percent growth from 1 percent.
And, according to the Bureau of Economic Analysis, the economy grew 2.1 percent in the fourth quarter of last year.
In short, no, were not in a recession unless you want to use a looser definition of what a definition entails, which is what Bank of America is using.
Also just to clarify
The National Bureau of Economic Research is the organization responsible for determining the stages of the business cycle, Bank of America told The Western Journal.
They define a recession as a period between a peak and a trough and that during a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year. So it doesnt have to be two consecutive quarters of negative growth for example, in 2001, where we didnt have two consecutive quarters of negative GDP.
The problem is that this is a profoundly expansive definition of what counts as a recession one that the NBER might not necessarily agree with.
According to their website, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
At this point, there is a significant decline in economic activity spread across the economy. It will be visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
It hasnt, however, lasted more than a few months.
Take 2001, for instance, which saw the collapse of the dot-com bubble combined with the effects of 9/11. The peak-to-trough period lasted eight months, from March to November.
Thats quite a bit longer than what weve seen here. Yes, the coronavirus outbreak is significantly different than anything weve seen before. Even the Spanish Flu, the virus outbreak which COVID-19 is most often compared to, also coincided with World War I and took place in a less-globalized world.
That recession also had a peak-to-trough period of seven months, the second-shortest recession on record for the NBER. (The shortest is six months in 1980.)
Why does this matter? Well, for one, this isnt the time to foment economic panic.
This is a period of obvious economic discomfiture, absolutely. The stock market is down thousands of points from its highs. However, we dont know where this ride goes from here.
Bank of America thinks the trough will be in April. This means a peak-to-trough time of two months one-third the time of the shortest recession on record.
There are plenty of people spreading fear, particularly in the media. Bank of America shouldnt do the same thing. COVID-19s effects on the economy are sui generis. Even Bank of America thinks its effect will be fairly short-lived."
If thats the case, they shouldnt be stoking fear the same way that the media is. The media, at least, gets to keep you in front of the TV the more afraid you are, and COVID-19 is the perfect drug for that.
Bank of America is in the job of making its clients money, and it doesnt need to help the media foment panic the media is doing a great job of that on its own.