Macro View on Economy

In 2020, the COVID-19 pandemic shut down many of the world’s leading economies. Factories and businesses closed as people isolated in their homes. The tourism industry ground to a halt, causing stocks such as Carnival Cruise Lines, CCL, to crash due to the stopping of all services. As people began to work from home, new social norms and companies arose. For example, companies held virtual meetings with products such as Zoom. However, many Americans lost their jobs as a result of closing businesses. In response to Americans struggling to pay for rent and other essential bills, the Federal Reserve printed trillions of dollars to provide people with stimulus checks. Now that it has been three years since the onset of COVID-19, how has the economy recovered, and what is the current forecast looking like?

Currently, economic growth in March is slowing as inflation remains high and companies start to lay people off. Due to ongoing supply chain shortages, inflation rose during the pandemic and still remains a concern to many. We can measure inflation with the Consumer Price Index, or CPI, which tracks the prices of various commodities. In February 2023, the CPI was at 6.0% for all items, meaning that the cost of various goods rose by 6.0% from February 2022. This notably excludes housing, and the housing market has slowly fallen in price since its peak in 2022. The median house price has dropped 1.2% yearly as supply increases while demand decreases. Furthermore, mortgage rates are at an all-time high, contributing to lower demand. 

Federal funds effective rate from 2018 to 2023

The Federal Reserve has been raising interest rates since the pandemic eased up in order to combat inflation. When the cost of borrowing money increases, people tend to spend less, which results in a decreased demand for goods, reducing inflation. In March 2020, interest rates were at 0%. Rates were quickly raised in 50 to 100 basis point increments (1 basis point is 0.01%). As of March 2023, interest rates are at 4.5%. These interest rate hikes have worked to reduce inflation, although they came at a cost: jobs. In late 2022, tech companies such as Meta and Google began layoffs to cut costs as interest rates rose and economic recovery was starting to look bleak. However, demand for jobs is still strong, but primarily for low-paying white-collar jobs. Many people do not want these jobs because the income simply isn’t enough to pay for goods and services, especially when inflation is still high.

 Furthermore, the energy market was disrupted by the Ukraine War, which saw oil prices skyrocket due to multiple factors. Western countries announced sanctions on Russia, which resulted in the U.S. selling natural gas to Europe. Many countries, including Germany, relied on Russia for inexpensive gas, so they had to resort to other sources, including the U.S., when sanctions banned purchasing Russian gas. This resulted in the demand for domestically produced natural gas to increase, which led to increasing prices. 

Dow Jones 5-year chart 

The Dow Jones has remained strong, but it has also shown strong volatility from late 2022 until now. Anxious traders are reacting to the latest news from companies and the government, which often results in a market correction. For example, Walmart and Home Depot announced warnings on February 21st that sales would slow and profits would drop. Both companies also announced that they would be spending more money on workers by increasing wages and benefits, revealing how tight the job market is right now. The stock market negatively reacted to this news because when people and companies spend less money, the economy slows down. When investors expect companies and the economy to generate less revenue, they invest less money into them, resulting in the prices of assets such as stocks and bonds to fall. 

Additionally, a new crisis emerged in early March: Silicon Valley Bank’s collapse. On March 10th, SVB abruptly collapsed, making it the largest bank collapse since the 2008 recession. Economists believe that economic policies during Trump’s presidency, rate hikes, and mismanagement caused SVB to fall. Then, Credit Suisse, Switzerland’s second-largest bank, had its share prices nearly crash after the Saudi National Bank said it could not provide any more cash to the bank due to regulatory restrictions. Trying to avoid a repeat of SVB, the Swiss National Bank stepped in and sent a lifeline of $54 billion to Credit Suisse. Its stock is currently almost 98% down from its all-time peak in April 2007. The failure of SVB and the near collapse of Credit Suisse have raised the alarm regarding the effect of high-interest rates on banks. If more banks start to buckle under the pressure, it could cause a chain reaction and send the economy into a free fall.

So what can we conclude from all of this information? Well, it’s tough to say. Opinions based on economic officials’ statements have varied from time to time, so trying to predict the economy is difficult. Nonetheless, economic growth is currently slowing, and we could be headed into a recession. The current bank crisis may be a sign of an economic downturn as the Federal Reserve continues to raise interest rates. However, only time will tell, but one should still be prepared during unpredictable economic periods.