The United States of America, the most powerful country in the world with the biggest economy and wealth, will go into a recession during Q2, starting next month (April). The United States economy is heavily connected to the world economy. China is already in recession for Q1 and has not completely recovered from COVID-19.
The quick blow to the United States economy is caused by COVID-19. The virus is causing the officials, locally and nationally, to implement strategies to eliminate the spread. The goal is to slow down the spread so we may develop vaccines and not overwhelm hospitals. These strategies come with grave consequences to the economy as it closes businesses, events, and travel. The United States economy is built with debt that must be paid by profits. When profits of companies are squeezed or non-existent, a recession is highly likely to occur. Many good debts of companies are now bad debts since profit has significantly decreased. The United States’ huge debt does not help with the situation and can cause an economic collapse.
Figure 1: Government Gross Federal Debt to GDP has greatly increased to 106.9%, just from 60% from 2008.
How will the United States Economy be affected by COVID-19?
Travel and Tourism industry was 2.9% of the United States GDP in 2018. Travel has been significantly discouraged by the U.S. Department of State and restrictions are placed for China, Iran, the European Union, and the United Kingdom. The decrease in tourism correlates to less spending at restaurants, bars, events, and other attractions. Just alone from the Travel and Tourism industry, the United States will easily decrease 2% of total GDP. It should be no surprise a United States recession will be caused by Travel and Tourism alone.
Figure 2: From the U.S. Bureau of Economic Analysis, the total number of employees associated with travel in 2018 was 9.2 million jobs.
Figure 3: Travel and Tourism as a Share of Gross Domestic Product in 2008–2018 by the U.S. Bureau of Economic Analysis
Figure 4: By Official Aviation Guide data, USA capacity has decreased at the beginning of March. American Airlines started to cut flights on March 2nd, 2020.
Consumers are now spending less due to many business closures including bars, restaurants, theatres, and events. Only pharmacies and groceries will thrive while many businesses will lose profits. Consumer spending on big purchases like cars, real estate, and heavy equipment will decrease. The quick decline of consumer spending will quickly decrease the GDP of the United States since personal consumption expenditures make up above 60% of the United States’ total GDP.
Figure 5: By Fred, Personal consumption expenditures make above 60% of the United States GDP.
Supply Chain Disruption (Trade)
China had a devastating effect on global trade. The domino effect has occurred. Not only China has affected the United States economy, but other countries trade. Those countries who trade with the United States are affected since they trade with China too. Many other countries like the European Union are on lockdown and trade will drastically decrease due to these measures. Global trade is very important to the economy of the United States and constitutes a Trade-to-GDP percentage of 27.544% in 2018.
Figure 6: Export % by Country of the United States (United Nations COMTRADE database on international trade)
Figure 7: Import % by Country of the United States (United Nations COMTRADE database on international trade)
Figure 8: By World Bank, Trade-to-GDP percentage for the United States has risen for the past 50 years.
China was the catalyst for the current oil war and started to import less oil since the government halted the economy. With much less demand for oil due to China, it equals much more competition between oil-rich countries. The oil war with Russia vs Saudi Arabia is a move to undermine American oil companies. United States oil companies are in debt and can not afford to sell at $30 per barrel. Many United States oil companies will file for bankruptcy in the next few months.
Figure 9: By U.S. Energy Information Administration, the United States became the top crude oil producer of the world by 2018.
Figure 10: By the U.S. Bureau of Economic Analysis, Oil and Gas extraction was 1.2% of the GDP in 2018.
Figure 11: By Trading Economics, many U.S oil companies took debt out and drilled when Crude Oil was above $40. It is unstainable for U.S oil companies to compete with Saudi Arabia and Russia at $20 a barrel.
The GDP of the United States will decrease during Q2 so the United States will enter the recession by the end of March. Q3 is highly likely will be a negative GDP growth putting the United States in an official recession. The United States will be in a recession for at least 6 months. The United States recession could easily be longer than a year depending on how the economy handles COVID-19 and how long the pandemic threat looms over the United States. Many assets will go down in value such as real estate, stocks, and commodities. Only bonds and cash are more valuable during the recession. The United States will not only be in the recession. The global world will be in the recession including China.
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