Recession likely, economist says

The black swan has landed.

Economist Dr. John Mitchell regales his North Idaho Chamber of Commerce audience every winter with fiscal forecasts that for 11 years have warmed the heart. That’s how long the nation’s longest economic expansion in history lasted — until last week, when a black swan event kicked economic growth in reverse.

A black swan event represents the kind of disaster nobody sees until after it’s happened.

“Yep, it’s over,” Mitchell told The Press on Thursday, citing the market decline of over 20 percent last week. “You’re probably going to get a recession this year. You didn’t think that was going to happen two months ago. We were growing; the numbers were looking OK.”

Then the coronavirus struck, inducing what Mitchell called a “supply-demand-financial shock.”

“It’s very likely going to result in at least a couple of quarters down,” he said.

Mitchell, who earned doctorates in philosophy and economics and has been one of the top economists in the Pacific Northwest for the past 50 years, said this black swan isn’t quite like any of the others he’s seen.

“The rapidity in a sense is similar from a financial perspective to 1987, a 23 percent decline on Oct. 19,” he said. “The weakness in the economy in the sense of shutdowns, that sort of thing, I have to say I’ve really never seen that before.”

By shutdowns Mitchell was referring to governors and mayors telling residents to stay in place, closing restaurants, curtailing travel.

“That’s new,” he said.

The growing response of cutbacks and layoffs portend unwanted ripple effects.

“You can say OK, it’ll just snap back when it’s over,” he said. “But the problem could be, the longer this goes on, the ability to snap back might not be there because it’ll become a financial problem.”

As an example of a financial problem, Mitchell cited airlines “grounding their planes, but the payments still have to be made.” Even without revenue, businesses pay taxes, rent and other costs. He said that’s what the Fed is trying to address.

“It’s not a financial issue now in the sense of a weak bank system,” he said. “The bank system is very strong. But if you start getting serious credit quality issues, that’s a problem.”

The chaotic market does present some opportunities, Mitchell noted.

“I tell my daughter, she’s young: ‘This is a buying opportunity for you,’” he said.

For those who might not be so young, finding it impossible not to watch their 401(k)s plummet?

“I tell myself rationally, ‘Hey, markets go down; over time it’ll come back,’” Mitchell said. “I’m not going to make any instant decisions because then I’ve taken what is a theoretical loss and turned it into an actual loss. If you have a diversified portfolio, just hang tight.”

Mitchell said that when we can all look at the pandemic in the rearview mirror, we’ll be amazed at what we see.

“I’m fascinated watching the behavioral change, the toilet paper thing,” he said. “I loved the letter to the editor in your paper about the toilet paper [hoarding]. It’s not like we’re talking dysentery here.”

He alluded to the narrative society is building and adding to, and its influence going forward.

“The stories we’re telling and repeating can impact behavior,” he said. “The stories we see, you turn on the television now and see empty shelves at Costco and grocery stores and no toilet paper, how many people died today. I think that’s freakin’ people out. I hope we don’t do this next year during flu season. It’ll scare people to death.

“The narrative has to change for this to end. Hopefully that will happen if the social distancing stuff goes on and you start to see declines in the number of new cases. Then the narrative may change. I worry about what’s going to be the damage in the interim.”