The Farm Economy: Overall Trends
The COVID-19 crisis has turned the U.S. economy upside-down over the last few months. The U.S. went from a relatively solid economy with moderate GDP growth and very low unemployment to what is undoubtedly a recession and record levels of new unemployment filings. While we don’t have official numbers for Q1 GDP growth, we expect it to come in negative due to the extreme disruption caused by state shutdowns of all but “essential” businesses across the nation. The dramatic and rapidly shifting impact of the coronavirus outbreak has made economic forecasting, always difficult, even more challenging than usual.
The coronavirus outbreak can be characterized as an “external shock” to the economy, similar to a war, natural disaster, or other event. The economic disruption brought on by this is different than a slowing of the economy due to broad business cycles. The underlying conditions of the economy were relatively strong prior to the outbreak, which means it is possible we may see a rebound effect when the current crisis passes. Several factors may temper this rebound, however.
One is that the impact of the coronavirus is global, and international trade has been especially hard-hit. China, the origin of the virus has experienced significant disruption of both its internal economy as well as its international shipping operations. Because Chinese demand is particularly important to U.S. agriculture, this could have a long-lasting effect on certain commodities even after quarantines and shutdowns are lifted. American manufacturing has also been significantly impacted by the disruptions in China, as many products assembled in the U.S. require components sourced from China or elsewhere.
Another significant risk to the economy is consumer spending. Consumer spending makes up approximately 70% of U.S. GDP. The coronavirus outbreak has had a tremendous effect on both consumers ability to earn money due to massive layoffs across many sectors, as well as their ability to spend money due to the shutdown of most “nonessential” businesses. The impact will be both real and perceived. A pull back of consumer spending, and a slow return to “normal” after the crisis fades will have a serious impact on the overall economy. Even if the coronavirus shutdowns were to end today, it could take the rest of the year for normal economic activity to resume.
Finally, the financial markets have taken a serious hit. This will impact consumers' wealth as well as their feelings of prosperity, and lead to reduced consumer spending. It will also reduce business investment.
The U.S. Federal Reserve has dropped the federal funds rate to zero, and taken unprecedented steps to boost the economy, including a $600 billion lending program that will purchase up to 95% of the loans from banks that they make to small businesses. However, the effect of such extraordinary measures is muted if the businesses where consumers would normally spend their money are shut down.
One of the ironies of the current situation is that several of our multiple trade disputes had made significant progress just as the coronavirus outbreak hit. The U.S.-Mexico-Canada Agreement (USMCA) which is so important to the continued agricultural trade between the three nations was ratified by Canada and should go into effect June 1. The U.S. and China agreed to a “Phase one” trade deal in January only to see a subsequent near-total disruption of the supply chain to China because of the coronavirus. The U.S. also forged a significant trade agreement with Japan in late fall 2019 but has yet to see significant gains in exports. The resolution of our trade disputes will provide a good foundation for the resumption of trade once the coronavirus crisis passes, but the lingering recessionary impact will limit export gains for some time. The World Trade Organization has forecast the volume of global goods trade to fall by between 13-32% in 2020 compared with 2019, depending on the extent of the virus’ impact.