LAS CRUCES - As the new virus that causes COVID-19 continues to sow economic chaos across the world, longtime New Mexico State University economics professor Chris Erickson warns of an upcoming recession as the pandemic takes hold in the United States. But Erickson, interim head of the Department of Economics, Applied Statistics and International Business in NMSU’s College of Business, predicts a short-lived recession with a speedy recovery.
In the following questions, Erickson further explains how the new virus is affecting economies across the globe, U.S. and New Mexico.
What affect is COVID-19 having on economies?
The problem is that the coronavirus is disrupting supply chains; it’s doing this by restricting the availability of labor. People are being forced to stay in their homes to quarantine and self-isolate. The consequence is a rapid drop in production. In China, which seems to have seen its way through the worst of the virus, the result – and we don’t have all the data yet – will probably be that for the first time ever, they’ll measure a decline in economic activity, quarter over quarter. That gives you an example of the impact of the virus.
But China also indicates another factor – one that’s often true with natural disasters. And that is once the natural disaster passes, the economy can recover quickly. Many observers believe – again, we don’t have complete data – that the Chinese economy and manufacturing are going to come back very strong in the next quarter. This is based on data we have about exports and also on-the-ground observations.
What can the U.S. expect?
We’re preparing for the pandemic to sweep over the United States. It’s like a huge tidal wave still out to sea that you can see coming. We’re going to see dramatic increases in coronavirus cases. As that washes over our economy, it’s going to cause a dramatic decline in production. It’s really unprecedented in modern times. But when the virus passes, and economic recovery begins, people will start to consume again by going to the movies, eating at restaurants, buying cars and shopping for clothes, etc.
What does the falling stock market mean?
The stock market is the single best indicator of the future of the U.S. economy, and the stock market decline we’re seeing is a measure of the seriousness of the virus for economic activity in the U.S. It is signaling a very sharp recession over the next few months.
Is a recession likely?
A recession is inevitable. I’ve been an economist at NMSU for 33 years, and I don’t think I’ve used the word “inevitable” in a prediction before. But my anticipation is that the recession will be short-lived. I’m not going to predict that the market is going to go back up to where it was in January or February, and I’m not going to predict we’re going to get new highs this year, but I predict there’ll be a substantial recovery in the market once we know the true extent of the virus.
How long will economic recovery take?
It depends a little bit on how far south we go. We could have a very dramatic drop off in economic activity. But I’m thinking we might have two or three quarters of recession, then recovery after that. The typical recession lasts more than a year. One reason for a quick recovery is the aggressive monetary policy and fiscal policy that is being proposed, which could dramatically decrease the impact of the virus on the economy.
How will this impact New Mexico’s oil industry?
New Mexico has another factor that is negatively affecting our economy, which is a dramatic drop in oil prices. The U.S. is neither a net oil importer nor exporter. We import and export oil, but they come very close to balancing each other. This means the U.S., as a whole, will neither benefit nor be harmed by the fluctuation in oil prices.
But New Mexico is a large oil exporter. As a state, we have a lot of oil production, and the energy market downturn is going to devastate our oil industry. Most of the employment in the oil industry is involved with drilling – and drilling may come to a halt given the declines in oil prices. Employment in the oil industry is going to be very hard hit by this.
The state of New Mexico also depends on oil revenue for more than a third of its budget. The oil industry and fracking boom have resulted in a large increase in revenues for the state, and that’s going to come to a sudden end. I don’t think oil production is going to fall much below the typical levels from 10 years ago because our fracking wells are very high producing. So, the wells that have already been drilled are still going to be producing and will generate revenue for the state, but we’re not going to see new wells come online.
How will New Mexico’s recovery compare to the rest of the country?
New Mexico’s recovery is likely to follow a different path from the rest of the country. Because we are an oil-exporting state, our recovery will depend on oil prices. If the sharp drop in oil prices persists after the COVID-19 pandemic has receded, then New Mexico’s economy will struggle. Low oil prices also mean a big hit to state government revenues, and that will be a problem. Of course, not everyone works in the oil patch. Restaurants, hotels and other services that are now hard hit by COVID-19 could well recover quickly, both in New Mexico and elsewhere, once the current crisis passes.
Carlos Andres López writes for New Mexico State University Communications and can be reached at 575-646-1955, carlopez@nmsu.edu.
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NMSU economist addresses economic impact of COVID-19 - Las Cruces Sun-News
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