The stock market is arguably the most important short-term indicator of the financial sector. The Dow Jones Industrial Index (DJIA) can be thought of as a weighted average of the most important stocks in a variety of sectors. When the price of an individual stock falls and the index remains unchanged, it likely represents troubles specific to the company for its future profitability. Conversely, when the value of the stock index as a whole declines, it typically represents a more wide-spread economic shock.

The stock market fell substantially as the Coronavirus crisis increased in intensity in late February. The DJIA fell by over one-third of its value in about a month, reaching a nadir on March 23rd, 2020. Since, it has slowly recovered, which commentators attribute to the fiscal policy and monetary policy (conventional and unconventional) response to the crisis.

One of the highest frequency indicators of real economic activity is initial claims for unemployment benefits, which is available on a weekly basis. As a result, an early sign of the economic fallout from the coronavirus crisis is most readily seen in the weekly report of new claims for unemployment benefits released on March 26, 2020. With no historical antecedent in previous reports, more than 3 million workers filed reports to receive unemployment benefits in the week ending on March 21. A week later, preliminary claims reached even higher at more than 6.5 million claims. These numbers dwarfs the previous single-week peak of 695 thousand claims in October 1982.

For additional context, in 2020 the cumulative claims for benefits for every week prior to the March 26th report totaled only 2.4 million, roughly 75 percent of claims made in the week ending on March 21. Moreover, as can be seen in the previous figure, this single week flow of new claims exceeded the total number of continuing claims. Continuing claims can be viewed as a high frequency stock proxy for unemployment (of course, this understates unemployment because not everyone is able to claim benefits). This is the first time since the reports were compiled that the flow of claims have exceeded this stock measure.

In early April the Bureau of Labor Statistics (BLS) released its monthly employment situation report which, again, provided additional evidence for how much the coronavirus pandemic is disrupting the labor market in the United States. For the first time since October 2010, the BLS reported that nonfarm employment payroll fell, declining by 701 thousand for the month of March. Given the initial claims reported in the latter part of March, it is clear that this understates job-loss that occurs in March. This is because the reference period for the BLS survey is March 8th to March 14th, more than a week before the majority of states put in place Stay-at-Home orders. Nevertheless, this reported decline in payroll employment was approximately the same magnitude as the decline seen at the peak of the Great Recession.

Many economic decisions that people make rely upon their expectations about the future. If, for example, unemployed workers believe their loss of a job is temporary, they may borrow to finance their livelihood in the interim; however, if the unemployment spell is likely to be long-lived, that same worker may find it prudent to cut back their spending to save for the future.

In general, pessimistic expectations about the future state of the economy may lead people to cut back their purchases of various goods and services, which in turn depresses economic activity further (see, for example: Carroll, Fuhrer, and Wilcox (1994); Ludvigson (2004); and Roth and Wohlfart (2020)).

Since the the early 1950s, the University of Michigan has issued its Survey of Consumers to assess how consumers perceive their own financial circumstance, the current and near-term state of the economy, and the long-term trajectory of the economy. Published each month, it provides a relatively high frequency measure of peoples' perceptions of the economy. Plotted above is the final published composite Index of Consumer Sentiment constructed by the University of Michigan, which provides a summary view of consumer expectations.

This index fell by 12 percentage points in March from a level of 101 in the previous month. Given the volatility of the index, this single-month decline is not atypical even during normal times. Whether sentiment continues to decline in April is dependent on the effectiveness of strategies to mitigate the spread of coronavirus and whether policies implemented to stabilize the economy are perceived to be effective.

Another method of gauging consumer sentiment about the future state of the economy is to look at internet searches for words associated with economic anxiety. This is the approach used in Fetzer, Hensel, Hermle, and Roth (2020) to assess how the mounting spread of coronavirus may be related to economic anxiety. These authors document that in the week after the first arrival of coronavirus to a country, internet searches associated with economic anxiety increased by more than 50% relative to their typical levels.

The real estate market is an important barometer of both the financial and economic state of the economy. Mortgages liabilities make up approximately one-quarter of non-government, non-financial liabilities in the United States. Household balance sheets are therefore highly dependent on the state of the housing market, which research has shown can have effects on employment, consumption, and new business formation. (Mian, Rao and Sufi 2013, Mian and Sufi 2014, Schmalz, Sraer, and Thesmar 2017)

Second, financial institutions hold mortgages on the asset side of their balance sheets (i.e., they lend to households and firms for real estate). When households and firms struggle to meet mortgage payments, potentially due to job-loss on the part of households or declining sales on the part of firms, such loans can fall into default and eventually become a non-performing loan. Non-performing loans affect the banks that extended them by impairing their balance sheets or asset prices if such mortgages are securitized and sold onto exchanges. For context, non-performing loans increased tenfold during the Great Recession.

Finally, even if all homes were paid in cash (so that the financial implications of house prices were nonexistent), there are still important economic implications of changing in house prices. Real estate prices represent the equilibrium price between the supply of available real estate and demand for such real estate. In the short-term, real estate supply depends on the acquisition of permits and the building’s subsequent construction, both of which are sensitive to delays due to coronavirus. Similarly, demand for real estate depends on household and firm desirability to move. This desirability to move is affected by coronavirus due to lack of available job opportunities and shelter-in-place laws.

When discussing the real estate market, it is important to distinguish between commercial and residential real estate markets. Residential real estate can be either single-family homes or multi-family apartment complexes. The Census Bureau estimates that there are nearly 140 million housing units (i.e., homes or individual apartments) in the United States. Commercial real estate refers to new real estate by firms, such as office buildings, stores, or factories.

The best measure of new housing supply is the New Residential Construction Survey available from the Census Bureau. This survey is monthly, and as of now data is only available through February. In lieu of this monthly series, we can track weekly mortgage rates available from Freddie Mac. Mortgage rates were trending downwards in late 2019 into early 2020, mostly as a result of the downward trend in the Federal Funds Rate (Link to Conventional), Beginning in March 2020, mortgage rates began to experience high volatility. This volatility reflected underlying stress in financial markets. The Mortgage Banker’s Association, which reports weekly applications for mortgage financing, found that their index of housing purchases declined by 11% from the week prior in the week ending March 27, 2020.

As an additional measure of real estate markets, we compare the equity prices of the largest real estate investment trusts (REITs). REITs are organizations that specialize in a certain type of real estate, such as industry, residential, healthcare, or retail. We plot the equity values of five REIT’s relative to their values on February 20, 2020. Each REIT specializes in a different sector, and so we use these REIT’s as a barometer of the real estate market within that sector. We emphasize that the value of the real estate market is co-determined with the profitability of the sector itself both today and in the future; given the economic situation, these equity values likely reflect the near-certain recession in the coming months, as well. Because the recession will have differential effects across sectors, one might suspect equity price changes to differ across industry.

Across these five major REIT’s, two patterns occur. First, all REIT’s experienced declining share prices in mid-March as the coronavirus epidemic began to take hold in the United States. Second, as expected, there is variation across REIT’s in the size of the decline. Telecommunications, a sector where the supply and demand for real estate is more likely to be resilient during this time period, regained much of its value in late March.

On the other hand, two REIT’s in particular experienced persistent drops in value. Shopping, proxied for by the retail REIT Simon Property Group, Inc. (Ticker: SPG), experienced an enormous decline in value on the order of 70% (or 1.2 log points). This reflects stay-at-home orders preventing households from shopping in brick and mortar stores as well as the increasing probability of recession.

Healthcare, proxied by the healthcare REIT Ventas (Ticker: VTR), lost a similar share of value. It may seem surprising that an event that places a high demand on healthcare should result in such a large decline in value for the healthcare REIT. To be clear, this healthcare REIT includes not only hospitals, but also real estate including nursing homes and medical offices. The vulnerability of the elderly population and shelter-at-home orders preventing patients from leaving at once reduces demand for and raises costs of maintaining nursing homes and medical offices, respectively.

We will track REIT prices throughout the crisis, and will be adding in residential housing measures as data becomes available.

A country’s nominal exchange rate is the rate at that country’s currency can be exchanged for another country’s currency. When a country’s currency depreciates, this means that foreign currencies become more expensive. In the figure below, we plot the cumulative change in the exchange rate for emerging markets vis-a-vis the United States dollar since February 20, 2020 (the day the stock market began to fall). A positive number implies that it takes a larger amount of the domestic currency to purchase the dollar (i.e., a depreciation). There have been two main effects of the coronavirus crisis on emerging market exchanges. First, on average, emerging markets have seen large depreciations of their currencies—evidenced by the average rise in nominal exchange rates in these countries. Second, among emerging markets the scale of depreciation has varied substantially, with some countries experiencing a 25 percent depreciation of their currency and others seeing their exchange rate remain essentially flat. During the onset of the 2008 financial crisis of (between September 15th and October 31st), exchange rates saw similar sized depreciations.

Why might a country care about the value of their currency? There are at least two reasons. First, when firms export to sell in a foreign country, the price they charge (and subsequently, their profit margin) depends crucially on movements in the exchange rate—oftentimes, the exchange rate that matters is actually the dollar exchange rate, irrespective of the country the firm is exporting to. For example, consider a Mexican firm (whose home currency is the peso) selling in the United States (which uses the dollar). If the peso depreciates, so that the value of the dollar rises, then Mexican exports become relatively cheaper than rival goods sold by American firms. Similarly, within Mexico, the depreciation of the peso makes imports more expensive.

Second, when firms (or governments and households) borrow (or lend) in foreign currency, movements in the exchange rate can affect the value of assets and the costs of repaying debt. If this same Mexican firm had borrowed in the dollar, the depreciation of the peso would make it more expensive to repay its debts, adding to the economic burdens such a firm is already experiencing as a result of the coronavirus crisis.

An obvious question is what has been driving differences across countries in terms of exchange rate movements. In general, economists have struggled to connect changes in the exchange rate with any macroeconomic variables, such as GDP or inflation. (Meese and Rogoff 1983; Engel and West 2005) A recent literature has emerged linking movements in the exchange rate (specifically, movements in the USD), to global measures of risk.

The general depreciation across most emerging market currencies supports the recent academic literature highlighting the role of global risk as driving currency movements. (Lilley et al. 2019) Specifically, due to the risky investment environment surrounding coronavirus, investors have shifted away from emerging market assets and towards advanced economy assets, specifically dollar-denominated assets, that have lower risk.

There remain two additional questions. Why have some emerging markets seen appreciations? What drives differences across countries? Some countries, like China, have a more managed exchange rate. How will such policies hold up over the coming months? As new data becomes available, we will be in a better position to answer such questions.

We have talked elsewhere of the additional challenges that emerging markets face relative to advanced economies. We have highlighted that exchange rate depreciations can put pressure on domestic firms. An additional hurdle facing emerging markets is raising the necessary funds to enact fiscal relief policies. Already, in many advanced economies, policymakers have passed relief packages costing trillions of dollars, which presumably will lead to larger government budget deficits. An important question is whether emerging markets will be able to implement packages of relatively similar sizes, if necessary. Historically, countries that entering financial crises with higher ratios of debt to GDP tend to experience larger and more persistent downturns (Jordà, Schularick, and Taylor 2016; Romer and Romer 2018). Should the coronavirus crisis place sufficient strain on the financial sector to produce a global financial crisis, countries with larger ratios may be in greater trouble.

In the figure below, we calculate, according to the October 2019 World Economic Outlook, the gross general government debt to nominal GDP ratio for 2019. The gray bars are debt to GDP ratios for emerging markets, while the red bars are debt to GDP ratios for advanced economies. The horizontal lines denote the average level for each group. Here, we restrict the figure to emerging markets and advanced economies, using the IMF’s definition of advanced economies and restricting the set of emerging markets to those with at least $10,000 in per capita GDP (PPP-adjusted) and at least 10 million people. The average debt to GDP among advanced economies is higher than that among emerging countries (outliers not-withstanding).

Thus, at first glance, one might suspect that emerging markets have more room to enact fiscal relief policies because they tend to have lower debt levels. However, this line of reasoning presumes, implicitly, that emerging markets can borrow to the same extent as advanced countries (either at the same interest rate or that investors are equally willing to lend at a given rate). Economists define the term “fiscal space” to denote the scope that countries have to enact additional fiscal stimulus or relief (Romer and Romer 2019). Emerging markets may have similar, or even less, fiscal space than advanced economies if the maximum amount investors will lend is relatively low—even for a comparable debt to GDP ratio.

How close are emerging markets to exhausting their fiscal space? Such a question is very difficult to answer. One indication that countries are close to reaching their borrowing limit is the relative price of borrowing. If interest rates rise substantially, this may reflect worry by investors that countries are reaching a default range. Spreads are frequently used in the academic literature to denote the probability of default. (e.g. Aguiar and Gopinath 2006, Arellano 2008)

In the figure below, we document that, separately among advanced and emerging, countries with a larger debt to GDP ratio have seen a relatively larger increase in spreads, suggesting that fiscal space may not be as large as necessary. In the Figure below, we show that, within the group of advanced or emerging economies, there is a suggestive positive relationship between the change in spread (from February 20, 2020) to today relative to the debt to GDP ratio in 2018.

To understand how close economies are coming to exhausting fiscal space, we plan on updating this figure regularly as new data comes in.