Economist warning of steep recession

BATON ROUGE – With the country in lockdown, markets in freefall, and national retail sales off 36% year-over-year, LSU Economist Emeritus Dr. Loren Scott says Louisiana has another serious factor looming.
“Louisiana will be particularly hard hit because of the deep dive of oil thanks to the production war going on between Russia and Saudi Arabia,” Scott said.
“This scenario is one of the worst I’ve seen for Louisiana.”
This week, oil prices are collapsing below $20 per barrel as demand plummets with workers worldwide staying at home.
Scott, who formulates 10 economic studies and 70 presentations each year for clients such as ExxonMobil and British Petroleum, predicts Louisiana will become collateral damage.
“For every dollar drop in oil,” Scott says, “Louisiana loses $12 million. The state’s budget is based on $54 a barrel oil. That means as this legislative session starts, out of the clear blue Louisiana could sustain a $300 million-400 million loss in severance revenues on oil price alone if the Russians and Saudis let this fight go into the fall.
“If that happens, you’re going to see even more layoffs of good-paying jobs in Houma and Lafayette. And Houma’s already lost about 18,000 jobs. Investors in the oil patch were already starting to pull back because returns weren’t that good plus the Russians wanted to drive oil down to try to put Americans drilling in the Permian, Bakken and other shale plays out of business.”
Optimistically, Dr. Scott says he believes the Russians will blink first, agree with the Saudis, and both will cut back production because both economies rely heavily on higher energy prices. That, he says, would save Louisiana’s budget.
“If not, will there be layoffs in Louisiana?”
“Absolutely,” replied Scott.
Dr. Scott, whose career spans a half century —30 years teaching in the Economics Department of Louisiana State University and another 20 years as economist emeritus — remains passionate about what makes Louisiana’s economy fluctuate amid strong outside forces. Coronavirus, he says, is a curveball Louisiana didn’t need.
“The ripple effect is not going to be good. The restaurant industry, hospitality, and air lines are already being hammered right now. Wells Fargo financial analysts are now saying that both the second and third quarters for the U.S. economy are going negative. They previously estimated only the second quarter to be down a negative .06% (-.06%). Now they have downgraded to a much steeper decline of three full percentage points (negative 3%) in Gross Domestic Product growth, negative now for the first time in over a decade. We’ve been in the longest boom time in United States history -129 straight months, or 11 years, of growth- and it looks like that’s going to come to a screeching halt.
“Two-thirds of the GDP pie is generated by personal consumption spending, people going out and buying. People spend based on income and wealth. Wealth has quickly taken a major hit in the over 30% drop in the stock market. When that happens, people start to hang on to their wallet and they don’t spend.”
“The second part,” added Scott, “is that uncertainty causes a reduction in business investment spending. That wasn’t growing very fast as it was. Now you’ll see that get squeezed down even further. The final part is net exports which have been reduced significantly to China and parts of Asia and Europe. These three parts will decline in real GDP in the second and third quarters. The only part that might grow is government which will be one helluva number that will add to the federal deficit and at some point the deficit is going to matter.”
Scott believes the economy will recover by late summer, but his brows furrow as he fishes for the right words to be accurate. In a half century of weighing Louisiana’s variables, he’s seen much of what keeps the Bayou State’s economy fragile and floundering. “Before all this happened, all the major forecasters were forecasting continued growth all the way out through 2021,” he laments. “They were saying the economy will continue to grow unless there’s some ‘exogenous factor.’ Well, here we are. The Coronavirus is the exogenous factor that came out of nowhere and ‘boom.’ You couldn’t have predicted it.”
With The New York Times quoting Chinese officials as trying to blame the United States for somehow planting the virus in China, Scott shakes his head over the timing of COVID-19 coinciding with America’s trade war with China. “I not sure where or why it all started because we were starting to come to agreements in trade,” Bottom line, Scott believes this economic downturn will lead to layoffs. “It’ll start immediately,” he says. “That’s why you have the second and third quarter forecasts going negative. It’ll happen almost simultaneously. Restaurants can’t keep paying staff if nobody shows up to eat. And if oil stays $30 below what Louisiana’s budget is based on, this legislative session could be a bloodbath.”