Yahoo Finance’s Brian Cheung breaks down the impact of COVID-19 on the economy and the timeline that will determine whether or not we are actually in a recession.

Video Transcript

ADAM SHAPIRO: I want to turn our attention to the R word. And that's "recession." A lot of people obviously expecting that we may already be in one. We won't know this for a couple more quarters. To explain how all this works, Brian Cheung is here with this week's episode or installment of Yahoo U. Bryan.

BRIAN CHEUNG: Well, Adam, class is in session. Welcome to our Virtual Yahoo U as we continue to practice social distancing here at Yahoo Finance. And yesterday, Jay Powell, the Fed chairman said on the "Today Show" that we may well be in a recession. And that wording is deliberate. Technically, we might already be in a recession. But because the data comes in on a lag, we might just not know it yet.

So I want to show you some presentation slides that kind of illustrate, if you will, the impact of all this. So right here, what I'm showing is two consecutive quarters. This is the number that the NBER, the National Bureau of Economic Research, defines as two quarters of GDP contraction. So what I'm showing you here is really just those numbers.

So the last figure that we got was 2.1%. Now, what's important to note here is that the shaded bars in this chart show you recessionary periods. So we had three quarters of GDP contraction between the third quarter of 2008 and the first quarter of 2009. We also had the dot-com bubble in the early 2000s.

But you notice anything weird? You actually saw negative GDP in Q1, 2001, and then positive 2.4% in Q2, and then negative 1.7& in Q3. Again, these are growth percentages. The NBER, though, actually declared this period a recession. Not necessarily because of GDP, but because of another measure called Gross Domestic Income, which did contract for three consecutive quarters in 2001.

So it's not always necessarily negative GDP, per se that has usually been the case for NBER-declared recessions. Now, as a reminder, GDP stands for Gross Domestic Product. And it measures the following things. Within the context of the current coronavirus, though, you can see how the business closures across the country would decrease GDP here, right? Arguably, the hardest hit would be consumption and investment. So the jobless claims yesterday's show a serious crunch on income.

That means fewer people dining out, hitting the mall, making big expenditures. And Americans are just trying to make ends meet right now, which means consumption will likely fall. In fact, Deutsche Bank estimates that total consumer spending will likely fall $4.1 trillion. And on investment, many businesses are either operating with reduced hours or are shut down entirely as business owners focusing entirely on just trying to meet rent.

The $6 trillion stimulus bill might offset those impacts as we think about the idea here of the government being able to offset the consumption and investment impact. But it's not as simple as just spending it. It's not as simple as just adding $6 trillion dollars. Because the money that would be disbursed to households would only count towards consumption if it actually were to be spent by average Americans. And then there's also net exports. But this is a very noisy figure with the supply chain disruptions that we've been seeing.

The last thing I want to point out here is that it took time to declare these recessions. So the NBER, again, needs to see two quarters of GDP contraction in order to declare it a recession. So in December, 2007, that was the peak that the NBER declared. They actually did not declare that being the peak until 11 months afterwards in 2008. The same case was for the March, 2001 peak where we had eight months after that time before the NBER declared that a recession.

So what does all that mean? Well, what all that means is that, effectively, we have to think about the fact that we're already in Q1. We're only a few days out from Q1. Because it ends in a few days. Q2 is when most economists say that the full impact of the coronavirus will take force. But we won't get Q1 numbers, at least a first read from the Bureau of Economic Analysis, until late April. And we won't get Q2 readings on GDP until July. Which means that we might not know if we're fully in a recession until later in the summer.

So for right now, it seems like we might be in a recession. But we won't know it for sure for many, many months down the road. Adam.

ADAM SHAPIRO: Brian Cheung, thank you for that.