The economic devastation from the coronavirus pandemic is only just beginning
  • The coronavirus epidemic will continue to be a drag on the US economy even after it is contained.
  • The economic pain caused by COVID-19 will not only shutter businesses like sports and casinos, but also hurt the businesses that rely on serving those shut down industries.
  • This means that Congress needs to supply more aid to Americans.
  • George Pearkes is the global macro strategist for Bespoke Investment Group.
  • This is an opinion column. The thoughts expressed are those of the author.
  • Visit Business Insider’s homepage for more stories.

As new case counts for COVID-19 peak in New York and potentially nationally, it’s reasonable to expect the trajectory for cases and deaths to slowly stabilize and potentially fall. 

But just because there may be some good news in the effort to stop the spread of the novel coronavirus does not mean that the US economy is going to come roaring back to full capacity anytime soon — in fact the economic outlook is going to be ugly for awhile.

Good news on the spread of the virus…

Per Johns Hopkins tracking data, the day-over-day growth of US confirmed cases of COVID-19 peaked back on April 4th. If precedents in China, Korea, and Western Europe hold, that suggests a one-way trip lower in case counts thanks to social distancing measures which have been introduced across the country.

The success of lockdowns, the public health burden being lifted, and the avoidance of a massive, overwhelming death toll is reason for celebration.

But that means we’ve moved to a new stage of the fight: preventing future outbreaks.

There is still no reasonable expectation for a vaccine before the fall at the very earliest, and possibly not before the middle of 2021. This means that in order to prevent a second flare up of COVID-19 some kind of social distancing or herd immunity is required.

Given how many people would need to be hospitalized under the herd immunity theory, that’s not an option, so economies are left dependent on social distancing — reducing group interactions, movement, and close contact to prevent spread — even after case counts decline.

We have evidence that lifting these measures can lead to more cases. Singapore’s uptick in cases and shift towards lockdowns is one example; that country had 13 cases by the end of January, but slowed spread so that only 102 cases existed a month later. By the start of April, though, schools and businesses were being ordered to close as new cases surged over 100 per day. 

South Korea, which fought so hard to test and trace every possible case early and even after its large central disease cluster exploded, is still reporting dozens of new cases per day.

These experiences show that lifting the various stay-at-home, lockdown, and quarantine orders that have done such a good job stemming the spread of COVID-19 can restart case count growth.

In short: until we have a scaled-up vaccine, there’s no way to “return to normalcy”.

…does not mean a sudden economic bounce back

As a result of the need to maintain these social distancing measures, economic activity will continue to suffer. 

Taking the simplistic view that the shuttering of businesses due to lockdowns and social distancing are the only economic effect, even an optimistic scenario would still mean US economic activity stays below — potentially far below — pre-virus levels for the rest of this year.

Concerts, cruises, conferences, crowded flights, crammed buses or subways, and large public gatherings like festivals or theme parks are going to remain massively risky to public health until a vaccine arrives, even if people take precautions like aggressive hand-washing, avoiding direct contact like handshakes, and wearing masks.

These are not the most productive sectors of the economy, but they represent billions in spending and millions of jobs.

More importantly, they all have downstream effects: other businesses rely on them for revenue and they bolster state and local budgets.

Therefore caps on a small slice of industries will have second-order effects (like less revenue for caterers) and third-order effects (like cutbacks to state and local government spending because events contribute fewer taxes and force reduced spending thanks to balanced budget amendments).

We haven’t even started to talk about the impact on consumers’ willingness to spend or companies’ willingness to invest. The almost certain decline in confidence among consumers and businesses will further exacerbate the economic shock of COVID-19.

Of course, fiscal stimulus is coming, and the CARES Act will sustain incomes for many while even boosting incomes for households which haven’t taken a hit; businesses that otherwise may have closed or defaulted can be kept open as well.

But even back of the envelope math suggests that the CARES Act is nowhere near enough. Excluding large corporate loans (because they will bolster balance sheets rather than income statements), the CARES Act’s $1.5 trillion in spending is only about 7% of GDP.

Lending programs from the Federal Reserve like those announced Friday will also ensure credit keeps flowing and reduce some of the financial feedback loops which can exacerbate downturns. The Fed will be lending billions to businesses and state or local governments, but that lending will have to be paid back rather than forgiven like small business loans or stimulus checks for consumers.

In a world where entire industries have seen income zeroed out overnight for at least a month if not longer and a huge negative shock to longer-term prospects, while one in ten workers file for unemployment claims in three weeks, 7% of GDP and ample lending won’t make up for the lost income in its entirety.

It definitely won’t be enough to offset the changes in behavior in response to the headline shocks, and those will take many months to play out as households, businesses, and sub-federal governments assess the damage to their incomes and adjust their expenditure accordingly, further dampening other agents’ incomes.

Case counts and equity market prices have moved very fast, with day-to-day or second-to-second updates which have focused on the positives related to disease burden. Those positives are real, but they are an incomplete picture of how severe of a drag COVID-19 will be on the economy over the course of this year.

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