Sunday, April 19, 2020

Economic Outlook: Reasons for Optimism and Pessimism

by Calculated Risk on 4/19/2020 10:52:00 AM

On March 31st, I wrote:

This is a healthcare crisis, and the economic outlook is based on presumptions about the course of the pandemic.  A key model suggests peak healthcare resource use will be around April 15th, but the peak will not be until May in many areas of the country.   Of course, this requires cooperation of the public.

Before areas can start easing restrictions, the US will need to have sufficient healthcare services and equipment, masks for everyone (it seems likely that it will be recommended that everyone wear a mask), and adequate testing to do surveillance monitoring. Right now, we are well short of all of these requirements, but making progress.   It is possible we could see some restriction easing in June.
There are a few reasons for optimism:  Clearly social distancing is working!

And the US does appear to be near the peak of healthcare resource usage, and there might be some progress on finding an effective treatment (although this is still uncertain).   It is also possible that a vaccine will be available in early 2021.

In addition, it appears there will be a Phase 4 disaster relief package that will provide additional relief for small businesses and a substantial increase in funding for testing.  The Phase 4 package is supposed to have $25 billion to increase testing.   There will have to be a Phase 5 package too for relief for the states.

But there are reasons for pessimism too. Merrill Lynch economists wrote this week:
The Trump Administration has released a three-phase plan for reopening the economy. … First, and foremost, it is not clear how our public health system will meet the recommended standards for re-opening. The plan suggests that states looking to re-open should have seen a 14-day downward trend in cases. They should also have: (1) widespread availability of tests, not just for the seriously sick and health care workers, (2) the ability to aggressively track cases and isolate those who may be affected and (3) the ability to quickly and independently supply enough medical equipment and increase ICU capacity to meet surge demand. In our view, all three of these conditions will be challenging to meet.
First, there is mixed messaging from the White House.  They put out a three-phase plan - that is going to require some time and significantly more testing before a gradual reopening - and then, the next day the White House is pushing states to open right away.  Mixed messaging is confusing and costs lives.

Also testing in the US is still limited.  The key number to follow is percent positive.   In the countries that are doing the best, they are testing enough people that the percent positive is well below 5%.   In the US, the percent positive is close to 20% - indicating the US is not testing enough people (something all the doctors are saying).

And there is no national test-and-trace program (this is apparently being left to the states).   And there is still a lack of PPE and masks.  It will take some time to meet these "reopening" criteria.

Sadly, there are some people pushing to open the economy prematurely.  Some claim incorrectly to be "libertarians", but they have forgotten - or never read - John Stuart Mill and the Harm Principle.   And I've even encountered some people that think COVID is a "hoax".

My overall economic view remains the same as I wrote last month:
My current guess is the economy will start growing - slowly - in June (maybe July). But growth will likely be slow at first as people put their toes in the water.  I don't expect a "V" shaped recovery unless there is an effective treatment or a vaccine, then growth will pick up quicker.

This is all subject to the course of the pandemic.  Stay healthy!
However, opening too early would be a huge mistake, and would set back the eventual recovery.