Thursday, June 25, 2020

Economic Outlook: The Gathering Storm

by Calculated Risk on 6/25/2020 02:15:00 PM

On March 31st, I wrote:

This is a healthcare crisis, and the economic outlook is based on presumptions about the course of the pandemic.
I've been updating my outlook monthly, and turning more and more pessimistic due to the poor US government response to the pandemic.

The Federal government's response has not been helpful, and in many ways, it has been counterproductive. The Vice President of the US, Mike Pence, wrote just last week in the WSJ: There Isn’t a Coronavirus ‘Second Wave’. The data has already proven Pence wrong.

Fortunately, some state and local governments have stepped up to fill the void, but in other localities, the response has been terrible.  And it is possible the pandemic will get worse in the Fall.

Some countries have been able to open their economies without an increase in infections. For example, in Japan, the economy is mostly open, however 1) everyone wears a mask, 2) there is robust contact tracing, and 3) everyone is urged to follow the 3 C's (avoid Closed spaces, Crowded places, and Close-Contact settings).   However, in the US, contact tracing is still ramping up, many people aren't wearing a mask or face covering, and many people are not following the 3Cs.

However, there is no leadership in the US to significantly change people's behavior.

It doesn't take an official lockdown to push local economies back into recession - many people will pull back as the number of cases and hospitalizations rise.  Based on recent hospitalization data, I expect further layoffs in some states like Arizona, Texas, and Florida.

I do expect another round of disaster relief in July - extending the extra unemployment benefits (perhaps at a lower level), extending the PPP, and providing relief to the States.   Without this disaster relief, the entire US economy might slide back into recession in August.

But even with another round of disaster relief, it seems likely the recovery will stall unless progress is made in slowing the spread of the virus.  The longer the widespread pandemic continues, the more structural damage to the economy.   And the more severe the economic damage, the longer it will take to recover from the pandemic.

Everyone is hoping for a vaccine in late 2020 or early 2021, but even if there is a vaccine, the damage to the economy will be extensive if we don't lower the infection rate significantly in the near term.

Perhaps there will be a sudden change in behavior while we wait for a vaccine - or some other breakthrough that will slow the spread of the virus - but I'm not sanguine.

After a decade of making fun of bearish analysts and writing "the future is bright", it pains me to be pessimistic.   I hope I'm wrong on the virus, but if I'm correct, then I expect every major economic forecast will be revised down for the 2nd half of 2020 and for early 2021.