Until Coronavirus Is Contained It Will Keep Going Down
The US economy is down. Don’t look now, but things are about to go from bad to worse. Recent activity data shows that the economy might be stalling. Rising coronavirus cases in 40 states aren’t helping get things back on track either.
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It's not V-shaped anymore
The US enjoyed a brief rebound in May and June, with some analysts celebrating a V-shaped model. This meant that while the economy plunged, a sharp rebound will happen after.
Recent weeks' have shown a cooling off in the recovery rate. Instead of a V-shaped model, analysts are now looking at what they call a reverse square root. Aneta Markowska, the chief economist of Jefferies, noticed the leveling off around June. “It was a straight line up for the better part of two months. So this is definitely a notable slowdown that began around June 17th.” Jefferies monitors daily indexes of high-frequency data on various economic activities.
Using anonymous credit card data, analysts from JP Morgan Chase were able to predict virus trends. Data suggested that as card purchases in restaurants increased, new virus cases followed. Card spending then drops afterward. Spending drops are more pronounced in high infection states like Arizona and Florida. According to Markowska: “Texas, Arizona and Florida have not just leveled off but are outright contracting … what began like a V is morphing into a W.”
Economic analysis firm IHS Markit sees a W-shaped recovery if a new wave of infections happens. It said: “Official backtracking on the relaxation of restrictions as well as the voluntary pullback on the part of consumers could cause spending to weaken again sharply, throwing the economy back into a brief two-quarter recession.”
Four Economic Indicators
In a July 11 article, Business Insider reported indications of an economic slowdown. The article showed four indicators support the idea that the recovery has slowed:
- Data from the Dallas Federal Reserve shows people have stopped moving around. While the movement is still trending upward since April, rates have slowed down.
- According to OpenTable, restaurant bookings have declined over the last few weeks. Especially in high-COVID states, reservation bookings have dropped.
- The rate of employees reporting for work has trickled down per Homebase. Compared to 37% of employees going back to work in May, gains were 6% in June. This means that the pace of business reopening has slowed down.
- Kronos, a time tracking software, reported a decline in the number of work shifts. The reduction is higher in states with high coronavirus cases. Fewer shifts mean lesser payroll.
Summer Plans on Hold
Ryan Preclaw, Barclay's director of credit strategy, sees the economic damage spreading wide. He believed that coronavirus outbreaks have the ability to influence economic outcomes. This applies not only to states with high incidences but to other states as well. Lower incidence states will take cues from high-risk ones and reconsider reopening plans.
Preclaw foresees people staying home over the summer instead of going out. In case they go on a trip, they will travel by car instead of airplanes. In a Jefferies survey, 60% of 1,800 respondents plan to stay home this summer, up from 52% from May. 75% of those planning a vacation intend to drive versus 60% in May. Jefferies analysts conclude that there is an “increasing fear of heading out to shop or enjoy entertainment, a sharp drop in expected travel and less optimism around a 2020 return to work.”
Survey respondents also talked about saving up. Around 33% say that the next stimulus check from the government will go to savings or used to pay debts.
Wear a Mask
Dallas Fed President Robert Kaplan thinks the key to recovery is much simpler. According to him, the most important thing for the economy is to wear a mask. “While the monetary and fiscal policy is very important, they’re not as important right now as us doing a good job flattening the curve on this virus.” If we do that, we’ll grow faster.”
Kaplan said that wearing masks in public is key to preventing the spread. “The primary economic policy from here is broad mask-wearing and good education of the health-care protocols. If we all wore a mask, it would substantially mute the transmission of this disease and we would grow faster.” He noted that “We would have a lower unemployment rate … we would be less likely to slow more of our reopening.”
Kaplan believes that stay at home measures helped arrest the spread of the virus last March. During this time, the GDP contracted by 35%, but he expects the economy to pick up later this year.
Watch this video of Cleveland Fed president on what the path to economic recovery could look like:
The continued rise in cases is slowing down any recovery efforts. Reopening the economy while outbreaks are still out there proved to be more difficult than expected. Something’s got to give eventually.
Given the situation, what are your summer plans this year? Will you brave it out, or stay at home? Share your plans and let us know why in the comment section below.
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