Read the November Economic Currents in PDF
COVID does not care who won the election or who will control the Senate, but it will be the single largest determinant of where the economy goes next. COVID cases, positivity rates and hospitalizations are all surging again, a fact lost in the turmoil surrounding the election. The current jump in infections is worse than the surge we saw in the Sunbelt during the summer.
The current surge is national as well as global in scope and is occurring before temperatures plummet across the country, which could exacerbate the spread of the disease. The pace of infections in the U.S. is now growing at an exponential rate and is starting to overtake that of the U.K., which has already initiated another round of lockdowns. (See Chart 1.)
Conditions could get markedly worse before they get better. Epidemiologists are predicting that infections will peak in late January, about the same time the next president will be sworn into office.
We are assuming president-elect Joe Biden will be sworn into office on January 20, despite challenges to the election results. The president-elect has already announced a new COVID task force to rein in the spread of the disease and better coordinate the country’s response. It is unclear what he can accomplish before he is sworn in and even then, the challenges will be substantial. Skepticism over the basic need to wear a mask to contain the spread of an airborne disease is high, while trust in the safety of a vaccine is low.
Fleeting Gains in Third Quarter
Real GDP surged at a 33.1% annualized pace in the third quarter, the fastest pace in history. The bulk of those gains could be attributed to the initial bounce in activity we saw in May and June. The level of economic activity was so high in June that the average for the third quarter would be substantial even if growth stalled between June and September, which it did. The third quarter surge was not enough to get the economy out of the hole created by COVID. Growth was still down 3.5% from the peak hit in the fourth quarter of 2019; that is close to the 4% drop in economic activity we suffered during the 2008-09 recession.
A surge in COVID cases is expected to bring the economy to a near standstill in the fourth quarter. Spending on discretionary services will suffer another setback. Commercial real estate is contracting, while lockdowns abroad put a damper on exports. Celebrations for the holiday season will be delayed. We could find new meaning to Christmas in July.
A federal aid package will offset some of that weakness in the first quarter. We will not be able to fully reopen until a vaccine is distributed and administered. We still have a long way to restore the trust that was lost during the pandemic, but there is a glimmer of light at the end of what has become a very long pandemic tunnel.
The light at the end of this dark tunnel is a vaccine. Pfizer
announced that clinical trials on its vaccine suggest
that it could be more than 90% effective. That is a game
changer, but the time it takes to ramp up production
and distribution means we will have to wait to reap the
Most don’t expect a vaccine to be widely available until
well into 2021 and not all vaccines in clinical trials will be
as effective. Pfizer has promised up to 50 million doses
by year-end and over 1.5 billion next year globally, but
two doses are required for immunity. That is still a small
fraction of the world’s population and we still don’t know
how long it will last. The jury is still out on whether the
vaccine is as effective against the most mild and severe
The vaccine requires a complex and well coordinated
supply chain to retain its efficacy; it has to be kept at
94 degrees below zero. Pfizer plans to start shipping to
hospitals and clinics that can accommodate the need for
cold storage after it receives emergency authorization
by the Food and Drug Administration in December.
Hospitals overwhelmed by COVID patients in the interim
could inadvertently slow the distribution of a vaccine. We
simply may not have enough health care workers to care
for patients and administer a vaccine.
Why can’t we just isolate older people to avoid the worst
outcomes and open the economy more fully? Because
death is only the most dire consequence of contracting
COVID. The disease triggers a whole host of long-term
health problems for patients of all ages, including
those with only mild symptoms. These span damage to
major organs, blood clotting, fatigue and neurological
problems. This is at the same time that the paid sick leave
provided by the CARES Act has lapsed.
Hospitalization rates are high, which is overwhelming
hospitals and undermining their ability to stay financially
afloat. COVID is not a profit center; it is costly to treat
and will accelerate consolidation in the health care
sector. That will further curb access to quality health care
and a vaccine, especially in rural areas where hospitals
are few and far between.
The timing of the surge in cases couldn’t be worse, given
the lapse in aid tied to the CARES Act. Families who once
were able to cover the basics of food and shelter are now
running on fumes. The ranks of those who are slipping
below the poverty line have soared. Layoffs once seen
as temporary are now permanent. The number of people
laid off for 27 weeks or longer jumped by more than one
million in October.
Unemployment is demoralizing. Once we cross the six-month
mark, research shows it starts to take a more
permanent toll on mental and physical health, family
structure and the well-being of children. Reemployment
is often at a lower-paying job than the one lost.
The resurgence in cases is in nearly every state. When
consumers and firms usually ramp up for the holiday
season, they will be pulling back. Celebrations will be
scaled back or canceled. The hiring that accompanies
those preparations won’t occur and an economy that is
recovering could stall out or worse.
High-frequency economic data has slowed. Credit-card
usage has slipped; consumption of gasoline has fallen;
and, initial unemployment insurance (UI) claims are still
high. The number of people applying for UI extensions
has jumped; those benefits will expire year-end.
Consumer sentiment fell in October as job prospects and
expectations about the future deteriorated.
This edition of Economic Currents
takes a closer look
at the outcome of the election and what that suggests
about policy shifts going forward. COVID and the aid
needed to fill the hole left by the pandemic will top
the new president’s agenda. We can’t fully reopen
and begin healing until people feel safe enough to
congregate again. Waiting for a vaccine in the volumes
needed to inoculate enough of us will feel like an eternity.
The remainder of the president-elect’s agenda will depend
heavily on the composition of the Senate, which is yet
to be determined in runoff elections. The gridlock and
partisan bickering that we saw leading up to the election
is not expected to disappear even if the Democrats
are able to win Senate runoffs in Georgia. Candidates
who were able to replace incumbent Republicans are
inherently more fiscally moderate than those who penned
the agenda for the president-elect.
What’s Likely and Doable
Chart 2 compares our postelection forecast with and
without a new aid bill. We have put in a “skinny” $1 trillion
package starting in the first quarter. That would get us
back to our precrisis peak in economic activity in mid-
2021. Employment would not reach its previous peak until
late 2023. That is sooner than previous recessions. The
receovery will depend on how much of the economy is left
to reopen once a vaccine becomes widely available. The
trajectory of growth could remain well below its precrisis
trend for years to come without additional efforts to
stimulate the economy.
Senate Majority Leader Mitch McConnell has said he’d
be willing to pass a deal during the lame-duck session.
McConnell is offering a much smaller deal than the
package that Treasury Secretary Steve Mnuchin and
Speaker Nancy Pelosi have been negotiating.
McConnell has some incentive to get a modest deal done,
given the surge in cases and the boost that aid would
provide incumbents in the Georgia races. I have given up
holding my breath on the timing of a deal. The bulk of any
new aid is not likely to show up in checking accounts until
the first quarter of 2021, no matter how the data is cut.
Congress can’t seem to get the votes to agree unless
the stock market is tanking. This is despite the fact that
the stock market is less reflective of the overall economy
now than it was in the past. A vaccine can’t come quick
enough to feed hungry families.
There is now upside risk to the outlook for the second half
of 2021 due to the prospects for a vaccine. That is still a
long time for an economy that is struggling to reopen
without the aid necessary to fill the holes left by COVID.
Any missteps in the process would set us back further but
it is very welcome news.
The president-elect has already announced a new COVID
task force. The goal is to coordinate efforts in the U.S. and
abroad, learn best practices and effectively distribute
tests, PPE, therapeutics and a vaccine. Therapeutics
could play a key role in minimizing the need for
hospitalization, but they are still in short supply.
He has also pledged to rejoin the World Health
Organization. Pandemics are by definition global in
scope. Much like the terrorist attacks of 9/11, this requires
global cooperation and a sharing of intelligence to
prevent another outbreak.
That said, we only have one president at a time; the
current president has yet to concede. The White House
has frozen funds for the transition team, which could
slow the process. The COVID task force will restart daily
briefings, but not until January. That is an eternity when
COVID case counts are rising at an exponential rate.
Fewer Tax Hikes and Spending Increases
Senate Democrats are more fiscally conservative than
those who wrote the platform. Even if the Senate tips in
favor of Democrats winning the two seats in Georgia, the
new president is not expected to have enough votes for
aggressive tax hikes or spending plans.
“The new president is not
expected to have enough votes
for aggressive tax hikes or
Beyond COVID, the president-elect is expected to devote
much of his time to repairing frayed relationships with our
allies. He has pledged to rejoin the Paris climate accord.
He is expected to reverse a flurry of executive orders
issued by the current president. These include an end
to curbs on immigrants including foreign students,
H-1B visa holders and Muslims from certain countries.
The immigration curbs represented a body blow to
university budgets, which rely on foreign students to
boost revenues and subsidize tuition for U.S. students. The
curbs on H-1B visas, including restrictions on the ability of
married partners to work, have inhibited recruitment for
COVID still determines the course of the economy. The
current surge in cases is much more worrisome than the
one we saw in the Sunbelt over the summer; it is expected
to be more disruptive to economic activity. The fact that
the cushion provided by the CARES Act has lapsed adds
insult to injury.
The longer we wait, the more the wounds triggered by
COVID will fester and leave permanent scars. A vaccine
with a 90% or better rate of efficacy is great news but
can’t stem the current surge in cases. Therapeutics that
stem hospitalizations are coming on line but will take
time to ramp up. We have the benefit of science and
technology that our forefathers didn’t during the 1918 flu
pandemic. We need to leverage those advantages.
Buy a small turkey. Tell your family you love them enough
not to risk their lives. Know they love you as much from
afar as near. Delay celebrations and demand our elected
officials do more for those suffering through no fault of
their own. Masks are disposable; people are not.
Copyright © 2020 Diane Swonk – All rights reserved. The information provided herein is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic, financial, investment or any other decisions. This communication does not constitute an offer or solicitation, or solicitation of any offer to buy or sell any security, investment or other product. Likewise, this communication serves to provide certain opinions on current market conditions, economic policy or trends and is not a recommendation to engage in, or refrain from engaging, in a particular course of action.