In part one of this series, I explained Moody’s definition of Depression as “12 consecutive months of 10+% unemployment”.
While that’s a bit of a narrow definition as far as most economists are concerned, it certainly fits a definition most on main street might agree with.
And without question, it’s something we want to avoid if at all possible.
Mark Zandi, Moody’s chief economist, just told CNBC that there is a single big catalyst, that’s actually likely to happen this year, that could push the US into a depression in 2020 unless we act aggressively as a nation to prevent it.
Second Wave of the Virus Could Trigger a Depression
If we get a second wave, it will be a depression…We may not shut down again, but certainly, it will scare people and spook people and weigh on the economy.” – Mark Zandi, Moody’s Chief Economist
While some might criticize Mr. Zandi for scaremongering, the most recent data say that he is likely correct.
Not only has Anthony Fauci and other leading pandemic experts said that a second wave is likely, even “inevitable” this fall/winter, but it’s also true that avoiding more lockdowns might do little to avert an even worse economic contraction.
Some people blame state governors for ordering lockdowns that caused so many businesses to close. But cell phone data indicates that in every single state, Americans stayed home in massive numbers beginning on March 12th and 13th, long before most states began ordering people to do so.
That includes states like North Dakota and Oklahoma, which never issued such orders at all.
When schools closed in all states (by March 13th), and President Trump issued a state of emergency (March 13th), and the WHO declared this a global pandemic (also the 13th) Americans took notice and did what they thought was reasonable to protect their families.
No one had to tell them to stay home, they figured it out on their own.
However, this has important implications for the 30 states that have started to reopen in phase one or plan to by the end of May.
Wall Street has been on fire on optimism that once states lifted lockdowns consumers would go surging back to reopened businesses.
Actually, the most recent surveys indicate that Americans consider restarting most businesses unsafe.
That’s without even considering a further spike in new infections and deaths. The research found that only 56 percent of the U.S. public feel comfortable going grocery shopping and the share is even lower for clothes shopping and dining out at just 33 percent and 22 percent respectively.” – Statista (emphasis added)
Nearly half of Americans feel it’s unsafe to go grocery shopping. Almost 80% consider it unsafe to go to a sit-down restaurant.
Georgia was the first state to lift its stay at home order, on April 24th, and the good news is that the state’s effective rate of transmission hasn’t gone up by a significant amount in three weeks.
Neither has GA seen a significant increase in daily cases or deaths.
One interpretation of this data is “victory over the virus!” Another is “Georgians aren’t going out significantly more than before and so the virus isn’t spreading faster.”
As far as the economy goes, we have further historical evidence that points to the “great lockdown debate” being false.
Heres’ the conclusion from an MIT study looking at how various US city social distancing affected post-pandemic economic recovery in the 1918 to 1919 Spanish flu pandemic.
We find no evidence that cities that acted more aggressively in public health terms performed worse in economic terms,” says Emil Verner, an assistant professor in the MIT Sloan School of Management and co-author of a new paper detailing the findings. “If anything, the cities that acted more aggressively performed better.”
With that in mind, he observes, the idea of a “trade-off” between public health and economic activity does not hold up to scrutiny; places that are harder hit by a pandemic are unlikely to rebuild their economic capacities as quickly, compared to areas that are more intact.
“It casts doubt on the idea there is a trade-off between addressing the impact of the virus, on the one hand, and economic activity, on the other hand, because the pandemic itself is so destructive for the economy,” Verner says.
It’s possible that the state lockdowns, at least the ones ordered from on high, had very little to do with this economic carnage.
After all, US air travel was not restricted. The government never ordered people to stop flying, yet they did so anyway, with plane travel falling by 95% and airlines now losing an estimated $10 billion…per month.
Carnival voluntarily canceled 20% of its cruises for two months, days before the government ordered all cruise lines to cancel all cruised for just one month.
In Georgia, lots of small businesses, such as bars, refused to reopen after the government told them they could.
Before Georgia renowned so early that even President Trump publically called it a bad idea, pundits on TV were arguing that there might be a political divide among Americans over the issue of lockdowns.
Well, there is a noticeable difference in the number of Americans who consider it safe to reduce social distance today. But basically 75% of conservative republicans considering it unsafe to leave their homes, and 89% of all Americans feel that way.
This bodes poorly for the “V-shaped” economic recovery theory. The one that says as soon as lockdowns are lifted it will be like flicking a light switch on a state’s economy.
Now we have a total of 15 states that never locked down at all or have reopened (on May 1st). This Friday we’ll get a critical piece of data that could be the final straw to break the back of the idea that government, rather than American people’s logical reactions to this virus, smothered our economy.
(Source: New York, Dallas Fed, Harvard University)
The Weekly Economic Index tracks 10 weekly economic reports to estimate, in as close to real-time as is possible, how rapidly the economy is contracting.
Currently Q2 growth, on an annualized basis, looks like its -48% based on this model.
The actual number will matter less than what happens by the end of the week after 15 states will have lifted shelter-in-place orders two weeks ago.
If we don’t see the estimated growth rate bottom or tick up, then it might confirm that regular Americans, almost 90% of whom feel it’s unsafe to go out, are not shopping significantly more than they were when states were officially locked down.
Does that mean we’re doomed to a depression that will last until we have a vaccine?
Not necessarily. The same Economist poll that said 89% of Americans consider it a bad idea to unlock now, said 36% believe it might be safe in a month or less, and 65% believe it will be safe “in a few months.”
Economic Salvation Depends on 3 Things
The current data is beginning to point to a singular cause of this recession and potential depression, the virus, not state lockdowns.
Americans acted overwhelmingly of their own accord to social distance before ordered to do so by state officials.
This means that the true salvation of the US economy will depend on Americans feeling that it’s safe to go out…both now and in the likely event of a second wave in the Fall or Winter.
Anthony Fauci, the nation’s leading infectious disease expert, reportedly said Wednesday that a second wave of the coronavirus is “inevitable” later this year.
If by that time we have put into place all of the countermeasures that you need to address this, we should do reasonably well,” Fauci told CNN in an interview. “If we don’t do that successfully, we could be in for a bad fall and a bad winter.”
The head of the National Institute of Allergy and Infectious Diseases said that if states ease restrictions too quickly, the country could see a surge that would “get us right back in the same boat that we were a few weeks ago,” adding that widespread testing is needed to avoid such a path…
“The truth is that we’re going in the right direction,” he said. “But we need to continue to partner in a very active collaborative way with the states, we need to help them the same way they need to do the execution.” – Thehill (emphasis added)
Currently, Americans have done a greater job in reducing the effective transmission rate of the coronavirus.
The effective reproduction rate of the virus (Rt), how many new infections each currently infected person produces, has fallen to below 1.0 for most states. In fact, the average Rt in the US is 0.9.
If we can sustain sub 1.0 Rt it means the virus will slowly burn itself out.
Rt by State 6 Weeks Ago
Rt by State May 10th
Compared to six weeks ago we’ve done a great job reducing the effective transmission rate of the virus, which is why US daily cases and deaths are declining.
US new cases and most importantly, deaths, have been falling for weeks now, at least the 7-day rolling average.
The average Rt of all the states is 0.9. That’s up from 0.88 last week, but not a statistically significant increase.
As long as our national average Rt remains under 1 it means that the virus is gradually burning itself out.
And in some states, like Montana, the Rt has fallen to just 0.64, helping drive new cases to near zero.
US daily testing capacity has been rising by about 50K per day for three weeks now.
300K to 500K daily testing capacity is what the expert consensus says is necessary for safely doing phase one restarts nationwide. Harvard estimates it’s 900K but within a few months, if we can sustain this ramp, we might hit 1 million daily tests by the end of August.
September and October are when the seasonal second wave is expected. By the end of October, we could have 1.4 million daily testing capacity.
- end of May: 400K daily tests
- end of June: 600K daily tests
- end of July: 800K daily tests
- end of August (phase 3 for all states is Federal government goal): 1 million daily tests
- end of September: 1.2 million daily tests
- end of October (second wave expected): 1.4 million daily tests
- end of November: 1.6 million daily tests
- end of December: 1.8 million daily tests
- end of January: 2.0 million daily tests
- end of February: 2.2 million daily tests
- end of March: 2.4 million daily tests
- end of April: 2.6 million daily tests (likely end of second-wave)
As long as we don’t get complacent, and continue to prepare for the second wave that the leading experts in epidemiology say is coming, we have a good chance of being prepared to combat this virus.
If by that time we have put into place all of the countermeasures that you need to address this, we should do reasonably well.” – Anthony Fauci
In late April NPR did a survey of all states to see how many contact tracers they had and were planning on hiring. Just four planned to have 30 per 100K, the recommended amount.
10 days later a repeat of the survey found states had increased their planned contract tracing capacity from 36K to 66K, almost doubling it. As a result, now eight states, not four, are expected to have sufficient tracers by the fall.
That includes CA, NY, and IL, three of the hardest-hit states.
66K is still far below the 100K we need (some estimate 300K) but it’s immense progress in less than two weeks.
Is US testing capacity guaranteed to keep ramping at 50K daily per week? No. Are states guaranteed to be able to hire enough contact tracers by the fall? Of course not.
But remember that what’s killing the economy right now is the virus, or more specifically, the logical fear of the virus that most people have.
If we can stockpile enough medical equipment to not be overwhelmed by a second wave, build sufficient testing capacity, and hire enough contact tracers then we might be able to significantly alleviate the valid fears Americans have about this pandemic.
By no means are we likely to “return to normal” and an end to social distancing. That’s not likely until we have a vaccine approved, mass-produced and distributed, which experts now say is likely in 2022.
But since it’s fear and negative sentiment that’s destroying the economy right now, if we can provide truthful and valid hope that this disease is beatable then it’s more likely that we can see people start returning to stores and businesses in the “next couple of months” as the latest polls indicate.
65% of Americans say that it will be safe to journey out in that time period. Another 19% are “not sure”. If the US can truly prepare for the likely second wave, and Fauci (which a Fox news polls says has an 80% approval rating even among conservatives) says it’s safe, then potentially 75% to 85% of shoppers might return to reopened businesses by the end of the year.
While a 20% reduction in traffic for the next few years might be painful, it would still represent positive growth over the economic horror show we are living through now.
More importantly, it would likely be enough to keep most businesses from closing their doors forever.
Within the report’s household survey, employment contracted by 22.3 million, and the number of people classified as unemployed on temporary layoff increased by 16.2 million — 72% of net jobs lost, according to Bank of America.
That means those workers “should be able to be more seamlessly rehired as the economy reopens,” wrote Bank of America economists led by Alexander Lin in a Friday note, adding that this measure is “the silver lining” in an otherwise dismal report.” – Market Insider (emphasis added)
Right now about 72% of job losses are temporary. If we can beat this virus, coming together to reduce the transmission rate now, while preparing for a likely second wave in the fall, then we can minimize the number of temporary job losses that become permanent.
Which in turn would shorter the duration of the long recovery we face when the pandemic is finally over, likely in 2022.
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About the Author: Adam Galas
Adam has spent years as a writer for The Motley Fool, Simply Safe Dividends, Seeking Alpha, and Dividend Sensei. His goal is to help people learn how to harness the power of dividend growth investing. Learn more about Adam’s background, along with links to his most recent articles. More...
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