The Bureau of Economic Analysis just released the initial estimate of economic activity for the first quarter of 2020. The gross domestic product or GDP reflects the total value of the economic activity that occurred in the country over the preceding three months. The decline of 4.8% ranks alongside the nation’s two worse downturns, The Great Depression (1929) and the Great Recession (2008).
But the worse economic news about COVID-19 is yet to come. Over the last four weeks, 26 million workers lost their jobs. If we add them to the 7.1 million previously unemployed workers, we can expect an unemployment rate of somewhere between 15 to 20%, the first Friday of May. More alarmingly, the first-quarter decline in GDP did not capture the full effects of the COVID shut down because most of it occurred in April. The GDP decline for the second quarter of 2020 will reflect the April shutdown. Expect the decline to be worse than 20%.
Without government intervention, the economy would be on its way to a new Great Depression. To date, government fiscal rescue expenditures have amounted to almost $4 trillion, and the federal reserve has more than matched that number in its efforts to keep liquidity in the system. The question is, will it all work, and if so, how long will it take? Usually, the timing would be an educated guess. But the answer is becoming more apparent.
For example, the US has not engaged in universal testing. Therefore, the country still does not know the magnitude of the crisis. Nevertheless, some states are opening up before achieving a downward trajectory in new COVID cases. Worse, they are opening up without sufficient safety protocols such as the following: mandated wearing of masks; significant testing, tracing, and isolation protocols; adequate hospital and health resources to address a new spike in cases; sufficient personal protective equipment for first responders and essential workers; and most important of all, a system to monitor and pinpoint the location of new outbreaks.
The current flawed strategy implicitly assumes COVID will be less lethal simply because people have cabin fever, and businesses need to restart. Both are true, but COVID does not care. The misguided strategy is like walking into a dangerous forest at night, hoping not to be eaten alive by wild animals.
Nothing in Georgia, Texas, or any of the dozens of states that are reopening convinces one they have a well-reasoned strategic plan to deal with COVID. As a result, not only do they face the likelihood that COVID will return in the fall, they also face the strong possibility it will resurface before then.
Imagine fighting a war with hope rather than strategy. That’s what is happening and the economic impact is simple to predict. The economy will drag along at a very low-level equilibrium, i.e., greatly underperform.
Consumers are still afraid of patronizing establishments where they would ordinarily spend money. Workers’ fear of returning to jobs has not lessened because a governor declared a state reopened. Furthermore, businesses still lack sufficient confidence and demand to operate anywhere near full capacity.
Solving the problem is not rocket science. It merely requires the federal government to develop a comprehensive plan and strategy to contain COVID while reopening. Letting each state do its own thing is not a plan. It’s hope. Imagine fighting a war by allowing each army division to develop its own war strategy. Relying on each state is akin to doing the same thing.
So, one thing seems crystal-clear. The economy will never operate at full steam again until either the federal government develops and executes a rational strategy to contain COVID (which does not seem likely under the current regime), or until some laboratory is fortunate enough to advance a vaccine. Optimistic estimates assume the latter will take at least 18 months. From that point it has to be produced, distributed and administered at scale.
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