Indicators are flattened, clear downside risks
Having overcome the initial coronavirus shock in March and April more rapidly than expected, aided by massive doses of fiscal and monetary stimulus, the rebound from the sudden recession is now being threatened by a surge in Covid-19 cases across many parts of the Sunbelt, including populous states like Florida, Texas and California.
The loss of economic momentum is already appearing in high-frequency data, all of which are flattening out. The impact is especially pronounced in the hardest hit states, as consumers again become more cautious and authorities pause or even roll back the process of lifting restrictions on economic activity.
According to an analysis of weekly data produced by Census Bureau about the economic impact of coronavirus, the share of US adults employed fell 1 percentage point from mid-June to early July, after it had been climbing steadily since early May.
“The economy is still very much depressed because of the out-of-control virus, and the virus is just getting more out of control,” says Aaron Sojourner, a professor of economics at the University of Minnesota and a former senior economist of the White House council of economic advisers under Barack Obama who analysed the Census Bureau data. “If that trend is allowed to continue there’s no reason we can’t lose the gains we’ve made over the last couple of months and even see worse things in the future.”
Senior Federal Reserve officials — who had from the beginning of the coronavirus crisis warned that the US economy was facing a long and difficult road back to normality — have been watching the real-time economic data with growing concern.
Lael Brainard, a Fed governor, said last week the US economy was still shrouded in a “thick fog of uncertainty” with “downside risks” dominating the outlook.
Rising deaths and hospitalisations — which have had a severe impact on Texas in recent weeks — were having a “chilling effect on economic growth”, he says.
The headwinds hitting the US recovery. After shedding 22.2m jobs at the start of the pandemic in March and April, according to the Bureau of Labor Statistics, US employers quickly rehired 7.5m people to work in May and June, including 503,000 people in Florida.
Other indicators bounced back rapidly too, such as retail sales almost regaining the ground lost earlier in the year. Manufacturing also showed some life, with the Institute for Supply Management’s index rising to a level of 52.6 per cent in June, pointing to an expansion of the industrial sector for the first time since February. But many economists fear that the upswing will prove to be unsustainable and susceptible to being reversed in the coming weeks and months, as a result of new outbreaks.
In California, America’s most populous state and a big driver of the US economy, Democratic governor Gavin Newsom last week ordered a shutdown of all bars across the state, and banned indoor operations for restaurants, wineries, cinemas and museums.
Even in states like Florida led by Republican governors who are more reluctant to reimpose restrictions, anxiety over the spreading disease risks undermining the economic rebound. That caution may even extend to states and regions, including the north-east, which were hit hard in the early stages of the pandemic.
Liz Ann Sonders, chief investment strategist at Charles Schwab, the financial services group, says the slowdown is being felt “pretty much across the country” and not just in the Sunbelt states.
The University of Michigan’s index of consumer sentiment dropped in July to 73.2, bringing it back down to near its April trough of 71.8 and losing the bulk of the gains made in June.
Ms Sonders worries that while the share of temporary job losses has been decreasing across the economy, the share of permanent job losses has been increasing.
John Newstreet, who leads the local Chamber of Commerce in Osceola county near Orlando, worries that more lay-offs could become permanent in his tourism-dependent area.
Won't recover for the next decade
America's recovery from the pandemic recession could last through the better part of the next decade, according to the Congressional Budget Office's 10-year forecast published Thursday.
The Covid-19 outbreak and subsequent lockdown has brought the economy to a stop, and even though states are slowly reopening, it will be a tough next decade as the country recovers from this recession, according to the CBO.
On top of that, the forecast is riddled with uncertainty in terms of the virus itself, changes to consumer behavior and policy responses, the CBO cautioned.
The CBO now forecasts the unemployment rate will remain above its pre-pandemic level -- which was a near-50-year low of 3.5% -- until after 2030, the end of the current forecasting range, the CBO predicts. The 10-year average unemployment rate will be 6.1%, up from 4.2% projected in January.
Meanwhile real US gross domestic product, the broadest measure of the economy, will be an average 3.4% lower over the next decade than what was originally predicted in January. It will take until 2028 until GDP will grow in line with long-term trend growth again.
And that's not all: This recession could nearly quadruple the federal budget deficit this year, pushing it to a whopping $3.7 trillion, according to projections from April.
The CBO projects the unemployment rate to peak in the third quarter before falling rapidly in the remainder of 2020 and throughout 2021. So far, unemployment peaked in April at a rate of 14.7%. More than 20 million jobs vanished that month.
But since then, America has seen a record number of jobs resurface as the economy reopens: 4.8 million jobs were added in June, bringing the unemployment rate to 11.1%. Still, with worries about rising Covid-19 infection rates in parts of the country, some states are putting their reopening on hold.
A stunted rebound will dash US president Donald Trump’s hopes of heading into the November re-election contest against Joe Biden armed with a V-shaped recovery, as he had banked on from the start of the coronavirus crisis.
But the jitters over the economic hit from a new wave of cases could be compounded by Washington’s inability to strike a deal over additional fiscal stimulus to help support the recovery.
One of the main reasons why consumer spending and a good chunk of jobs bounced back so fast in the US was that they were driven by the $3tn in stimulus approved in the early months of the crisis, including direct government payments to households, a sharp expansion in jobless benefits, and forgivable loans to small businesses.
The question now is whether this is just a blip and the recovery will soon gather pace again, or whether the world’s largest economy is heading for a relapse that would compound the damage to American businesses and households — and the global economy — already inflicted by the first hit.
But the impact of those measures is fading just as the outlook is darkening. While Democrats have called for an additional $3tn in new spending on unemployment assistance, direct payments to households, and funds for cash-strapped states and local governments, Republicans have been reluctant to support the measures, leading to a stand-off that will come to a head in the coming days on Capitol Hill.
One of the biggest sticking points is the fate of $600 per week in emergency jobless benefits introduced during the pandemic, which expires later this month and which Republicans and the White House have wanted to cut because they believe it is excessively generous and disincentives work.
Even if a compromise is reached, it is likely to involve a significant reduction in support compared with the previous round, which may reduce discretionary income for many families and even jeopardise their rent or mortgage payments. If no money is approved for cash-strapped states and municipalities, many will be forced to further shrink their workforces. Many economists are concerned that any agreement coming out of Washington could be underwhelming and insufficient.