Two Steps Forward, One Step Backwards
The surge in Covid 19 cases unnerved investors this past week, which is understandable. People did get complacent as various states reopened, particularly those that hadn’t been hit hard when the pandemic first arrived in the U.S. So, infections spiked notably in places that hadn’t previously been subjected to large numbers of cases. At a minimum, the several day incubation period of Covid 19 ensures that case counts will rise further over the next week or two. If people respond by wearing masks and taking the risk more seriously, we should see case counts falling again in mid or late July. In the meantime, the economy seems to have bottomed and is starting to recover. Critically, policy remains very focused on promoting that economic rebound.
The surge in cases of Covid 19 is not at all a second wave. It is really part of the first wave, but reflects a transition from regions more heavily affected early on to areas of the country that were only lightly affected. We have also learned a great deal about the virus with mixed effects. We now know that young people are unlikely to die from the illness, reinforcing their sense of invulnerability, so they quickly resumed normal behavior as states emerged from lock down. As large numbers of the young in states previously only mildly affected have caught the virus, the average age of those becoming ill has plummeted. From March 1 to June 15, the average age of those infected fell from 65 to 35 in Florida, so the recovery rate should be quite high, especially as treatments also seem to be improving.
It is understandable that investors are concerned that the rise in Covid cases could derail the economic recovery. In some states, such as Texas, Arizona, Florida, and California, it is surely going to push out the rebound. But in states where the pandemic first exploded, such as New York, New Jersey, Massachusetts, and Connecticut, infection rates are low and still receding. In New Jersey, total cases are now growing by only 0.2% versus around 1% daily growth just a month ago. These states are now carefully reopening their economies, even as they also strongly encourage people to wear masks, limit large gatherings, and urge people to remain careful to contain spread of the virus.
There are solid signs of economic recovery. Consumer spending rebounded strongly in May. Road traffic has rebounded quite sharply. Air travel is still far from pre-Covid days, but TSA checkpoint volume is already running around 25% of pre-Covid levels after falling close to zero at the bottom. Airlines are slowly adding aircraft and additional flights into service as planes fly fuller. The economic recovery will take time and there are likely to be setbacks, notably when cases rebound, as they are doing right now.
A full economic recovery will take time, even if a vaccine were discovered tomorrow. Millions of workers lost their jobs, plenty of companies shut down, especially small ones, and it takes time for new job opportunities to open up. Unemployment will remain elevated for a number of years before it returns to satisfactory levels. Just as it took a number of years for employment and GDP to recover after the credit crisis recession of 2008, a full recovery now will not occur overnight. If a vaccine is discovered, the pace of recovery would likely be turbocharged. Until then, policymakers seem to be all in to reinforce the natural tendency of the economy to recover on its own. We expect the Fed to keep its policy rates very low for at least a year, but quite possibly two or more. Another fiscal stimulus package is likely to gain approval in July, as the previous one expires. An infrastructure bill may also be coming, since both Democrats and Republicans appear supportive. In the meantime, hiring has resumed, with 2.5 million hired in May. Housing demand is rebounding quite sharply. Consumer spending also surged, so the rebound is likely to continue, even if there are some setbacks.
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