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NEW HAVEN, Connecticut: Suddenly there is a credible case for a vaccine-driven economic recovery.
Modern science has produced what must surely be one of the greatest miracles of my long life. Just as COVID-19 dragged the world economy into the sharpest and deepest recession ever recorded, an equally powerful symmetry on the upside now seems possible.
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If only it were that easy. With COVID-19 still on the rise, and infection, hospitalization, and death rates now out of control (again), short-term risks to economic activity have been declining decidedly lower in the United States and Europe.
The combination of pandemic fatigue and the politicization of public health practices has come into play precisely as the long-awaited second wave of COVID-19 is approaching.
Unfortunately, this fits the script for the dreaded double dip recession that I warned about recently. The bottom line is worth repeating: apparent economic recoveries in the US have given way to relapses in eight of the 11 business cycles since World War II.
The relapses reflect two conditions: the persistent vulnerability of the recession itself and the likelihood of aftershocks. Unfortunately, both conditions have now been met.
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STILL NO RECOVERY
Vulnerability is hardly debatable. Despite the record 33% annualized decline in real GDP growth in the third quarter of this year, the US economy was still 3.5% below its previous high in the fourth quarter of 2019. .
With the exception of the 4% decline from peak to trough during the global financial crisis from 2008 to 2009, the current gap of 3.5% is as large as that found in the depths of all post-WWII US recessions. .
Crowds shop at The Galleria as social distancing guidelines to slow the spread of the coronavirus disease (COVID-19) have relaxed in Houston, Texas, USA, May 4, 2020. REUTERS / Callaghan O ‘ I will do
Consequently, it is ridiculous to speak of an American economy that is already recovering. The second-quarter snapback was nothing more than the proverbial dead cat bounce, a mechanistic post-lock bounce after the steepest drop on record.
That is very different from the organic and cumulative recovery of an economy that is really improving. America remains in a deep hole.
Ask American consumers, who, at 68 percent of GDP, have long represented the dominant share of America’s aggregate demand.
After plummeting an unprecedented 18% between January and April, total consumer spending has since recovered about 85% of that loss (in real terms). But the devil is in the details.
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CONSUMPTION OF GOODS AND SERVICES
The rebound has been concentrated in the consumption of goods: high-priced durable goods like cars, furniture and appliances, plus soft goods nondurable goods like food, clothing, fuel and pharmaceuticals that have more than made up for what was lost during the induced block. immersion.
In September, consumption of goods in real terms was 7.6% higher than its peak before the January 2020 pandemic.
The rebound benefited significantly from an increase in online shopping by stay-at-home consumers, with e-commerce going from 11.3 percent of total retail sales in the fourth quarter of 2019 to 16.1. percent in the second quarter of 2020.
But consumption of services, which accounts for more than 61 percent of total spending by American consumers, is an entirely different matter. Services accounted for 72 percent of the collapse in total consumer spending from January to April.
A customer’s temperature is taken as he queues outside an Apple store to pick up Apple’s new 5G iPhone 12, as the coronavirus disease (COVID-19) outbreak continues in Brooklyn, New York, on October 23. 2020 (Photo: REUTERS /). Brendan McDermid)
While services have partially recovered since then, as of September, they had recovered just 64 percent of the losses induced by the lockdown earlier this year.
With COVID-19 still on the rise, vulnerable American consumers remain understandably reluctant to re-engage in the personal interaction required in face-to-face service activities such as restaurant dining, in-person retail shopping, travel, hotel stays. and leisure and recreation. activities.
Together these services represent almost 20 percent of total household service expenditures.
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BEWARE OF POSTCARDS
The understandable fear of personal interactions in the midst of a pandemic leads us to the second ingredient of double dip: aftershocks.
With the current exponential increase in COVID-19 cases, the lockdowns are back, not as severe as in March and April, but still pointing to a partial reduction in person-to-person activity ahead of the all-important Christmas season.
Precisely at the time when the economic calendar tends to expect a huge surge in activity, the chances of a major seasonally adjusted disappointment increase.
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This poses serious risks to the still ailing US job market. Yes, the overall unemployment rate has dropped dramatically from 14.7 percent in April to 6.9 percent in October, but it is still essentially double the pre-COVID low (3.5 percent).
With weekly unemployment insurance claims only beginning to rise in early November as new curfews and other lockdown-like measures are implemented, and a dysfunctional US Congress failing to agree on another aid package, the risk of a new weakness in employment in general is growing.
THE BEST TIME AND THE WORST TIME
The news about vaccines is truly extraordinary. While the production and distribution logistics are daunting to say the least, there are good reasons to hope that an end to the COVID-19 pandemic may be in sight.
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FILE PHOTO: A video still showing a researcher in a laboratory run by Moderna, who said his experimental vaccine was 94.5 percent effective in preventing COVID-19 based on interim data from a late-stage clinical trial. (Image: Modern / Brochure via REUTERS)
But the impact on the economy will not be instantaneous, and vaccination is unlikely to produce so-called herd immunity until mid-2021 at the earliest.
So what happens between now and then? For a still vulnerable US economy now in the grip of predictable aftershocks, the case for a relapse, or double dip, before mid-2021 is even more compelling.
To paraphrase Charles Dickens, this is the best of times and the worst of times. As financial markets celebrate the impending vaccine-driven boom, the confluence of epidemiological and political aftershocks has pushed us back into a quagmire of increased economic vulnerability.
In Dickens’s terms, to reach a “spring of hope” we must first endure a “winter of despair.”
Stephen S. Roach is a member of the faculty of Yale University and the author ofUnbalanced: the codependency of the United States and China.
