The writer is president of Fulcrum Asset Management
The relentless rise in the number of new Covid-19 infections in the US, followed by a rise in hospitalization and death rates in the hardest hit states, suggests that Anthony Fauci of the Casa Coronavirus task force Blanca was justified when she recently described the deteriorating situation as a “perfect storm”.
So far, the US policy response has been muted, certainly compared to nationwide blockades in other countries in March. And markets remain surprisingly relaxed, according to reports, because investors are optimistic that an effective Oxford University vaccine or Moderna trials may be “in sight.” Those tests are very encouraging. But even the most favorable outcome in vaccine development would come too late to save the American economy from the spread of the virus in the next three months.
Unless public policy can control the infection rate across the entire American sunbelt, there could be adverse consequences for any economic recovery in the United States for the rest of this year. Consensus economic forecasts have not yet given much weight to this growing risk, although the United States Federal Reserve is becoming increasingly concerned.
Fulcrum economists have developed a new model that tracks the epidemic state by state, based on the now-familiar SIRD model used by the Imperial College Covid-19 response team and other researchers.
It suggests that the effective reproduction number of the virus, known as R, is now above the critical level of 1 in all but five of the 50 US states Weighted by gross domestic product, this means that 95 percent Percent of the US economy is affected by a viral reproduction rate high enough to cause an exponential increase in the number of cases, unless something intervenes to prevent it. Other researchers have found similar results.
This spread of R levels above 1 is the widest since the epidemic began. In March, absolute R levels were highest in the Northeast, when the reproduction rate exceeded 3 for several weeks and infection numbers doubled every few days.
In the current wave, generally lower levels of R have decreased the spread of the disease. Furthermore, the age distribution of the infected group is younger, and the case fatality rate within intensive care units has decreased as treatment has improved.
As a result, there has been political resistance to complete blockades in the most severely affected states. Unfortunately, international experience suggests that delayed blocks result in worse outcomes for cases and deaths, at least in the short term.
The key economic question now is how much harm will be done to activity as policy blockades and voluntary social distancing control the epidemic. So far, the answer is very small.
According to Harvard University economist Raj Chetty’s website, which tracks the recovery and relies on big data, US consumer spending has flattened since late June, but has not declined substantially, even in the states. most affected. Crawlers based on Google searches and other big data show a similar picture.
Therefore, most forecasters assume that there will be nothing worse than a short period of stable activity. This would lead to very positive growth between the second and third quarters. For example, Goldman Sachs believes the virus can be controlled by measures focused on ending indoor meetings and promoting the use of face masks. Both have been effective in some states.
Such measures would not achieve complete blockages from staying home, allowing the economy to resume recovery. Arizona is an example of a state that has made encouraging progress. However, the downside risks are obvious.
Fulcrum economists have modeled an alternative scenario where full locks are eventually needed in states where R is currently above 1.5, with partial locks in states where R is between 1.25 and 1.5, and no locks elsewhere. .
This would lead to a large drop in activity, in effect a double drop, of approximately 7 percentage points across the economy while the locks last. If the situation persisted for three months, it would eliminate almost 2 percentage points of this year’s growth rate, compared to the latest consensus forecasts.
This double dip may not be the most likely outcome, at this time. But it is the most plausible worst case scenario if the national spread of the virus is not controlled soon.
