Covid-19 was a threat that so many in the developed world underestimated. Even as the virus spread through the Hubei province of China in late-January, many, including myself, were focused on other things. Indeed, most western European governments, alongside that of the United States failed to adequately prepare in the weeks leading up to early-March. This lack of preparedness left hospital systems in desperate need of personal protective equipment, ventilators and available labor hours when the caseload began the exponential curve upward. Citizens and foreign nationals alike were also caught unawares, causing a run on grocery stores and stranding many unable to return home amidst broad-based travel bans. All of this underscores the difficulty of dealing with a pandemic...by the time infections begin to increase, the time for preparation has already long since passed.
The "flattening of the curve" as it has come to be known, is a process of implementing strict social distancing measures to limit the spread of disease, in this case, Covid-19. These measures are painful, especially for leisure and hospitality industries and yet essential to prevent demand far outstripping the supply of healthcare services, namely intensive care hospital beds. Such extreme quarantine measures are appearing to work. In the United States, the government has revised lower the expected absolute morbidity rate to ~60,000 people, down from a range between 100,000 and 240,000 just two weeks earlier. One shutters to think of the morbidity rate if life had "continued as usual." Indeed, the latest estimates represent a massive improvement and shows, in real-time, the power of social distancing to limit the negative effects of Covid-19. This should not go without saying that a loss of even 60,000 people is a heart-breaking event and I hope that the ultimate death toll comes in far below even this new lower estimate.
While the Coronavirus will remain a problem for some time, I want to shift my focus to the economic implications of strict lock down requirements. As I mentioned, such social distancing measures have been key in limiting the negative effects of Covid-19. Unfortunately, such measures represent an effective shut down of broad swathes of the U.S. economy, leading to huge levels of unemployment and a deep output contraction. Unemployment claims alone have been eye-watering in just how quickly these totals have risen, up by 17 million in just three weeks. In total through 2020, total initial claims are currently holding at 19.18 million. To put this in context, through 2008, the last time initial claims spiked higher, a running sum of applications did not manage to hit current 2020 levels until November of that year!
Running Sum of Initial Jobless Claims by Year
Source: U.S. Department of Labor
U.S. energy demand has also hit record lows. A lack of automobile transportation has pushed gasoline demand to levels not seen since the 1990's. An unwillingness to travel via air has also limited the demand for jet fuel, which finished last week at the lowest level since records were first published in 1991. Refinery throughput was equally as depressed, finishing even under totals that occurred in Q3 2017 when Hurricane Harvey ripped through the Houston area, forcing many refineries offline for several weeks. The entire energy supply chain, from production to transportation and refining are under enormous strain.
The U.S. Federal government and Federal Reserve alike have taken drastic steps to stop the bleeding. A record fiscal stimulus totaling $2 trillion is likely a first in several spending bills meant to provide financial assistance to American citizens and businesses impacted by the forced economic closure. The Federal Reserve has gone far beyond traditional monetary policy, providing trillions in additional liquidity through broad-based quantitative easing (process of purchasing debt on the open market). Just this week (April 9th), Chairman Powell extended short-term lending facilities to state and local governments in desperate need of cash to insure a continuation of essential services. Unlike in the 2008/2009 financial crisis, the response, especially out of the Fed, has limited what could have turned into a far more serious financial crisis. While not guaranteed, U.S. labor markets have a fighting chance of recovery after Covid-19 begins to recede.
Despite optimism around governmental action, my outlook remains grim. The likelihood of a sharp "v-shaped" rebound is unlikely. U.S. consumption behavior will be demonstrably altered as a result of the Coronavirus outbreak. A willingness to travel via air, either for leisure or business, faces a remarkably less rosy future. The reopening of restaurants and other businesses requiring the congregation of people will need to be slow and controlled and most importantly, consumers will need to feel safe returning to these places of commerce. This feeling of safety will be difficult to guarantee, likely limiting the speed at which many businesses can recover. My hope is that output will undergo a slow and steady rise through the 2H with growth accelerating into early-2021 that eventually returns GDP to the long-run rate of increase. The worst case scenario is a protracted period of low/no growth in which labor markets struggle to find a footing for several years as was the case following the financial crisis. I'm optimistic this will not be the outcome as governmental intervention has been far more aggressive to take on Covid-19. The fact that current weakness in economic output is the result of a health-related crisis, not a financially driven one, is also a positive factor that makes long-run economic sluggishness less likely.