A sharp spike in COVID-19 cases across the U.S. is
threatening the economic recovery and increasing the odds of a double-dip
recession.
Daily coronavirus infections surpassed 100,000 for the first
time earlier this month; since then, they have surged past the 150,000 mark. At
the same time, congressional leaders appear increasingly unlikely to strike a
deal on another COVID-19 relief package, even as another round of key
unemployment benefits is set to expire in the coming weeks.
Economists across the political spectrum have consistently
warned that sustained growth is dependent on getting the coronavirus under
control, with many now viewing the rise in infections with heightened concern.
“It’s alarming, to put it mildly," said Beth Ann
Bovino, chief U.S. economist at S&P Global. "If this spreads and
governments are forced to go back to lockdown measures, this very fragile
recovery is sure to fail.”
Earlier in the year, S&P Global forecast several
scenarios for the economic recovery. The baseline scenario, which would lead to
a 4 percent decline in gross domestic product, assumed Congress would pass a
limited $500 billion relief bill and that the winter spike in COVID-19 would be
under control.
Instead, there is no coronavirus relief package, and cases
are surging.
"Everything that is happening now, the risk of a
resurgence in COVID-19 as well as policymakers walking away from stimulus
negotiations — those two factors are what my team had feared would happen,”
said Bovino.
Without improvements on either front, a bigger economic
contraction is likely, to the tune of 5.1 percent.
“It wouldn’t be as large as what we experienced in the first
half of the year, but it would be a double dip,” Bovino said.
The jump in coronavirus cases can affect two crucial aspects
of the economy: business operations and consumer confidence.
In Europe, several countries have reimposed severe
restrictions or resorted to a second round of lockdowns in an attempt to ease
the strain on hospitals.
President Trump has been vehement that he opposes lockdowns
at any level of government, and President-elect Joe Biden’s transition team has
indicated it would favor targeting hot spots instead of the nation as a whole.
“I think of this as a dimmer switch, not an on-and-off light
switch,” Celine Gounder, who is advising Biden on his COVID-19 response, said
in a CNBC interview Friday.
“I think we need to close only those things that really are
contributing to the spread,” she added.
Already, states such as Michigan, New York, Oregon and
Virginia have announced they will impose more restrictive measures to curb the
spread of the virus, limiting the number of people who can gather in one place
and restricting hours or capacity at bars, gyms and restaurants.
Ben Ayers, senior economist at Nationwide Insurance, said
those kinds of steps would help avoid a double-dip recession, as well as avoid
the kind of full-scale lockdowns that much of the country saw in April when the
pandemic took hold.
“My estimation is that there’s not much of an appetite for
anything that severe, so we see the downside as slower growth but not a double
dip,” he said.
“The odds say that once an expansion starts, it’s really
hard to slow the economy so quickly,” he added.
New Mexico, however, ordered a two-week shutdown on Friday,
a sign that more severe restrictions could soon be in place elsewhere.
Even without government restrictions, the increase in cases
can spook consumers, prompting them to stay at home instead of going out and
spending money.
Consumer confidence dropped nearly 5 percentage points this
month, almost entirely based on consumer expectations of what the economy will
look like in the future, according to preliminary figures from the University
of Michigan.
While consumers in the early part of the recession were
bolstered by stimulus checks and enhancements to state unemployment benefits,
those revenue streams from Congress have since disappeared.
Federal Reserve Chairman Jerome Powell has insisted that
fiscal stimulus remains among the most important factors affecting the
economy’s near-term trajectory.
But Speaker Nancy Pelosi (D-Calif.) and Senate Majority
Leader Mitch McConnell (R-Ky.) remain miles apart on striking a deal for more
coronavirus relief.
Pelosi favors a $2.2 trillion measure the House passed in
October, while McConnell wants legislation closer to $500 billion.
The prospects for a deal are dwindling, creating anxiety for
millions of people who remain unemployed and thousands of struggling small-business
owners.
A key small-business loan program, the Paycheck Protection
Program, has expired, and federal support for state unemployment benefits has
largely ended as well.
The remaining federal unemployment programs, for
self-employed and gig economy workers, will expire on Dec. 31 without
congressional action. Those two programs alone are covering 13.5 million
Americans.
One bright spot, for those who have investments, is the
performance of U.S. financial markets.
Markets this past week shrugged off moves by states to
increase restrictions, with the Dow Jones Industrial Average rising 400 points,
or 1.4 percent, on Friday alone, and the S&P 500 closed at a record high.
"We have an effective vaccine around the corner. The
market is going to look through what we’re experiencing with that knowledge in
mind," said Nick Juhle, director of investment research at Greenleaf
Trust.
Even if the economy slips, he said, markets are keeping
their eyes on the long-term prize.
“When you think about the markets, we’re talking about
publicly traded companies that we’re pricing based on future earnings,” he
added.
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