The Pandemic So Far...

Chief Economist Scott Brown discusses his monthly economic outlook.

COVID-19 has affected the data collection process for the major economic reports, including employment, consumer prices, retail sales, and industrial production. However, the incoming economic figures imply a stunningly swift, sharp decline in economic activity. This is especially clear in the two best real-time indicators, weekly jobless claims, and the UM Consumer Sentiment survey. We have not seen the economy bottom out, and forecasting the recovery is difficult. As Fed Chair Powell noted in mid-March, “the economic outlook depends critically on the spread of the virus, the measures taken to contain it and how long that goes on, and all that’s really not something that’s knowable.”


When considering the economic aspects of the pandemic, it’s important to ask if there are any parallels, any examples of previous shocks and their impacts on the economy. The 2007-09 financial crisis reflected the collapse of a housing bubble, but was also an unwinding of massive leverage within the financial sector. While financial strains are part of the current weakness, they are not the primary cause. The Great Depression was also caused by a financial crisis, but the reasons it was so severe and lasted so long was that policymakers made all the wrong moves – the Fed raised interest rates to defend the currency (because we were on the gold standard), the government raised taxes in the middle of the depression because lawmakers were worried about the budget deficit, and the government let thousands of banks fail, taking people’s life savings with them. The current situation is somewhat like World War II, in that we are we are going through a period self-sacrifice, but World War II also coincided with a redirection of capital into defense goods, which isn’t really going on right now. Hence, this is really an unprecedented event in economic history. Looking at past recessions for guidance is unlikely to be useful.

The key aspects of the coronavirus are its asymptomatic transmission (the fact that one can show no symptoms and still spread it) and its relatively long incubation period. That makes it difficult to contain. The death rate varies by age and the initial health of the individual. It’s more deadly if you’re older or have health issues, such as respiratory problems, diabetes, or heart disease. While many of the infected exhibit mild symptoms, about 20% of the cases are serious and require hospitalization. As with any virus, the spread appears to start slow, but builds exponentially, doubling every few days until it either runs out of potential hosts or is met by mitigation (efforts to contain it). This is where social distancing comes in. Social distancing (staying at home and avoiding crowds) slows the spread of the virus, helping to insure that hospitals won’t be overrun with infected patients, and buys time for the development of palliatives (treatments or a vaccine). States and countries that adopted social distancing earlier have had better results in containing the virus. Testing is improving, but has long been inadequate. As a consequence, we haven’t had a good handle on how many people have had the virus and it has been much more difficult to track the spread. In a best case scenario, it will take 12-18 months to develop a vaccine, although that process has already begun. To date, we don’t have an effective treatment, which will be a key factor in re-opening the economy.

Ending social distancing too soon risks generating a wider outbreak of the virus and a more significant impact on the economy (as self-imposed social distancing would last a lot longer). The key is whether we can test enough people, and be able to detect and isolate infected individuals and those with whom they have come into contact. Coming up with an effective treatment will help to ease public fears and having a vaccine would be ideal.

There’s a lot of uncertainty now about how to loosen the social distancing and what the new normal is going to look like. Eventually, the pandemic will be behind us. However, the severity of the economic decline implies that this won’t be a V-shaped recovery.