For this week’s Market Commentary, I am attaching an excerpt from the second quarter edition of The Farr View. If you would like to read the full piece, please click the box to the left and sign up to receive it in your email each quarter.
There is no sugar-coating it. The economy has undergone a massive shock. And while it’s tempting to join those calling for a V-shaped recovery, we just don’t see it. But first the numbers. According to the latest estimates, the US economy is expected to contract 5%-6% this year after adjusting for inflation. If those estimates indeed come to fruition, it would mark the worst economic contraction since 1946. The ranks of the unemployed have increased by about 12 million to 17.8 million since the epidemic first hit our shores in January. Another 4.6 million have left the labor force. Adding the two figures together, there were about 16.6 million fewer people working in the US in June compared to the end of 2019. The only thing positive about that number is that it’s down sharply from 25.4 million in April. We worry the improvements may prove fleeting.
There is no doubt that the economic fallout from the pandemic has been limited by government action. A combination of aggressive fiscal and monetary stimulus was designed to support consumers and the economy at large until the pandemic can be brought under control. The medical community believes that won’t happen until enough of the population (estimates are 60%-80%) becomes immune to the virus through either a vaccine or previous infection. When we reach that point, called “herd immunity,” the chances of further outbreaks fall dramatically, and some semblance of normalcy can be restored. The government’s goal is to build a bridge to herd immunity while at the same time minimizing serious illness, deaths, and damage to the economy.
But a successful transition is far from assured at this point. A combination of inconsistent messaging from leadership, failure to address the pandemic at a national level, and an unwillingness to follow medical guidelines (masks, social distancing) has resulted in another spike in infections in some of the most populous US states, including California, Texas and Florida. According to Jan Hatzius of Goldman Sachs, “states representing about 60% of the US population have responded to the worsening virus situation by pausing or reversing their reopening plans.” Most economists are now forecasting further job losses as a result of the virus’ resurgence. As well, many people are likely to revert, at least to a certain extent, to social distancing and self-quarantine. These unfortunate developments will negatively impact consumer spending, especially on the kinds of services that provide so many US jobs and have borne the brunt of the layoffs to date. Needless to say, the setback will raise the stakes for another round of government stimulus spending.
But even if continued monetary and fiscal stimulus is successful in bridging the gap to vaccine approval, questions will remain. How effective will the vaccine be? How quickly can it be produced and administered to such a large population? How much of the population will refuse to take the vaccine? How quickly will businesses regain enough confidence to boost payrolls and other investments? Will lingering fears inhibit a return to pre-pandemic consumer spending patterns or will savings rates stay elevated? How long will the federal government support consumers, businesses and banks as we wait for the economy to normalize?
All this is to say that notwithstanding the unprecedented economic support provided, the pandemic response has not been managed well in the U.S. America has sustained nearly a quarter of total global fatalities from COVID-19 even though we only account for about 5% of the world’s population (and the outbreak reached us months later than most other countries). And the tally keeps rising by the day. In an ironic turn of events, some countries are restricting entry for those traveling from the US due to fears about spreading the disease. It didn’t have to be this way. A lot of unnecessary damage has been inflicted. Still, success in fighting the disease in other countries shows that it is possible to do so. I am also highly optimistic that with all the resources brought to bear, we will soon find a vaccine. But in order to defeat this pandemic, we will need to circle the wagons anew.