For months, critics of the re-opening push (and also would-be critics who, by virtue of the positions they hold, were compelled to couch their criticism in neutral terms), cautioned that restarting the world’s largest economy in haphazard fashion risked the worst possible outcome.
There was a time when Americans were known for discipline and altruism. But that is ancient American history. Generally speaking, we are a nation of consumption-addicted, instant gratifiers, selfish well beyond what’s natural for human beings. There was little chance citizens would put the interests of the polity first when it comes to things like mask-wearing and avoiding the kinds of behavior with the potential to spread an airborne virus.
In situations like the one the country is in currently, discipline has to be imposed on Americans, as it was by governor Andrew Cuomo, who managed to couch his benign paternalism in terms emotional and “real” enough to engender at least begrudging respect from New Yorkers. The result: New York was able to largely prevail in the fight to get control of COVID-19.
What we’ve seen over the past several weeks, though, is that states which did not seek to impose discipline (real discipline) on the public are now facing dangerous flare-ups, with Florida, Texas, and Arizona witnessing large increases in caseloads, hospitalizations, and positivity rates.
Sure enough, businesses are being re-closed, and, invariably, that will lead to layoffs and a generalized deceleration in economic activity.
Cue Goldman to revise down their outlook for the economy in light of recent developments.
Jan Hatzius describes COVID’s resurgence in the US as “dramatic”. “In response, officials have paused or reversed reopening in states containing more than half the population”, he goes on to say. Here’s a bit more:
Exhibit 2 shows that over the past two weeks, states representing about 60% of the US population have responded to the worsening virus situation by pausing or reversing their reopening plans. Nearly all states had eased restrictions by June, but over the last week states including Florida, Texas, and California moved toward tighter restrictions with targeted measures including closing bars and limiting restaurant occupancy. Texas has also limited elective medical procedures to free up hospital capacity.
Texas — where governor Greg Abbott resorted to a statewide mask mandate on Thursday after a series of additional steps to curb the state’s outbreak met with little success — reported a record total for hospitalizations over the weekend (7,890).
New York had only 844 hospitalizations on Saturday, down from almost 19,000 during the most harrowing days of the state’s crisis.
Of course, it’s not just the mandatory re-closure of bars and other high-contact businesses that has the potential to impact economic activity in a scenario where cases surge. Once things get moving in the wrong direction, headlines documenting the surge may force a given state’s citizens to adopt voluntary containment protocols they might not have been inclined to observe previously. That compounds the effect, and the psychology could spill over into other locales.
“A combination of tighter state restrictions and voluntary social distancing is already having a noticeable impact on economic activity”, Goldman’s Hatzius goes on to say. “States with the most severe deterioration in the COVID situation saw declines in consumer and workplace activity at the end of June that will likely continue into July, and activity flattened in other states”. And more:
A combination of tighter state restrictions and voluntary social distancing in response to the virus situation is already having a noticeable impact on economic activity. Mobility data from Google show that states with a more severe deterioration in their public health situation–defined here as those states meeting none or only one of the gating criteria for reopening as of June 28–saw a modest decline in retail and recreation activity and workplace activity toward the end of June that began even before authorities tightened policy (see Exhibit 3). Activity was flat on average in other states.
The bank goes on to warn that “the healthy rebound in consumer services spending seen since mid-April now appears likely to stall in July and August as authorities impose further restrictions to contain virus spread.”
Consider also that unless Congress acts, additional federal unemployment benefits will expire this month, which means incomes lost will not be totally replaced going forward. The surge in consumer spending thus appears highly tenuous.
Again, this was always the risk from the very first days, when critics warned that Georgia was setting a potentially dangerous precedent by re-opening salons, tattoo parlors, and the like, despite not having the virus under control on some metrics.
Goldman does write that “the ongoing recovery in manufacturing and construction should be largely unaffected”, which is good, but the US economy lives and dies by the consumer. In this scenario, “lives and dies” can be taken figuratively or literally.
In addition to cutting their forecast for a rebound in Q3 to 25% (and that’s QoQ SAAR, obviously) from 33%, Goldman also reduces their full-year forecast to a 4.6% contraction, down from 4.2% previously.
But all hope isn’t lost. For one thing, simple math means the Q3 GDP print will still look good. “Our 2020Q3 forecast of +25% is still strikingly strong because of the statistical overhang created by the sharp upward trajectory from the April bottom through June”, the bank notes, adding that “even if GDP were flat in Q3 at the June level, we estimate the QoQ annualized growth rate would still be +17%”.
Further, Goldman says they “expect the US economy to get back on track in September”.
Why? Well, because the example set by other countries proves America can do better. “Other major economies have returned to similar levels of activity while containing the virus, showing that further progress is feasible”, he writes. That harkens back to the points made here at the outset — Americans’ psychology isn’t necessarily conducive to this effort, and that may make comparisons with other societies less useful.
Hatzius goes on to say that “policy and behavioral changes such as mask-wearing offer opportunities for controlling the virus at minimal economic cost” and expresses some guarded optimism that Texas’s new mask mandate “shows that US authorities are willing to adapt”.
Fingers crossed on that, but color me skeptical.