March 20, 2020
Our government officials in Washington as well as state and local leaders have mounted an all out effort to prevent the spread of the corona virus. That action has stopped the economy dead in its tracks and will almost certainly result in a deep but very brief recession, and bigger budget deficits in the years ahead. In our opinion, the government had to introduce those draconian measures to curtail the fear. The drastic action taken should show some hints of success by early April and widespread evidence that the virus is under control by the end of April. At that point the restrictions can be loosened gradually and the economy will begin to recover. One thing we have learned over the years is to never underestimate the strength and resilience of the U.S. economy.
Throughout America every restaurant and bar is closed as are most retail stores. Airlines are flying with more than half of their seats empty. Hotel occupancy rates are falling just as sharply. Businesses large and small are laying off workers. Supply chains for manufacturing firms are drying up. If they have not shut down yet they will be forced to do so before long. The economy has come to a screeching halt. But it will not last long.
Let’s review the China experience. The corona virus originated there in late December. Xi Jinping quarantined the Wuhan province in late January. The number of new cases reported daily began to slow in early February – about a week after the quarantine was imposed. The number of active cases peaked at 58,000 on February 19 – three weeks after the quarantine was imposed. They have fallen every day since and are now at 6,500 – seven weeks after the quarantine was imposed. The draconian measures imposed by China quickly stopped the spread of the virus. There is no reason to think the pattern will be significantly different in the U.S. Chinese-type measures to stop its spread were imposed here in mid-March. We should see early evidence that the virus is slowing down by early April. The number of active cases should begin to drop by mid-month. Once that happens, we can all breathe a collective sigh of relief.
So, what have we learned? We now know that drastic measures will quickly stop the spread of the virus. But at what cost? In the short-term we might experience a single-quarter GDP drop of 10%. In the longer-term future budget deficits have just escalated from $1.0 trillion per year to $2.0 trillion. Our initial reaction is to say that these consequences far outweigh the benefits of trying to stop the virus.
We have often wondered why all the attention of the world is on the corona virus and nobody even mentions the basic flu virus. Through March 7 the CDC estimates that 43,000,000 Americans have contracted the basic flu – or 275,000 people per day. As of March 20 a total of 14,350 people have contracted the corona virus. We keep hearing the corona virus is more deadly than the basic flu. But the grim reality is that thus far 38,500 Americans have died from the basic flu, but only 200 people have died from the corona virus.
Last year 35.5 million people contracted the flu in the U.S., and 34,200 died from it. This year is shaping up to be somewhat worse than last year. But a year ago nobody worried about the flu and nobody suggested that the economy had been impacted by it. So why all the fuss?
The answer is that, justified or not, people are afraid. They do not understand this virus. In their mind it is unlike anything we have seen before. Will it end by summer? How many people will die? The world is in panic mode. That fear has been exacerbated by the media. Everybody loves bad news. Ratings go up. Feed the fire! So, what exactly do our policy makers do to halt a panic?
Neither the regular flu nor the corona virus have a cure. If you get it, you have to let it run its course. Nothing you can do will cure it. But there are things you can do to help. The corona virus is a respiratory disease and some people that contract it could eventually experience difficulty breathing. They need a ventilator. But ventilators are in short supply.
Test kits are also in short supply. If you contract flu-like symptoms a test kit is not going to cure you, but it can help determine whether you have the corona virus or the basic flu. If it is the latter, there is no need to head to a hospital. Making more kits available should alleviate some of the overcrowding of hospitals.
But neither ventilators nor test kits can suddenly materialize. It takes time to ramp up production.
So what else might you do to halt the panic?
The Fed tried to offer assistance by cutting rates to 0% in two increments. It also indicated that it was prepared to make available whatever amount of credit was required to make sure that the financial markets continued to function. It wasn’t enough. The markets decided it was the wrong solution to the problem and sank following both cuts.
The Administration proposed a $1.0 trillion relief package. It wasn’t enough. The action taken treated the symptoms, not the cause. The markets continued to fall.
The world was gripped by fear. By early March it became apparent that measures taken by China seemed to be working and, we would suggest, that nothing short of a similar solution would be deemed acceptable to the financial markets. Government officials were basically forced to adopt the same draconian measures that China had imposed. They had no choice. The consequences of a financial meltdown would have been far worse than the virus. While there will be longer-term economic fallout, right now the goal is to restore confidence.
This seems similar to the financial panic that gripped the world after the collapse of Lehman Brothers in 2008. Some of the biggest firms in the country were on the brink of collapse. What to do? A government bailout is not an ideal solution. Somebody has to decide which firms will go under and which will not. But sometimes you just have to hold your nose and jump. Not doing so would have almost certainly triggered a 1930’s type of depression. So which was the better of two lousy solutions? Government officials chose the bailout and it worked. The economy recovered and entered the longest period of expansion in its history.
The same thing is true now. There are no good solutions. The government was forced to introduce drastic measures to stop the panic. By doing so the virus will be brought under control quickly. The economic fallout will almost certainly result in a sharp but very brief recession and larger budget deficits in the years ahead. But we can worry about that later. Right now the goal is to restore confidence.
Keep an eye on the daily reports from the CDC regarding the spread of the corona virus. By the middle of April we should see some improvement, and by mid-April it should be readily apparent that the virus is getting under control.
Hang tough. The world has not yet ended.
Stephen Slifer
NumberNomics
Charleston, S.C.
Hi Steve, the measures introduced in China did work. However the u.s. is not on track to implement anything near that. Currently we’re tracking more like Italy as to rate of infections. Hopefully we will slow that down but as of today it’s not looking good. I agree the media sounds hysterical, however when I read interviews with epidemiologists and other medical personnel who are experts in pandemics, they also sound hysterical. That concerns me. Depending on how we “flatten the curve” their data indicates we are looking at a death rate in the U.S. of between 500,000 and 3 million people, this year. That would make this by far the single largest cause of death in the U.S. Additionally we are likely to have to go through two flu seasons prior to a vaccine being commonly available. The federal government report on this I read last week is talking about the likelihood of a 18 month period of rolling illness and quarantine. Furthermore the government is openly speaking of unemployment rates of +20%. I’d love if the measures put in place are effective and we so bounce back, but the epidemiologists are saying not to expect that.
Steve,
What you wrote about the virus is excellent.
Good Afternoon Doctor Slifer
Quite curious what leads you to think the Corona virus recession will be short with a “V” recovery
With respect to you and completely disagree
Indeed reading that make me think I was reading something Mr. Kudlow wrote
No snap of the fingers will restore the supply line
Indeed you can not turn off machinery and turn it back on six months later as it just does not work that way by any means
Goldman, Morgan, etc do not see a quick recovery
I would like to see your reasoning
Lastly, why would you believe anything the Chinese report
Respectfully
Hi Chris,
As always I welcome your comments. You give all of this a great deal of thought so I want to hear what you are thinking. I, too, read and hear the interviews with the health care specialists. There is one frequently quoted guy from the U.K. who says something like, “In the U.S. 2 million people will die if nothing is done.” That is a scary comment. But something IS being done. My suspicion is that all of these guys are assuming that nothing happens and we continue on the current trajectory in which case I can easily see where they are coming from. But I am pretty certain that trajectory is going to change. The curve has turned downwards dramatically in China, but also in South Korea. It has flattened in Japan — meaning that just as many people get the flu each day as recover from it. And, I noticed this morning it appears to have turned downwards in, of all places, Iran. So what I am seeing is more than just a China phenomenon. Gives me hope.
As of yesterday, March 20 — Friday — the drastic measures here in the U.S. had only been in effect for a couple of days. The curve has not shown any sign of flattening yet. But let’s see if we can see any sign of change between now and the end of next week.
Stay healthy.
Steve
Thanks Walter. The reaction to my hopeful outlook has been split about 50/50. Half of the people who comment are supportive — like you. But others wonder how I can question the judgment of health exports. I also hear that other well known economists are presenting a doom-and-gloom outlook and who am I to question their wisdom. First of all, most economists have gotten spooked by something about once a year and have called for any number of recessions which have never materialized. Could they be right this time and I am wrong? Of course. But just because others have a different view does not automatically mean they are right.
And re: the health care experts I read and hear the interviews with many of these people. There is one frequently quoted guy from the U.K. who says something like, “In the U.S. 2 million people will die if nothing is done.” That is a scary comment. But something IS being done. My suspicion is that all of these guys are assuming that nothing happens and we continue on the current trajectory in which case I can easily see where they are coming from. But I am pretty certain that trajectory is going to change. The curve has turned downwards dramatically in China, but also in South Korea. It has flattened in Japan — meaning that just as many people get the virus each day as recover from it. And, I noticed this morning it appears to have turned downwards in, of all places, Iran. So what I am seeing is more than just a China phenomenon. Gives me hope. We have not yet seen the number of active cases in the U.S. begin to bend downwards yet, but the rather draconian containment measures were only imposed earlier this week. Let’s see what happens by the end of next week. I hope there are signs that things are coming under control We will see.
All the best.
Steve
Hi Allen,
Thanks for your comments. I respect your view even if it is different from mine. For what it is worth, the comments I have gotten regarding my commentary have been split about 50/50. Some supportive. Others, like yourself, strongly opposed. Fair enough. Lots of room for different opinions out there. None of us have seen this before. Nobody has a lock on truth.
You mentioned Goldman and Morgan Stanley. Both organizations have a good group of economists. Smart guys. But in the pasts 10 years economists have worried about a looming recession about once a year and they have been proven wrong every time. Could they be right this time and me wrong? Of course. But just because others have a different view does not necessarily mean they are right.
You seem to have a distrust of anything coming from the Chinese government. It is one thing for China to say GDP growth in that quarter was 5.0% and it was really 4.0%. Hard to dispute. But when the number of active cases of this virus have fallen from 58,000 in mid-February to 6,000 as of this morning, that is a dramatic drop. If it were really, to pick a a number, 50,000 or 100,000 it seems to me that we would have some sense that that figure was completely off base. I choose to believe that the number of active cases in China has turned downward dramatically in the past month. And it is not just China. South Korea’s curve has turned downward. Japan’s curve has flattened out which means that just as many people are contracting the virus each day as are recovering from it. And, I noticed this morning, that the curve has also begun to turn downwards in — of all places — Iran. It has not yet begun to do so in the U.S. but the rather draconian measures to halt its spread have only been in place for a few days. Let’s see what happens by the end of next week.
And I do not believe I talked about a “V” recovery. What I said in the first paragraph was: “At that point the restrictions can be loosened gradually and the economy will begin to recover. One thing we have learned over the years is to never underestimate the strength and resilience of the U.S. economy.” The speed of ascent will depend upon how quickly the restrictions can be lifted. Given the fear of re-igniting the virus my guess is that will be a slow process. But the stock market may be a different story. As fast as it went down, it can turn upwards quickly once we get clear evidence that the virus is under control. EVerything seems to change at warp speed these days. Once that happens business and consumer confidence will return and the economy will turn upwards.
If all of this drags on for months we obviously get an entirely different outlook. We will see.
Steve
Thanks for your responses Steve. It’s a strange time, it’s harder than usual for anyone to predict the future and I appreciate you taking the risk and trying. I suppose economically speaking, the only thing I’m pretty sure of at this exact moment in time is “cash is king”. Sooner or later that will be less true. The question is when 🙂
Is there enough US data to predict? Right now predictions are based upon chunks of data from the three hot spots in NYC Seattle and Calif. In China 20,000 have died. She has 4+ times our population. Soo people are predicting we will have many, many more?
My guess is we will have a better idea when testing catches up and we are doing > 1000,000 test a day. Dr, Birx on 3/20/20 seem to know what was going on but today, Sunday, she was nowhere to be found!
Hi Walter,
Thanks for taking the time to comment. Like everybody, I suppose, I am tracking the number of cases globally as well as the number of active cases. As more testing kits become available in the U.S. the numbers will go up, but those cases were there previously, we now just know about them. As you have read, I am using the experience from China and S. Korea as models for how this will play out here (and elsewhere). What we need first is to see the curve flatten out. That means that the number of new cases daily starts to slow from 23,000 new cases currently, to 22,000, 20,000 etc. Still getting more cases of the virus, but getting them at a slightly slower pace. That is a good start. We are not there yet. I am hoping that will happen by mid-April. The second step is the number of active cases starts to do the same thing. When we get the virus a couple of weeks later most of us recover, some die. So active cases are the total less deaths less recoveries. That represents the number of people out there who are still capable of transmitting the disease. When that number falls we should feel fairly comfortable that we are on the right track. In China they peaked at about 59,000 in mid-February. As of this morning they had dropped to 5,120. I think it will happen here by mid- to late- April.
My question is, how long can businesses — small businesses in particular — keep going? Second quarter GDP growth is going to look awful. We are at -10.0%. Now hearing numbers as high as -20% to -25%. Entirely plausible. Depends on how quickly we can start easing up on the restrictions.
All the best.
Steve