All 50 states have begun to lift COVID-19-related restrictions and incoming data are suggesting that economic activity is beginning to pick up, even sharply in some sectors - Photo by BBC

JAKARTA (TheInsiderStories) – All 50 states have begun to lift COVID-19-related restrictions and incoming data are suggesting that economic activity is beginning to pick up, even sharply in some sectors. This has made April the trough of economic activity nationally.

However, many states are now showing increases in the daily number of new cases. Nationally, the number of new cases is spiking, reported for June 25 at nearly 41,000. Frighteningly, hospitalizations are also on the rise, and the national 7-day moving average of deaths from COVID-19 has also turned up sharply.

Scenes of “socially dense” crowds of people, most of whom were not masked, from over the Memorial Day holiday weekend raise fears that a repeat may occur over the Fourth of July holiday weekend, perhaps adding fuel to the fire.

The interplay of relaxing restrictions, increased mobility, increasing economic activity, “social distancing fatigue” and other factors raises the odds that the alarming rise in new cases and deaths, if it were to continue, could result in another economic downturn. Both official backtracking on the relaxation of restrictions as well as voluntary pullback on the part of consumers could cause spending to weaken again sharply, throwing the economy back into a brief two-quarter recession.

In this piece, we highlight this risk by presenting an alternative projection that is driven by this narrative. This scenario is one of six alternative scenarios we prepare each month in addition to our base forecast. We begin by observing the relatively quicker re-opening in some states that has already occurred, and assume that it continues and broadens.


This is assumed to contribute to a somewhat higher trough in economic activity nationally in the second quarter, and a larger pop in activity and stronger growth in the third quarter than in the base forecast. In this scenario, GDP declines by less in the second quarter (–35 percent vs –42 percent) and grows much faster (+30 percent vs 13 percent) in the third quarter, than in the base forecast.

Accompanying this early opening and upturn in activity has been increased mobility, and, unfortunately, clearly careless behavior of some residents in those states and others, perhaps due to what has been called social distancing fatigue. People are just tired of being isolated at home.

In this scenario, this combination of factors continues to fuel the increasing pace of new cases and deaths into the fall, when the turn to cooler temperatures exacerbates the spread of COVID-19. This occurs until states and local governments increasingly pause or roll back the relaxation of restrictions.

Moreover, consumers voluntarily go back into a strategy of “shelter in place” as a result of seeing the rise in cases and deaths around them. The resulting direct decline in consumer spending and knock-on effects is sufficiently sharp to push the economy back into recession beginning in the fourth quarter. GDP declines at an 8 percent rate then, and contracts at a 12 percent pace in the first quarter of 2021.

For purposes of this scenario we also assume that effective treatments for COVID-19 are not in widespread use until early 2021, while a vaccine is not in widespread use until fall 2021. Hence, the faster reopening of the economy in this scenario, bends the new-case curve upward, rather than downward.

A strong rebound begins in the spring of 2021 as the virus is gotten under better control, while the eventual roll out of effective treatments succeeds in lowering the mortality rate. Still, the lessons of the attempt to open too early and too fast, keeps the second recovery somewhat more subdued than the sharp jump seen in the third quarter of 2020.

The level of GDP contracts 11.4 percent through second quarter 2020, rises 6.8 percent (not annualized) in the third quarter as the economy begins to recover, but then declines another 5.1% through early 2021 as the second dip rolls over the economy. The recovery that begins in the second half of 2021 allows GDP to rise to just 1.4 percent below baseline by the end of 2024.

The unemployment rate rises to 12.8 percent in second quarter 2020, retreats modestly as people begin to get their jobs back, and then rises again to a peak of 11.6 percent in mid-2021. The rise in employment that accompanies the second recovery brings the unemployment rate to 4.2 percent by fourth quarter 2024.

Nevertheless, the unemployment rate averages 8.6 percent through 2026, roughly 2 percentage points higher than in the base case. Inflation starts out a bit higher than the base forecast, owing to the initially stronger recovery, but then slides to near zero for much of a two-year period. As a result of higher unemployment and lower inflation, the Federala Reserves maintains the target range for the Fed funds rate at 0-0.25 percent through 2024.

Risk spreads widen as corporate default risks jump. Some businesses that may have survived the first downturn are left cash starved, and more at risk of defaulting when the second downturn hits. As a result, the Baa spread over the 20-year Treasury note yield rises to 338 basis points in mid-2021, in contrast to the 275-basis-point spread in second quarter 2020.

Due to the early re-opening, the S&P 500 rises 28 percent from its first-quarter trough through fourth quarter 2020, before falling 5.8 percent in the first quarter of 2021. The subsequent rebound brings it to just 4.3 percent below the baseline by the end of 2024.

by Chris Varvares, co-head, US Economics, IHS Markit