Economy and a Covid Resurgence
This column is about adverse consequences to the economy if there a resurgence of the Covid pandemic. Dr. Anthony Fauci, the nation’s top infectious diseases expert, does not expect the US will need to reenter lockdown as the Delta strain of the coronavirus drives surges in new cases across the country. Even if that prediction proves to be correct, there are still many reasons for concern about the economy. Let’s look at a few of them.
Fear of infection due to the more infectious Delta variant and the increase in breakthrough illnesses can keep large numbers of potential consumers from restaurants, indoor shopping, travel etc that they have recently resumed doing. That would be a self-imposed, mini-lockdown even without a government mandate.
Illness is an economic problem, not just a humanitarian one. It is difficult for an organization, business or government agency to operate effectively if managers don’t know who will show up to work. It’s not just the sick employee to account for because others may need to quarantine. The death of any employee due to Covid can be especially devastating emotionally and operationally.
Companies in most states will be authorized to impose a vaccination mandate for those who want to work for them, at least on site. That makes perfect sense, but adamant anti-vaxxers who are current employees will be gone.
Business that adapted to the initial pandemic and then re-adapted to the opening economy may not be able to re-adapt again. For example, uncertainty is already impacting the hospitality industry , which had been recovering. “People are rescheduling trips, canceling trips, saying they’re concerned about kids that are not vaccinated,” according to one Massachusetts company.
Masking requirements were difficult enough to enforce. Any vaccination requirement will pose a new challenge for onsite customer dependent businesses. If such a requirement is seriously enforced the business will lose between 25-30% of its customer base because , as of this writing, only about 70% of US adults have been vaccinated. However, if there is no vaccination requirement a significant number of the vaccinated will stay away. Either way, the business loses customers.
Many people, mostly women, found that they couldn’t work if their children were learning from home instead of in school. If schools need to go hybrid or completely off site again, those parents who were planning to go back to work in September will find it harder to do so.
If supply chains are disrupted again, business that rely on inputs for manufacturing or other business activities will need to operate at reduced levels if they can operate at all. Industries like automobile manufacturing that rely on computer chips have been slowly recovering. A new disruption would scale back or reverse the production gains made in recent months.
A resurgent pandemic will adversely impact the entire world including our trading partners. That will complicate supply chain problems and reduce demand for the products those countries have been importing from the United States.
If the financial markets dive as they did in early 2020,there would tend to be a reduction in spending from those holding financial assets. This is sometimes referred to the wealth effect. When asset values rise, people who hold them tend to spend more money.
However, when the value of those assets sharply decreases, people who hold them tend to spend less .
The federal government will not be in as strong a position to intervene as it was in 2020.
In 2020/21 pandemic the Federal Reserve bolstered the economy by reducing interest rates toward zero. It would be difficult to reduce interest rates to less than zero. Negative interest rates can be economically perilous in themselves.
Our federal government borrowed $5 trillion since March 1, 2020 to boost the economy with programs like the Payroll Protection Plan. This borrowing was necessary to prevent another Great Recession or worse. However, if there is a Covid resurgence, borrowing trillions of dollars again would be more difficult. Lenders and political considerations will support only so much debt.
So what would a resurgent Covid pandemic mean for the US economy? Fear of infection can cause a mini-lockdown without a government mandate. The broader world economy may weaken since the Covid pandemic is world wide. Employers, employees and consumers face a new round of uncertainty in terms of both health and financial security. The ability of the federal government to borrow trillions of dollars and of the Federal Reserve to lower interest rates is not as great as it was a year ago. Unless the pandemic becomes no more serious that the seasonal flu, we are facing another round of serious economic hardship, perhaps including a new recession.