The impact of the coronavirus on the U.S. economy is far reaching. And governments have started stepping up, for better or worse. Here’s an important question that keeps coming up… is the aftermath of the cure going to be worse than the coronavirus itself?
For the short answer, probably not. Flattening the curve might save over half a million lives in the U.S. alone. Forced quarantines, shutdowns and social distancing are slowing the spread. This gives more time to develop treatments and build life support systems like ventilators. It also prevents hospitals from becoming overwhelmed…
Thank You! I salute nurses, doctors, garbage collectors, grocery store clerks, delivery workers and many others on the front lines. They’re vital to saving lives and maintaining our way of life. Yet, they’re often overlooked.
On the surface, flattening the curve seems like a great decision. Although, a forced economic shutdown is sending the U.S. into a recession. It’s self-induced pain that also has deadly consequences.
For example, the number of suicides and opioid deaths climb with unemployment. Depending on the severity of this recession, those factors alone could easily lead to an additional 30,000 deaths in the U.S. And there are many other unintended consequences.
To shed some light on this dire situation, I’m going to cover three big ways coronavirus is impacting the U.S. economy.
1. Record Unemployment Shocks the U.S. Economy
During the last U.S. recession, the worst week for unemployment claims reached 665,000. And looking back over 50 years and the last seven recessions, the max weekly claims comes in just a little higher. It reached 695,000 in 1982.
In the chart below, you can see the last two weekly claims far outpace previous highs…
The coronavirus is impacting the economy in an unprecedented way. You’ve maybe seen this chart before but the next one isn’t as common. It shows continued claims with data that’s reported a week behind initial claims. But still, it’s already hit an all-time high (almost 7.5 million) but will climb even higher with the next report. It will easily top 10 million continued claims soon…
Every recession has seen a continuous climb in total unemployment claims. For example, continued claims were below 2.8 million at the end of 2007. By mid 2009, they had climbed to 6.6 million. So, with history as a guide, the unemployment situation will likely get much worse.
Side Note: Unemployment is one of three powerful trends leading to a new economic paradigm. Here’s my favorite research that points to one outcome: Universal Basic Income.
Millions of Americans are already struggling to make ends meet. The loss of millions of paychecks is starting to send shockwaves throughout the U.S. economy. And to help put things in perspective, consumer spending makes up about 70% of GDP.
As people lose their income, they stop supporting businesses. Then as some businesses go bankrupt, more will follow. It’s a domino effect.
Many areas of the economy are feeling the pain… restaurants, airlines and the auto industry just to name a few. I could go into great detail about how the coronavirus is impacting each industry. Although, I’m only going to cover one of the biggest today…
2. Coronavirus Housing Crisis 2.0
Housing makes up about 15% of GDP. And the last recession is still vivid in many minds. Yet, housing prices have climbed well above pre-crisis highs. You can see this in the chart below. And it’s one of six trends I covered in an article last year predicting a stock market crash in 2020.
This chart doesn’t show home prices after adjusting for inflation. But even then, prices are above previous highs.
Now, this build up isn’t as toxic as the past housing crisis. Lending standards are a little safer, along with the collateralized debt market. Although, record unemployment claims are going to lead to higher mortgage default rates.
If unemployment climbs into the teens, the coronavirus housing crisis might be worse than the last collapse. But to counter the potential of millions of missed payments, the government has already stepped in. Borrowers with loans backed by Fannie Mae, Freddie Mac and Ginnie Mae can now postpone a year’s worth of monthly payments. And this is just one of many actions the government is taking…
3. Uncle Sam Puts on More Weight
As mentioned, the government has stepped up to save lives by flattening the curve. Federal, state and local governments have forced businesses and communities to shut down. They have good intentions but there’s another dangerous outcome.
The forced economic shutdown is leading to even more government action. Early bailout measures have far outpaced past intervention. The 2008 bank bailout came in at $700 billion (and since, there have been ongoing bailouts which put that number way higher. But that’s a conversation for another time).
Now to compare, the recent CARES Act tops $2 trillion. It’s the largest bailout in U.S. history and there will likely be more handouts. The government is in uncharted territory and debt is at an all-time high. Total public U.S. federal debt is above $23 trillion. It’s a dire situation and to help put it in perspective, I use an analogy with Trump and Putin standing in a pool together. You can check out that analogy and research here: The MAD Global Debt and Interest Rate Problem.
Big bailouts also set a dangerous precedent. The government has started labeling companies that are too big to fail. But letting them fail would likely be better for our economy in the long-run. Bailouts can prolong inefficient business and lead to excessive risk taking.
I’m not sure these tradeoffs will be worth it. Sure, we’re saving many lives – older and immunocompromised lives – in the short-term… but it might lead to a worse long-term outcome. An outcome that also costs many lives.
I don’t have a clear answer of what path is better. The government and coronavirus are impacting the U.S. economy in many ways. Although, I hope my research helps people think more about the big tradeoffs over the long-run.