The stock market posted another strong performance on Friday, with the Dow Jones Industrial Average rising more than seven hundred points. It has now regained about half of the losses it suffered between late February and late March, as the death toll from the coronavirus mounted and great swaths of the economy were closed down. Indeed, the market is only about eighteen per cent below its all-time peak, which came on February 12th.
Investors were reacting to some encouraging news about a possible treatment for people hospitalized with covid -19 and to the prospect of parts of the economy reopening soon. On Friday, Texas announced the lifting of some restrictions, and Michigan’s governor, Gretchen Whitmer, expressed the hope that some of her state’s economy could “re-engage” as early as May 1st. These developments came a day after the White House released a set of guidelines for reopening the economy, which envisage a three-stage process, with states moving from one stage to the next as they meet various “gating criteria” related to the incidence of the virus, testing capacity, and hospital capacity.
Within the past week, the virus claimed roughly two thousand lives a day in the United States. Within one twenty-four-hour period, more than forty-five hundred people had died from covid -19 and the President’s medical advisers have acknowledged that any reversal of the shutdowns, even a limited one, will be risky. Some Asian territories that seemed to have the virus under control, including Japan, Hong Kong, and Singapore, recently experienced a second wave of infections. The possibility of something similar happening here surely explains why Trump, in a conference call with governors on Thursday, said, “You are going to be calling your own shots.” “Trump’s the-buck-stops-with-the-states posture is largely designed to shield himself from blame should there be new outbreaks after states reopen or for other problems,” the Washington Post reported, citing current and former Administration officials who have been involved in the crisis response.
Despite a month of shutdowns and distancing measures, the virus hasn’t stopped spreading, but the rate of new infections has gone down. At a national level, based on figures from the Covid Tracking Project, the number of cases is rising by about 4.7 per cent, which is down from about 7.5 per cent a week ago. Ian Shepherdson, the founder of Pantheon Macroeconomics, has been looking at what’s happening in other countries, too. In the past week or so, Germany, Spain, and Italy have announced limited steps to reopen stores and other businesses. These countries waited until the daily new infection rate had fallen to a bit below the current U.S. level, Shepherdson said. By this time next week, the U.S. rate may well have closed that gap.
In absolute terms, however, the number of new infections is still much higher in the United States, because the over-all number of cases is so large. So far, most governors, Republican and Democrat, have resisted the idea of lifting stay-at-home orders. But the economic cost of the shutdown is rising—in the past four weeks, more than twenty-two million Americans have lost their jobs or been furloughed, figures released on Thursday showed. And in some Democrat-run states, conservative protesters have staged demonstrations against the restrictions, with Trump openly egging them on.
The big question is what will happen if some businesses do start to reopen. Shepherdson said that the outlook in the United States is complicated by a pattern of infection that varies greatly across regions and states. “If you are in a state that has done well, the danger is that if you open up you could get flooded by people from next door,” he said. He cited the experience of Rhode Island, which is situated between two hot spots—New York and Boston—and where the number of cases is still rising by about nine per cent a day.
Practically everybody agrees that comprehensive testing will be vital going forward. For example, in “National Coronavirus Response: A Road Map to Reopening,” released at the end of March, the American Enterprise Institute, a conservative think tank that carries influence at the White House, said that we need “better data to identify areas of spread and the rate of exposure and immunity in the population.” During Thursday’s briefing about the Administration’s new guidelines, Dr. Deborah Birx, the coördinator of the White House’s virus-response task force, claimed that the necessary data would be available from three different sources: test results from people exhibiting covid -19-like symptoms; reports of influenza-like symptoms across the country; and expanded “sentinel surveillance”—i.e., testing of people in high-risk areas, such as indigenous communities, nursing homes, and “inner-city federal clinics.” Right now, about a hundred and twenty-five thousand tests are being carried out each day. By the end of April, the U.S. will have administered more than five million tests in total, Vice-President Mike Pence said at Thursday’s briefing.
But many governors, medical experts, business leaders, and economists are highly skeptical about the extent of testing, which is still largely confined to people who have already developed symptoms. The key to keeping down the infection rate is locating and isolating asymptomatic carriers and then doing contact tracing.
“The reality is we are not even testing health-care workers,” Paul Romer, a Nobel-winning economist who is a professor at New York University, told me on Friday. “We need to be testing all of them regularly, and many others, too. Trump’s medical advisers are stuck with blinkers on. They are not stepping back and looking at the big picture.’’ In Romer’s view, this involves creating a public-health strategy that can be sustained for a year or eighteen months, until a vaccine is developed. The only available options, he said, are continued shutdowns or a massive expansion of testing to find and isolate asymptomatic carriers before they spread the disease. Romer, who served as the chief economist at the World Bank from 2016 to 2018, is calling for at least ten million tests per day , and ideally as many as twenty million or thirty million.
Absent large-scale testing, the outlook is grim, he said. “As soon as we stop the shutdowns, we’ll go right back to exponential growth. It won’t even help us much if we get down to very low rates of infection first, because exponential growth is so fast you get right back there very quickly.” Given the limits to testing capacity and the Trump Administration’s refusal to take the lead in this area, Romer suggested that the most likely outcome is a series of reopenings and renewed shutdowns, as the infection rate rebounds. “From an economic perspective, that is almost as bad as a permanent shutdown,” he said. “Nobody is going to invest. Nobody is going to reopen a restaurant.”
Not everybody agrees with that analysis, of course. But there is general agreement among economists that even under optimistic scenarios, where the rate of infection doesn’t shoot back up immediately, restoring the economy to health is going to be an extended and difficult task. “Absent a vaccine or treatment breakthrough, reopening will be gradual,” the economists at Goldman Sachs wrote this week. “Several other countries have taken steps toward reopening. We see three lessons from their experiences. First, initial reopening timelines often prove too optimistic. Second, even countries at the forefront of reopening have gradual and conservative plans. Third, recovery is easier and quicker in manufacturing and construction than in consumer services.”
Today’s American economy is predominantly a service economy, of course. Private-service industries, such as retail, finance, lodging, entertainment, and restaurants, contribute close to seventy per cent of the gross domestic product. Even if some restaurants do defy Romer’s prediction and reopen, they will have to meet social-distancing requirements, which will reduce their capacity. The same goes for airlines, hotels, gyms, and many other businesses. “No amount of stimulus spending is going to change those realities,” Shepherdson said. He is predicting that G.D.P. will plummet at an annualized rate of thirty per cent in the April-to-June quarter, before rebounding somewhat, but not fully, in the second half of the year. For 2020 as a whole, Goldman Sachs is predicting that G.D.P. will decline by more than five per cent. That would be the biggest fall since the aftermath of the Second World War.
For now, the stock market is focussing on the upside. Shepherdson said that institutional investors, whose performance is often measured against the market, can’t afford to miss out on a rebound, and they are placing a great deal of faith in the Federal Reserve. “If you are out of the market now, you are fighting against the momentum, you are fighting the stimulus, and you are fighting the Fed,” he said. “The only thing you have going for you is the truth—the recovery is going to be very slow, and on the virus front there are going to be relapses.”
