Will infections spike, state reopening rollbacks hurt recovery or spur a new recession?
As 17 states pause or roll back reopening plans amid a resurgence in coronavirus cases, the reversal is likely to crimp the recovery from one of the worst recessions in U.S. history.
At least one economist says the shift has noticeably increased the risk of a second recession later this year. But other economists foresee just a modest impact and believe the recovery should largely stay on course.
Five states – Arizona, California, Florida, Texas and Michigan – again have shut down businesses such as bars, gyms, water parks and theaters amid a jump in cases. Several counties in South Florida and Los Angeles County in California are closing their beaches for the July 4th holiday weekend in response to a spike in infection rates.
Twelve other states – including Arkansas, Nevada, North Carolina, Tennessee and Utah – have hit the pause button on plans to further allow businesses to reopen.
Some health officials have blamed state decisions to relax restrictions too early and too aggressively before seeing a drop in COVID-19 cases in a bid to restart near-moribund economies.
“They came out of the gate fast and they’re now falling flat on their faces,” says Mark Zandi, chief economist of Moody’s Analytics. “It will weigh heavily on the economy.”
About 30% to 50% of the nation’s gross domestic product comes from counties that are seeing infection spikes, Deutsche Bank says.
In a new report, Goldman Sachs says a national face mask mandate could substitute for lockdowns that otherwise would subtract nearly 5% from U.S. gross domestic product.
Mask mandate?:A national mask mandate could lower virus infections and help recovery, Goldman Sachs says
Many experts believe the U.S. economy will contract at an annual rate of 30% to 40% in the second quarter, the steepest quarterly drop on record. The recent rise in infections and the reinstatement of business constraints will pare back the third-quarter economic rebound to 17% from 20%, Zandi estimates. He predicts 7.25 million jobs will be added in the July-September quarter, 280,000 fewer than his forecast a few weeks ago.
While the brunt of that pullback can be traced to the states scaling back their reopening plans, even states in the Northeast and Midwest that are moving ahead could be forced to downshift because of new risks linked to visitors from the "hot spot" states, Zandi says.
Ian Shepherdson, chief economist of Pantheon Macroeconomics, says the 21% third-quarter growth forecast by economists surveyed by Bloomberg “is now at serious risk.”
The economy shed a record 22 million net jobs – including layoffs and new hires – in March and April before adding 2.5 million in May as many merchants reopened and brought back workers. The Labor Department on Friday is projected to report another 3.1 million job gains in June.
As states force some businesses to close down again and others to delay or limit reopening, some might be forced to lay off workers or even shutter permanently, Zandi says. For now, he expects that fallout to be contained, resulting in no further long-term damage to the economy, but he adds there are risks of more lasting harm.
Chris Varvares, co-head of U.S. economics at IHS Markit, worries about both the state rollbacks and a surge in infection rates and deaths that discourage consumers from going out and spending.
“It raises the odds that we will be back in recession by the end of the year,” he says. That would constitute a “double-dip recession,” with the first downturn limited to the second quarter and the second running from the fourth quarter to the first quarter of 2021, he says. He puts the odds of another slump at 20%, up from 5% in May.
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Other economists are less concerned. While the climb in infections and the state rollbacks will curtail economic activity in the South and West, that should be more than offset by reopenings that are advancing in other parts of the country, says Shepherdson and economists at Morgan Stanley.
The economy also should be bolstered by another stimulus package in Congress, Morgan Stanley says. Because of the state rollbacks, Zandi now expects that aid to total $1.25 trillion, up from his previous estimate of $1 trillion.
Contributing: Joshua Bote, Grace Hauck and Jessica Menton