Over the past month, the news has been dominated by the rapid spread of the coronavirus. People have become used to graphs with lines pointing upward and reports of tens of thousands of deaths. Even as the human tragedy becomes more apparent each day, there are signs of hope that the number of new cases has started to decline. If that trend continues, the public will focus increasingly on a different type of virus — economic contagion.
As public anxiety over the virus grew, and governments ratcheted up restrictions to contain its spread, the previously strong economy collapsed more suddenly than ever before in our national history. On Thursday, another 5.2 million people filed unemployment claims, making a total of 22 million in just the past month. By comparison, in March 2009, the worst month of the Great Recession, 2.6 million people filed. That’s fewer than half what we’re experiencing now.
As recommendations on social distancing were superseded by shutdown orders, restaurants lost $25 billion in sales in March, forcing them to lay off 3 million workers and counting.
The cancellation of most travel has forced airlines to idle most of their fleets and shed workers in a crisis that surpasses the Sept. 11, 2001, attacks by several orders of magnitude. Just to take one measure, on April 14, 2019, the Transportation Security Administration reported screening 2.2 million passengers. On the same day this year, it was down to 87,534 — a staggering drop of 96% in traffic. “Travel demand is essentially zero and shows no sign of improving in the near-term,” United Airlines CEO Oscar Munoz wrote in a letter to employees. He added, “We expect to fly fewer people during the entire month of May than we did on a single day in May 2019.”
Hollywood has delayed the release of major movies or made them available directly on streaming platforms, so the theater business has been devastated. AMC, the largest movie theater chain, is considering bankruptcy. It is incurring massive costs renting and maintaining massive multiplexes without the hope of selling a single ticket or bucket of popcorn for the foreseeable future.
Disney, an iconic American business success story, faces the biggest crisis in its history. Its theme parks are shut, its cruise lines have been suspended, it can’t release movies in theaters, and its ESPN network has no live sports to broadcast or to discuss. The loss of its resort business alone has meant the furlough of 75,000 workers in California and Florida.
With colleges cleared out, and, by some reports, contemplating not returning in the fall, local economies of college towns built around serving students will be obliterated.
This grim picture doesn’t take into account the informal economy. Think not just of the baseball teams or official stadium vendors who are losing money by the suspension of the season, but of the guy who fills up a cooler with cheap bottled drinks from Costco and sells them for a dollar or two outside the stadium on game day. What happens to him when there are no games?
Economists trying to wrap their heads around the impact of the coronavirus hope for what’s known as a V-shaped recovery. The idea is that a rapid plunge is followed by a swift rebound driven by pent-up demand once we put the pandemic behind us.
JP Morgan economists have predicted a stunning 40% drop in GDP in the second quarter, which would be the highest in recorded history by far. The current quarterly record is a 10% contraction in 1958. During the Great Depression, when GDP was recorded only annually, it contracted 13%.
After a historically bad first half of 2020, JP Morgan expects the economy to rebound in the third quarter with a stunning 23% growth rate, followed by another 13% increase in the fourth quarter.
We hope that is so, but it could turn out to be optimistic, especially with health officials warning of a second wave of infection in the fall. The longer it takes to return to some semblance of normal activity, and the later we begin it, the more unlikely a swift recovery becomes. Instead, there could be a prolonged downturn to rival or even exceed the Great Depression. That is because of economic contagion.
To this point, the focus has been on the industries dependent on human interaction and thus most directly affected by shutdowns. The longer it persists, however, the more that previously thriving businesses start to fail. Then, economic problems spread.
What happens when laid-off or furloughed waiters, flight attendants, pilots, bartenders, or hotel employees are left without disposable income to spend? Or when people cannot pay rent, and landlords, many of them retirees, or other independent owners relying on rental income, are still stuck with mortgage and maintenance costs? What happens if highly leveraged large corporations, which spent the decade since the financial crisis borrowing low-interest debt, start to default?
Even the $2.2 trillion in relief by Congress, or the trillions more in liquidity being injected into the economy by the Federal Reserve Board, won’t be enough to stop the hemorrhaging if things reach that point.
Nor do public officials have a lever to pull so as to “reopen the economy.” A recent Gallup poll found that just 20% of people said they would “immediately” return to normal activities even if the government lifted all social distancing restrictions. It is likely, however, that as concern about the danger of the virus declines, alarm over economic disaster will rise. The two lines will probably cross quickly.
We have for weeks urged a balanced approach to reopening the economy accompanied by such precautions as widespread mask-wearing, mass testing, isolating positive cases, and notifying their contacts.
Restoring confidence may require the rapid development of pharmaceuticals that reduce the severity of COVID-19. That is not pie in the sky. There should be data from the first wave of clinical trials soon that could provide the tools needed to resume normal activities without fearing a crippling resurgence in the fall. It would allow most people to begin to return to regular routines while eagerly awaiting a vaccine.
There is already deep economic pain, and there is more to come. But all must be done to mitigate it, not just with the vital efforts to control the disease but also with clear-eyed and practical moves to restart commercial activity where possible. The longer that takes, the more the economic contagion will spread.
