To put the pandemic’s impact in perspective, consider that transportation, recreation, restaurants, and accommodations – the most COVID-sensitive segments of consumer demand – accounted for 21% of total household expenditures on services in the first quarter of 2020, before the pandemic hit full force. Combined spending on these categories plunged at an 86% annual rate in real (inflation-adjusted) terms in the second quarter.
The monthly data through June underscore the lingering headwinds from these important segments of discretionary consumption. While combined consumer spending on durables and nondurables bounced back to 4.6% above pre-pandemic levels (in real terms), household spending on total services – by far, the largest component of total consumption – has recouped only 43% of its lockdown-induced losses.
On balance, this points to what can be called an asynchronous normalization – a partial recovery that is drawing greater support from the supply side than from the demand side. The US is hardly unique in this respect. Similar outcomes are evident in other economies – even China, whose state-directed system is much more effective at command and control of the supply side than it is in influencing the behavioral norms shaping pandemic-sensitive household consumption on the demand side.
But the asynchronous normalization of the US economy is very different in one key respect: America’s abysmal failure at containing the virus not only underscores the lingering fears of infection, but also raises the distinct possibility of a new wave of COVID-19 itself. While there has been a reduction in the incidence of new cases over the past month, the daily infection count of nearly 48,000 in the week ending August 20 is more than double the pace recorded in May and June.
Together with a death rate that has averaged a little more than 1,000 per day since late July – and projected to remain at that level for the rest of the year – this elevated pace of infection takes on even greater importance as a predictor of what lies ahead. Consumer fears – and their impact on pandemic-sensitive services – are unlikely to subside in such a climate and could well intensify if a new wave hits.
Therein lies the case for a double dip. Partial and asynchronous normalization in the aftermath of the worst economic shock on record signals lingering vulnerability in the US economy. And failure to contain the virus underscores the distinct possibility of aftershocks. This is precisely the combination that has led to previous double dips. Yet frothy financial markets are wedded to the narrative of a classic V-shaped recovery. The rhymes of history suggest a very different outcome.
Stephen S. Roach, former chairman of Morgan Stanley Asia and the firm's chief economist, is a senior fellow at Yale University's Jackson Institute of Global Affairs and a senior lecturer at Yale's School of Management. He is the author of "Unbalanced: The Codependency of America and China."