The Investment Implications Of The CARES Act
Last week, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, a huge package of federal spending and tax cuts, primarily aimed at helping the economy weather the recession triggered by our “social distancing” response to the COVID-19 virus. This legislation is three times the size of the stimulus package enacted in response to the Great Financial Crisis, and may be augmented by further measures in the months ahead. It will have significant effects on economic growth, unemployment, the federal deficit and the fortunes and families and companies over the course of the recession. It also will shape the financial landscape after the recession, with the potential for higher inflation, higher interest rates and higher taxes in years to come. However, any analysis of the effects of this act should start by looking at the COVID-19 pandemic and the social distancing recession it has precipitated.

An Update On COVID-19
According to John Hopkins, as of Sunday, there were 125,433 confirmed U.S. cases of COVID-19, up 277% from a week earlier, with 2,201 deaths. The crude mortality rate, which equals cumulative deaths divided by cumulative confirmed cases, was 1.8%. A simple extrapolation of growth and mortality rates over the next few months would imply a terrible human toll.

However, both of these numbers should fall in the weeks ahead. Social distancing should slow the transmission of the disease, although a long incubation period and a slow start to testing is causing a significant lag between the reality of how many people are contracting the disease and the reported numbers. In addition, since most cases are mild and go unreported, the crude mortality rate likely significantly overstates how lethal the disease is.   

Slowing the spread of the disease through social distancing or “flattening the curve” is very important to reducing mortality, as the experience in both Wuhan and Italy shows that overwhelmed medical systems yield much worse outcomes in terms of mortality. 

Having said this, “flattening the curve” also means “extending the curve.”  COVID-19 is a very infectious pathogen and it might, under normal conditions, have the potential to infect half the population. (In an interview on CBS on March 2nd, 2020, Dr. Marc Lipsitch, director of the Center for Communicable Disease Dynamics at the Harvard T.H. Chan School of Public Health warned that between 40% and 70% of the world population could eventually get COVID-19.) If, because of temporary strict social distancing, we were able to hold that number to 10%, then the other 90% of the population would have essentially no resistance to it and many would quickly become infected if we resumed normal social interaction. If social distancing fails, the human toll could be terrible. But if it succeeds, it will be hard for the economy to get back to normal until we have much better treatment options or an effective vaccine, hopefully within the next year to 18 months.     

The Shape Of The Recession
Broadly speaking, the CARES Act should soften the impact of the recession for both consumers and businesses and may prevent a further deterioration in economic conditions beyond the second quarter. Even with this, however, the outlook could best be described as a deep, U-shaped recession, or, in other words, “fall, stall and surge.”

The fall began in March, ending the longest economic expansion in U.S. history. However, real GDP growth for the first quarter should not look too ugly. The economy was relatively strong through February, and, while the second half of March saw a precipitous drop in spending on travel, entertainment, leisure, restaurants, autos and general retailing, it also saw a surge in spending at grocery stores and on line, as households stocked up for a stay-at-home lifestyle. 

However, the second quarter will see a very sharp slowdown in economic activity. Within this, there will be huge declines in consumer spending in travel, entertainment, leisure, restaurant, autos and general retailing, while spending on food and consumer basics could be flat to down, given the stockpiling of the first quarter. Investment spending will be hit hard by a very sharp drop in oil exploration in reaction to the recent collapse in global oil prices and other investment spending is also likely to be negatively impacted by business uncertainty and shutdowns. Inventories likely fell sharply at the end of the first quarter and should fall again in the second. Homebuilding could see a significant decline off a weather-enhanced first quarter while government spending could rise due to an emergency response to the crisis. Finally, trade looks like a mixed picture, with both imports and exports likely to fall, reflecting the global nature of the downturn. Overall, we expect real GDP to be down 1% annualized for the first quarter and down 13% in the second.

Thereafter, partly because of the cash infusion to the economy from the CARES Act, economic activity could rise at a very slow pace rather than deteriorate further. Still, growth should be slow in the second half of the year and into early 2021, until a vaccine is widely distributed. At that point, we expect a surge in spending in all of the most impacted sectors of the economy.

Unemployment should follow a similar path. The outer bands of the economic hurricane arrived in last Thursday’s unemployment claims release, showing nearly 3.3 million layoffs, almost 5 times as high as the next highest weekly peak over the past 50 years. We expect further very high numbers of new claims over the next few weeks as a wide swath of businesses, both large and small, are forced to furlough workers. This will have a very limited impact on the March employment report, due out this week, which refers to labor market conditions in the second week of March. However, the April jobs report, due out on May 8th, will refer to the week of April 12th to April 18th, and should display the full impact of the social distancing recession. 

First « 1 2 3 » Next