The Economic Impact of COVID-19

At the moment, financial market participants around the world have decided that this disease is going to hit the global economy about as hard as the disastrous Spanish Flu Epidemic of 1918. That was the first appearance of the H1N1 virus or “bird flu.”

It sickened more than 500 million people globally or about one-third of the total Earth population. A total of 50 million people died, of which about 675,000 were in the U.S. One thing that made that event so deadly was that there was no vaccine.

According to the Centers for Disease Control and Prevention (CDC), the second coming of an H1N1 pandemic in 2009 afflicted about 61 million people in the U.S. and caused 12,419 deaths. The global death toll was also far lower than in 1918.

One good way of looking at how to think about the situation is to use the framework popularized by Donald Rumsfeld, who served in the Ford Administration 1975-1977 as our youngest Secretary of Defense ever and came back to the same role under President George W. Bush 2001-2006. In some ways it sounds ridiculous, but it accurately describes certain circumstances:

“Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.”

To me, COVID-19 should be classified at the moment as a “known unknown.” We are always aware that a serious health scare is coming—someday—we just don’t know what form it will take or when it will arrive. So far, COVID-19 is quite insignificant in the U.S. with fewer than 100 cases reported with most of those people from the cruise ship that was (ineffectively) quarantined off of Yokohama, Japan.

You can follow the data on seasonal flu (Influenza Viruses A and B) in the U.S. in the CDC’s weekly FLUVIEW. For the seven weeks ending February 15, 2020, they report 29 million cases of flu in the U.S. with 280,000 people hospitalized and 18,000 deaths. Those numbers currently dwarf COVID-19 and yet they have had no impact on market participants or economic growth because nothing is shut down as these viruses infect the population every year.

My current forecast for real GDP growth in 2020 is 2.0% on a year-over-year average basis, a small decline from 2.3% in 2019. This is only a little higher than the average of my fellow Bloomberg panelists, which is 1.8% this month.

That includes a weak first quarter of 2020 of 1.5% at a seasonally adjusted annual rate for both me and the consensus. Most of that slowing from the 2.1% seasonally adjusted annual rate in the fourth quarter of 2019 is caused by Boeing suspending production of its 737-MAX airplanes and its continued inability to get FAA approval for airlines to put them into service. (The 2.1% for 4Q 2019 comes from the Bureau of Economic Analysis on February 27, 2020.)

Based on what we know about the economic impacts of COVID-19 so far, including such relatively large ones (at least culturally) as the shutdown of public K-12 education in Japan and the banning of attendees at soccer games in Italy, there seems to be no reason to change my current real GDP forecast.

A consensus is developing among forecasters to trim their estimates for real GDP growth in the U.S. by 0.1 to 0.2 percentage points for this quarter. A few go as high as 0.5 percentage points. All have a “snapback” in growth in the second and third quarters. Third quarter real GDP data will be released by the BEA on October 29, just five days before the election.

One reason why many forecasters have been ramping up their estimates of the negative effects on U.S. real GDP from COVID-19 is the myriad corporate announcements of detrimental impacts from supply-chain disruptions or loss of sales in China or both. While these situations are real, it remains to be seen how large they are in the aggregate.

Furthermore, analysts appear to have forgotten the genius behind the creation of NAFTA in 1994. This agreement and its successor USMCA effectively combine Canada, Mexico and the U.S. into one giant market. There are no goods or services that are needed in our three countries that cannot be produced in one or more of them. The cost may be higher than sourcing from China, but it can be done. This is a big reason why my forecasts have not yet changed.

If COVID-19-related developments hold down growth in real GDP in the first half of the year and boost it strongly in the third quarter, some analysts suggest that would be very favorable for President Trump. No one really knows, of course.

For now, in my personal opinion the estimates of the detrimental economic impacts of COVID-19 seem exaggerated. That could change, as we all realize, but until economic damages are large and obvious, my best advice is to keep a very jaundiced eye on the wilder forecasts being circulated.

If you want a good read on the fight against an earlier health crisis, you should read “Superbugs: The Race to Stop an Epidemic” by Matt McCarthy. He’s a physician who outlines what is involved in a successful battle against a disease such as COVID-19. Happy reading!

James F. Smith, Ph.D., CBE
Parsec Chief Economist


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