ON NOVEMBER 9TH the end of the coronavirus pandemic came into tantalising sight. Pfizer and BioNTech announced that their vaccine was more effective than expected. Investors’ hopes for a stronger economy sent stockmarkets soaring. Ten-year Treasury yields neared 1%, levels last seen in March (see article).
Even before the vaccine news broke, the speed of America’s economic bounceback was exceeding forecasts and surpassing others in the rich world. In April the IMF reckoned that GDP would shrink by 6% in 2020. It now projects a decline of 4%. Unemployment peaked at 14.7% in April; in June the Federal Reserve had expected it to still be around 9% by the end of the year. It went on to fall below that rate only two months later. In October it stood at 6.9%.
Can a vaccine accelerate the economy’s return to its pre-covid state? The coronavirus is still spreading unchecked, with the burden often falling on the poorest. But many economists had also worried that the pandemic would leave broader economic scars that take time to heal. Here, a look at firms’ and households’ finances offers grounds for optimism.
The resurgence of the virus will put a dampener on the recovery in the months before a vaccine becomes widely available. Infections are rising so rapidly that, in the admittedly unlikely event that current trends were to continue, 1m Americans a day would be catching the disease by the end of the year (see article). Renewed local restrictions on activity seem inevitable. That will lower some types of economic activity and could in turn increase the number of people who have lost their jobs permanently.
Still, it seems unlikely that America will enter a double-dip recession, as Europe is expected to. For one thing, it probably will not impose lockdowns as severe as those in Britain, France or Germany. High-frequency indicators, including The Economist’s analysis of Google mobility data, suggest that America’s recovery has slowed compared with the summer. But it has not gone into reverse, as it has in Europe. And the vaccine could boost the economy in some ways even before it becomes available. Torsten Slok of Apollo Global Management, an asset manager, argues that “households and firms are going to plan ahead, for example by booking travel [and] vacations”.
On the current growth path, at the turn of the year there will still be 10m fewer jobs than there would have been without the pandemic. Output will be some $700bn, or 4%, lower than otherwise. Most forecasters reckon that income per person will not exceed its pre-covid level until 2022, if not later. But growth will accelerate as jabs are administered. Everything from theatres to public transport will feel safer. That will further revive the labour market. Before the pandemic over a fifth of workers were in jobs involving close proximity to others.
There are other reasons to think America’s recovery may be faster than after previous recessions. History suggests that recoveries are sluggish when downturns leave deep economic scars. The financial crisis of 2007-09 cast a long shadow over subsequent years in part because of its chilling effect on bank lending, for instance. This time around, the effect of school closures on children’s education will be felt for decades to come. But in many other respects there is less evidence of lasting economic damage. A wave of bankruptcies and permanent closures has been avoided—especially of small firms, which employ half the workforce. And families’ finances have been resilient.
Start with small firms. At one point in April nearly half of them were closed, according to data from Opportunity Insights, a research team based at Harvard University, as shelter-in-place orders forced closures and fear of the virus prompted people to stay at home. Six months on, many firms are still struggling. In early October nearly a third of small firms reported that the pandemic had a large negative effect on business, according to the Census Bureau. One quarter of small businesses remain closed.
But these closures may not become permanent. Total commercial bankruptcy filings are running below their pre-pandemic trend, not to mention the levels of the last recession. Such data are not perfect, because not every firm that closes down files for bankruptcy. A new paper by economists at the Fed brings together many different measures of “business exit”, and finds “somewhat mixed” evidence that more businesses have gone bust in 2020.
But these unlucky outfits do not appear to represent a large share of employment. In addition, this bankruptcy ripple seems unlikely to turn into a wave. The share of small firms very late on their debt repayments is currently about half its level in 2009. Moreover, although the number of active businesses fell during the first wave of the pandemic, it has recovered almost all the lost ground, suggesting that new firms may have come up in place of exiting ones.
Firms’ resilience helps explain why unemployment has dropped much faster than expected. The share of unemployed Americans who say they have lost their job temporarily remains unusually high. Such workers expect to be recalled to their old employer, pointing to further declines in the unemployment rate.
What explains small firms’ surprising resilience? It seems hard to credit America’s business-focused stimulus measures. So far less than $4bn (or 0.02% of GDP) has been doled out by the Fed’s Main Street Lending Programme, which is supposed to channel funds to small and midsized enterprises. Economists are also underwhelmed by the Paycheck Protection Programme (PPP), which provided loans to small businesses that are turned into grants as long as recipients do not sack their employees. A paper by David Autor of the Massachusetts Institute of Technology and colleagues found that “each job supported by the PPP cost between $162,000 and $381,000 through May 2020”. But this money was poorly targeted: a lot of it was lapped up by firms that planned to continue operating, come what may.
Other factors are more important. Many small firms have managed to trim their outgoings. A recent paper from Goldman Sachs, a bank, finds that in May rent-collection rates fell to 10% or less for firms such as cinemas and gyms. A growing number of landlords now set rent as a percentage of tenants’ revenues, an arrangement that was uncommon before covid-19.
But perhaps the biggest reason for the lack of small-business carnage relates to consumer spending. In September retail sales were more than 5% up on the previous year. Americans appear to have tilted their spending towards small firms over large ones, on the premise that they are less likely to catch covid-19 in places with fewer people. The latest figures from JPMorgan Chase, a bank, show that credit-card spending in early November was only marginally lower than it was a year ago.
This relatively sturdy consumption in turn reflects the second factor behind the lack of scarring this time around: resilient household finances. Compared with other rich countries, America has directed more of its fiscal stimulus towards protecting household incomes. The federal government sent out cheques worth up to $1,200 per person and temporarily bumped up unemployment benefits by $600 a week. That is not to say that the disadvantaged have not been badly hit: some measures of deprivation have risen sharply. But viewed in aggregate, the financial security of households has proved remarkably stable.
A survey by the Federal Reserve found that 77% of adults were doing “at least OK” financially in July 2020, up from 75% in October 2019, before the pandemic struck. Between March and September households saved 19% of their gross income, up from 6% during the same period the year before, thereby accumulating $1.3trn (6% of GDP) in extra savings.
The stockpile gives consumers a buffer for the coming months, and should help support economic growth. In part for that reason, another blowout stimulus package may not be needed now that a vaccine is near. Lawmakers from the Democratic Party have pressed for spending of $3trn or more. Injecting money into the economy could well hasten the recovery. But another $1trn a year in stimulus may be enough to restore normality, assuming that by the start of next year the gap between America’s current and potential GDP may be around 4% of output, and that increases in government spending will translate somewhat less than one-to-one into extra GDP, as the evidence currently suggests.
A lot could still go wrong. Stringent lockdowns, European style, could still derail the recovery. Stimulus may not be passed at all. Either would worsen the economic scars that have so far been minimised, for instance by making it harder for the 3.6m Americans who have been unemployed for more than six months to find work. America’s many layers of government could delay the distribution of vaccines, just as they have botched the allocation of covid-19 tests. But households and businesses, at least, are in better shape than you might have feared. ■
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This article appeared in the Finance & economics section of the print edition under the headline "Giant jab"