What only a couple of weeks ago seemed like a distant distraction has become an all-consuming battle for most people on the planet. Our screens and inboxes are being inundated with Covid-19 updates and disconcerting headlines, which are almost certainly going to deteriorate over the coming weeks. We are all worried about our health, families, friends, communities, hospitals, jobs, businesses, and future.
We can’t determine when uncertainty, panic and fear will peak. We can, however, state definitively that bold actions are being taken around the world by both the public and private sectors to support economies and communities that will be pressured over the coming weeks. And while these efforts will not stop the virus in its tracks, they offer all of us hope that we shall overcome. Recent news on containment and nascent economic activity in China and South Korea are reassuring proof points.
The goal of this commentary – the first in a weekly series – is to offer you regular insights into what we are seeing across the U.S. and within the HCG portfolio. We aim to do so by sharing facts and data, both macro and micro, that when combined can offer you direct insight to our domain: the real US economy. Other than this introductory piece, future updates will be brief and pointed to address our observations. We aim to publish every Friday for the foreseeable future.
Real U.S. Economy & Policy
Faced with the reality of sharp economic pain, the U.S. government made the tough choice to take bold action and implement extraordinary measures that would have been unthinkable a few weeks ago. We applaud its initiatives as well as those of the Fed, the states, and the private sector:
- The Federal government, despite a sloppy and chaotic start, will soon enact programs with over $1 trillion of firepower directed at consumers (over $500 billion), small businesses (over $300 billion) and large firms ($200 billion). And more programs are on the way. The all-in stimulus will likely end up being a multiple of 2008’s stimulus.
- The Federal Reserve acted swiftly to cut interest rates to zero and instituted several programs to maintain smooth operation of the financial system.
- State governments are stepping up with directed stimulus via appropriations, and many have started implementing lockdowns to contain the virus.
- The private sector is demonstrating leadership through expanded social benefits, recovery funds and hiring, specifically of individuals who lost their jobs due to the virus.
Key observations of this week:
- The U.S. context should be considered: Does it help stunt contagion velocity?
- The U.S. economy is not a monoline – it is diversified across a vast land mass. Demographics in the country are young and over 70% of the population lives in suburbia or rural communities, leading to a lower population density (1/7th of Italy’s). Public transportation is not the preferred means of transportation for the country.
- Unemployment will spike, from a record low base. Initial claims (NSA) were:
- Week ending Feb 29: 216,982
- Week ending Mar 14: 250,892
- Week ending Mar 21 (estimate from 15 states): 629,899
- Since 1967, weekly initial claims have averaged ~350,000
- We anticipate the increases this week and over the next few weeks will be sharp, confirming the abrupt slowdown in economic activity
- Economists have started to size the impact on U.S. GDP.
- Initial estimates from Wall Street economists peg the potential impact over the next 3 months at -5% to -14%, or $1 – $3 trillion on about $21 trillion of nominal GDP. While more reliant on export, we can look to China’s -13.5% (annualized January and February) as an observed data point. For full year 2020, estimates are a tamer -1.5% and +1.5% for full year 2020 GDP, or roughly +/- $300 billion.
- The economy is diversified across numerous industries, and over 70% is driven by consumption. While some segments of the economy – namely hospitality and travel – will suffer, other segments – medical, education technology, online entertainment and retail – will continue to function, and in some cases grow.
- Workforce productivity may decline, but it is not going to zero.
- Technology infrastructure and our online behavior are allowing many to continue working from home while self-isolating. 100 years ago, productivity was binary – you were either at work and productive, or not. Today, tools like email, Zoom and Slack are enabling virtual presence across continents and time zones. And many of us already fulfill our personal needs online, from retail to pharma to entertainment to banking, further minimizing interruption.
- Life sciences companies, labs and practitioners are working around the clock globally to identify vaccines and treatments.
- Ongoing and new trials for new agents against COVID-19 numbered 248 in China and 90 in the U.S. Going from drug and trial design to first-patient-treated in a new trial, all within 3 months, is astonishing. No one in drug discovery has ever seen anything like the mobilization going on today against the COVID virus.
Instantaneous information leads to global synchronicity, transparency and access. The same powerful forces that are revealing the spread of Covid-19 and heightening panic should allow us to see past peak uncertainty, fear and economic pain, to find solutions quicker and ultimately to help economies bounce back faster. The tunnel we are walking down feels dark and long, and the headlines over the next 4-6 weeks will be brutal. However, we believe rays of light will start to flicker.