I recently interviewed one of my favorite economists about the COVID-19 economy. Don Rissmiller is the Chief Economic Partner at Strategas Research Partners, an institutional brokerage and advisory firm that provides macro research and capital markets and corporate advisory services.
The most significant difference that Don sees between where we are now versus our situation during the Financial Crisis is that today’s uncertainty started with a health emergency, which has led to economic challenges. The Financial Crisis was simply an economic calamity.
And he’s right. We’re in the midst of what I refer to as a Great Economic Pause due to the Coronavirus. How will we rebound? Don and I talked through how recovery may look, the ramifications of our current shutdown and how we “press play” again.
Don certainly has his finger on the pulse on how the economy is faring during this second quarter of this year. We can all make our forecasts from experience – we know that this economic period will be awful. According to Don, the ramifications of our flailing second quarter are not subtle.
Don estimates that 25% of the economy is offline for April. Most notably, Main Street is closed. Restaurants, shops, gyms and hair salons are doing little or no business. Because one person’s dollar spent is another’s dollar of income, this disruption on Main Street is impacting everyone.
There have been COVID-related hits to the economy. Manufacturing, airlines, hotels and energy have all been impacted. Energy is reeling from a second blow: the crude oil price war between Russian and Middle Eastern producers.
“Recessions are contagion events where one sector gets another sector in trouble, and it flows from there,” says Don.
Losing 25% of economic activity for just one month may not sound like a gut punch to our GDP, but it is. Before the COVID-19 economy, our GDP was about $22 trillion, about $1.8 trillion per month. April took it down to $1.4 trillion. In May, if we’re 95% back online, that’s still a 5% drop, or $1.75 trillion. Even if we’re fully back in June, GDP will still have shrunk from $22 trillion to $19 trillion in the second quarter.
Our GDP is not a year-on-year comparison; it’s an annualized calculation. In this way, this weak quarter would result in a negative 30% on annualized GDP for the quarter.
“Whether we get the economy re-opened in one month or two months or three months will determine the scope of COVID’s economic impact,” says Don. “And I have to think we’re close to re-opening. People have employed social distancing; they’ve been able to function in ways that the health officials seem more and more satisfied with. And now I think the question is how much of the economy we can reopen and how can it be done safely.”
Don and I then dove into the prospects for the third quarter, and whether the shutdown could bleed into that timeframe, too.
If this COVID-19 economy and shutdown continue, Don notes, we could see greater financial stress placed on governments around the world. These include emerging market countries, and our own state and local governments. The emerging market countries can go to the International Monetary Fund (IMF) for help, and state and local governments could go to the federal government for assistance. So, there are backstops.
We are living at an accelerated pace in so many ways. We’re in the most unique financial time in a century. What’s important to remember is that every day counts, both from a health or economic perspective. Every. Single. Day.
According to Don, it’s mainly up to the scientists and doctors to decide when we can all go back to work. The medical community would likely answer that we can’t move forward until we have this thing 100% stamped out. That would mean therapeutics that are months away or a vaccine that’s not slated to be released realistically until early 2021.
Unfortunately, we can’t afford such a rigorous standard. We are on a tightrope – we need to go back to work. The consequences will be devastating if the current economic shutdown lasts well into the third quarter.
We must have an economy that is working. Otherwise, we could go into another Great Depression. But I know Americans won’t allow that to happen. We’ll look to our politicians.
Just yesterday, President Trump released broad guidelines for states to begin to reopen. He said he would leave the implementation up to the states, adding that, “We’re starting to live our lives again. We’re starting to rejuvenate our economy again in a safe and structured and very responsible fashion.”
I don’t believe we can wait until we get the 100% all-clear from medical professionals before we get back up. There will be too much loss – loss of jobs and loss of the ability to bring those jobs back.
We’ve made great strides in the fight against the coronavirus. We know more. And each day we learn more. We understand the risks more. We’re getting better at public health – we’ve internalized the things we’ve been forced to learn so quickly, such as social distancing, contact tracing, wearing masks and vigilantly washing our hands. We also have more rapid testing for determining who has COVID-19 and serological testing of who has had the virus.
The economy needs to reopen. We, as a people are saying, “I know how to protect myself. I want to go back to work.” Americans don’t watch a house burn down – we work to put it out. We are people of action.
It’s okay to have a wobbly April and May, but we can’t afford to risk June and July, too. We just can’t have this level of impaired economic activity bleed into the summer months.
Now, we have to ease into the restart. This doesn’t mean we’re back to the way we were before COVID-19 – it means that we make smart, careful moves towards getting back to business. Some of us may still work from home, while others can go back to their offices.
At some point – and I mean sooner rather than later – Americans are going to demand an economic restart. We won’t, however, be flooding the streets and head to Braves games and concerts. It’s unlikely that these events will be this summer’s norm. It means, instead, that we’ll reopen the economy slowly. I see this coming in May so that in June we’ll be back up and running. Then, in July, I can see almost every business opening its doors.
We will be going back to business in a slightly different way, but we need to get the locomotive fueled and running in May. And, when we practice the public health measures we’ve learned, we can avoid another flare-up of the virus. We can get back to business in America. So long as we have our new public health prescription, we will have defeated the virus in large part and will be combatting the massive recession that we’re in right now.
This is the most challenging economic time in a century. But, if we get the economy and the job market back up and running in a timely fashion, we’ll see company earnings repair themselves, making the markets for a healthier place for investors.
Don and I also discuss the CARES Act during our talk. You can listen to the full interview here. If you have any questions about how to handle your finances in this challenging time, the CIA team is here to help.