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There Is No Panacea for the Coronavirus Economy

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Even under optimistic scenarios, restoring the economy to health is going to be an extended and difficult task.Photograph by Spencer Platt / Getty

The stock market posted another strong performance on Friday, with the Dow Jones Industrial Average rising more than seven hundred points. It has now regained about half of the losses it suffered between late February and late March, as the death toll from the coronavirus mounted and great swaths of the economy were closed down. Indeed, the market is only about eighteen per cent below its all-time peak, which came on February 12th.

Investors were reacting to some encouraging news about a possible treatment for people hospitalized with COVID-19 and to the prospect of parts of the economy reopening soon. On Friday, Texas announced the lifting of some restrictions, and Michigan’s governor, Gretchen Whitmer, expressed the hope that some of her state’s economy could “re-engage” as early as May 1st. These developments came a day after the White House released a set of guidelines for reopening the economy, which envisage a three-stage process, with states moving from one stage to the next as they meet various “gating criteria” related to the incidence of the virus, testing capacity, and hospital capacity.

Within the past week, the virus claimed roughly two thousand lives a day in the United States. Within one twenty-four-hour period, more than forty-five hundred people had died from COVID-19 and the President’s medical advisers have acknowledged that any reversal of the shutdowns, even a limited one, will be risky. Some Asian territories that seemed to have the virus under control, including Japan, Hong Kong, and Singapore, recently experienced a second wave of infections. The possibility of something similar happening here surely explains why Trump, in a conference call with governors on Thursday, said, “You are going to be calling your own shots.” “Trump’s the-buck-stops-with-the-states posture is largely designed to shield himself from blame should there be new outbreaks after states reopen or for other problems,” the Washington Post reported, citing current and former Administration officials who have been involved in the crisis response.

Despite a month of shutdowns and distancing measures, the virus hasn’t stopped spreading, but the rate of new infections has gone down. At a national level, based on figures from the Covid Tracking Project, the number of cases is rising by about 4.7 per cent, which is down from about 7.5 per cent a week ago. Ian Shepherdson, the founder of Pantheon Macroeconomics, has been looking at what’s happening in other countries, too. In the past week or so, Germany, Spain, and Italy have announced limited steps to reopen stores and other businesses. These countries waited until the daily new infection rate had fallen to a bit below the current U.S. level, Shepherdson said. By this time next week, the U.S. rate may well have closed that gap.

In absolute terms, however, the number of new infections is still much higher in the United States, because the over-all number of cases is so large. So far, most governors, Republican and Democrat, have resisted the idea of lifting stay-at-home orders. But the economic cost of the shutdown is rising—in the past four weeks, more than twenty-two million Americans have lost their jobs or been furloughed, figures released on Thursday showed. And in some Democrat-run states, conservative protesters have staged demonstrations against the restrictions, with Trump openly egging them on.

The big question is what will happen if some businesses do start to reopen. Shepherdson said that the outlook in the United States is complicated by a pattern of infection that varies greatly across regions and states. “If you are in a state that has done well, the danger is that if you open up you could get flooded by people from next door,” he said. He cited the experience of Rhode Island, which is situated between two hot spots—New York and Boston—and where the number of cases is still rising by about nine per cent a day.

Practically everybody agrees that comprehensive testing will be vital going forward. For example, in “National Coronavirus Response: A Road Map to Reopening,” released at the end of March, the American Enterprise Institute, a conservative think tank that carries influence at the White House, said that we need “better data to identify areas of spread and the rate of exposure and immunity in the population.” During Thursday’s briefing about the Administration’s new guidelines, Dr. Deborah Birx, the coördinator of the White House’s virus-response task force, claimed that the necessary data would be available from three different sources: test results from people exhibiting COVID-19-like symptoms; reports of influenza-like symptoms across the country; and expanded “sentinel surveillance”—i.e., testing of people in high-risk areas, such as indigenous communities, nursing homes, and “inner-city federal clinics.” Right now, about a hundred and twenty-five thousand tests are being carried out each day. By the end of April, the U.S. will have administered more than five million tests in total, Vice-President Mike Pence said at Thursday’s briefing.

But many governors, medical experts, business leaders, and economists are highly skeptical about the extent of testing, which is still largely confined to people who have already developed symptoms. The key to keeping down the infection rate is locating and isolating asymptomatic carriers and then doing contact tracing.

“The reality is we are not even testing health-care workers,” Paul Romer, a Nobel-winning economist who is a professor at New York University, told me on Friday. “We need to be testing all of them regularly, and many others, too. Trump’s medical advisers are stuck with blinkers on. They are not stepping back and looking at the big picture.’’ In Romer’s view, this involves creating a public-health strategy that can be sustained for a year or eighteen months, until a vaccine is developed. The only available options, he said, are continued shutdowns or a massive expansion of testing to find and isolate asymptomatic carriers before they spread the disease. Romer, who served as the chief economist at the World Bank from 2016 to 2018, is calling for at least ten million tests per day, and ideally as many as twenty million or thirty million.

Absent large-scale testing, the outlook is grim, he said. “As soon as we stop the shutdowns, we’ll go right back to exponential growth. It won’t even help us much if we get down to very low rates of infection first, because exponential growth is so fast you get right back there very quickly.” Given the limits to testing capacity and the Trump Administration’s refusal to take the lead in this area, Romer suggested that the most likely outcome is a series of reopenings and renewed shutdowns, as the infection rate rebounds. “From an economic perspective, that is almost as bad as a permanent shutdown,” he said. “Nobody is going to invest. Nobody is going to reopen a restaurant.”

Not everybody agrees with that analysis, of course. But there is general agreement among economists that even under optimistic scenarios, where the rate of infection doesn’t shoot back up immediately, restoring the economy to health is going to be an extended and difficult task. “Absent a vaccine or treatment breakthrough, reopening will be gradual,” the economists at Goldman Sachs wrote this week. “Several other countries have taken steps toward reopening. We see three lessons from their experiences. First, initial reopening timelines often prove too optimistic. Second, even countries at the forefront of reopening have gradual and conservative plans. Third, recovery is easier and quicker in manufacturing and construction than in consumer services.”

Today’s American economy is predominantly a service economy, of course. Private-service industries, such as retail, finance, lodging, entertainment, and restaurants, contribute close to seventy per cent of the gross domestic product. Even if some restaurants do defy Romer’s prediction and reopen, they will have to meet social-distancing requirements, which will reduce their capacity. The same goes for airlines, hotels, gyms, and many other businesses. “No amount of stimulus spending is going to change those realities,” Shepherdson said. He is predicting that G.D.P. will plummet at an annualized rate of thirty per cent in the April-to-June quarter, before rebounding somewhat, but not fully, in the second half of the year. For 2020 as a whole, Goldman Sachs is predicting that G.D.P. will decline by more than five per cent. That would be the biggest fall since the aftermath of the Second World War.

For now, the stock market is focussing on the upside. Shepherdson said that institutional investors, whose performance is often measured against the market, can’t afford to miss out on a rebound, and they are placing a great deal of faith in the Federal Reserve. “If you are out of the market now, you are fighting against the momentum, you are fighting the stimulus, and you are fighting the Fed,” he said. “The only thing you have going for you is the truth—the recovery is going to be very slow, and on the virus front there are going to be relapses.”

 

 

Source: – The New Yorker

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As the economy hits its peak, stock market gains could be harder to come by – CNBC

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A specialist trader works inside his post on the floor of the New York Stock Exchange (NYSE).
Brendan McDermid | Reuters

Diminishing economic returns could mean diminishing stock market returns as the U.S. transitions to a post-pandemic economy.

Wall Street increasingly is talking about peak growth in both the economy and corporate earnings as a stimulus-fueled recovery gives way to more normalized patterns.

Congress and the Federal Reserve have provided trillions in funding and liquidity measures that soon either will dry up or at least begin evaporating, leaving investors to ponder what lies ahead with their portfolios.

The market will have to handle what is likely to be a lasting bout with inflation at a time when the drivers for growth are uncertain.

“It’s a world that we haven’t had to deal with in 40-plus years, and I don’t think you can just take out your regular playbook from the last couple of decades,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “Valuations of pretty much everything are extraordinarily high, which means there’s no room for error.”

Boockvar spoke of an environment in which inflation will be higher as growth moves lower, a cycle known as “stagflation,” something the U.S. wrestled with for years from the mid-1970s to early ’80s. Practically no one thinks the current conditions will morph into something that bad, but there are similarities.

Inflation is running at 30-year highs, according to the Fed’s preferred gauge, while growth lately has been solid but a bit disappointing. Second-quarter GDP rose at a 6.5% annualized pace, but that was well below the 8.4% Wall Street estimate. Manufacturing data released Monday showed the sector still expanding, but at a lower-than-expected rate.

The factors are combining in “the classic recipe for a growth scare,” wrote Nick Colas, co-founder of DataTrek Research.

Looking at Apple Mobility and Google data that examines how people are getting around, Colas found that they are providing “a worrisome combination” though it’s too early to tell how things will shape out in the long run.

Still, he warned that investors high on the second quarter’s record-breaking pace of corporate earnings beats may find trouble ahead.

“Excellent Q2 earnings have allowed us to shake off that [growth scare] narrative every time it’s come up in recent weeks,” Colas said. “Now that the bulk of earnings season has passed, however, and seasonal volatility trends assert themselves we may see the growth scare narrative break through more convincingly.”

The trouble with optimism

The factors of higher inflation, slowing growth and waning stimulus occur amid high levels of investor sentiment as the major stock market averages hover around record highs.

In fact, that brimming optimism is flashing warning signs, according to Bank of America.

The firm’s gauge of investor sentiment that measures Wall Street portfolio allocations to stocks is the closest it’s been to a “sell” signal since May 2007, shortly before the market was about to hit record highs that soon would come tumbling down during the financial crisis.

“We have found Wall Street’s bullishness on stocks to be a reliable contrarian indicator,” Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, said in a note to clients. Higher allocations to stocks eventually end up pointing to a decline ahead, the gauge has shown.

Subramanian said the indicator’s current level is pointing to price returns in the next 12 months of just 7% compared with the average forecast of 13% since the financial crisis ended in 2009.

To be sure, a slowing economy doesn’t mean negative returns, and the current conditions may be pointing at nothing more than a cooling off for a market that has been on fire since rocketing to its pandemic low in late March 2020. After all, even though fiscal stimulus is slowing, the Fed remains committed to keeping its policy ultra-loose until it sees much more progress on employment.

“With the recovery still underway, investors shouldn’t be frightened by headlines declaring slowed momentum,” said Seema Shah, chief strategist at Principal Global Investors. “Once markets have digested the transition to a more sustainable pace of expansion, decelerating growth is usually associated with weaker, but still positive, equity returns.”

In fact, the past two peaks in earnings cycles have led to double-digit market gains over one-, three- and five-year periods, said Jason Pride, chief investment officer of private wealth at Glenmede.

“Rather than obsessing over near-term growth peaks, investors would be wise to see the bigger picture,” Pride said in his weekly market note.

Still, signs that growth is abating are worrisome.

The bond market in particular is pointing to a substantial slowdown ahead, with the 10-year Treasury note yielding just 1.18% Monday afternoon. The benchmark yield below 1.25% is the bond market “signaling not all is well economically,” wrote Christopher Harvey, senior equity analyst at Wells Fargo.

Boockvar, the Bleakley investment chief, said the current economic environment could cause problems for a market that has relied on investors willing to pay consistently at higher valuation multiples.

“One of the characteristics of the equity market in the 1970s was one of multiple compression,” he said. “A lot had to with the sharp rise in interest rate. But it becomes a more challenging environment with a bout of stagflation, even if it’s stagflation-lite.”

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Working from home is here to stay, and that's hurting the economy – CNN

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Love it or hate it, commuting is good for the economy. You pay train conductors’ salaries with your subway fare. The dry cleaner by the office and the coffee shop around the corner all count on workers who have been largely absent for nearly a year and a half.
In 2020, the number of people working from home nearly doubled, to 42% of America’s workforce, according to the Bureau of Labor Statistics.
And although many workers may prefer that setup, staying home is likely to delay the recovery of the vital office-adjacent economy.
According to economists from Goldman Sachs (GS), office attendance in large US cities is only about one-third of pre-pandemic levels. That’s a lot of employees who are still working remotely and not spending cash on items like train tickets or lattes — the kind of economic activity is essential in America’s consumer spending and service-driven economy.
For example, in New York — one of cities hit hardest at the start of the outbreak — subway ridership is still not even half of what it was pre-pandemic, according to data from the Metropolitan Transportation Authority.
To put this in perspective, New York’s public transport system is the largest in the nation and at the heart of the city’s economic power. Before Covid, it brought in nearly $17 billion in revenue. But with ridership still depressed, revenue predictions have been slashed, too. The Metropolitan Transit Authority received nearly $4 billion in government funding through the CARES Act, but fare and toll revenues aren’t expected to come back to their previous levels until 2023, according to a report from the Office of the New York State Comptroller earlier this year.
Other businesses that workers frequent on their way to the office are also struggling.
For Starbucks (SBUX), the loss of that daily consumer is weighing on the bottom line. Last quarter, the coffee chain’s average in-store transactions were at 90% of pre-pandemic levels.
“We certainly have the ability to bring more customers in, but our opportunity is the frequency of those customers,” Starbucks CFO Rachel Ruggeri said on an earnings call.
As a global coffee behemoth, Starbucks has a staying power that smaller, local coffee shops don’t have.
When it comes to lunch, salad chain Just Salad has reopened all of its locations and said business is picking up steadily. “We expect that to accelerate even more after Labor Day,” when more employees are slated to return to in-person work, Just Salad’s CEO Nick Kenner told CNN Business in an email.

Drag on the recovery

But the targeted September return to the office is in jeopardy for many businesses. The rapid spread of the more infectious Covid-19 Delta variant is a new hurdle to in-person work.
Tech giants Apple (AAPL) and Google (GOOG) have already pushed back the dates for the office return.
Further complicating the return to the office, the Centers for Disease Control and Prevention reversed its mask guidance last week, urging even vaccinated Americans in high-transmission areas to wear masks indoors — another development that could complicate the return to in-person work and slow the pace of the broader economic recovery.
No matter when it really happens, the way we work has permanently changed for many professions: Remote work and hybrid in-office models are likely here to stay as one of the legacies of the pandemic.
This is bad news for the metropolitan areas and states that heavily rely on the services sector, be it through workers or tourists, including Hawaii, Las Vegas and New York. Those places are lagging behind in the recovery.
Even those called back may not be ready or able to go back full-time, citing issues like child care challenges or living with at-risk family members.
“Job ads increasingly offer remote work and surveys indicate that both workers and employers expect work from home to remain much more common than before the pandemic,” Goldman Sachs economists said in a note to clients.

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Delta variant bears down on China just as its economy loses steam – CTV News

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BEIJING —
The Delta variant poses new risks for the world’s second-biggest economy as it spreads from the coast to China’s inland cities and presents fresh challenges to authorities who have for months managed to avert any widespread outbreak of the coronavirus.

Barely a month after disrupting industry in the southern export hub of Guangdong, cases of the Delta variant were detected in Nanjing, capital of Jiangsu province on the coast. The infections were traced back to a flight from Russia.

Since Nanjing confirmed its first Delta cases on July 20, numerous cities in southern China and a few in the north including Beijing have reported infections. The tally of locally transmitted cases stood at 353 as of Sunday.

It was not immediately clear whether Nanjing was the source of all the infections, as some authorities have yet to disclose the outcome of their virus-tracing efforts.

Jiangsu, the province with the second-largest economic output after Guangdong in 2020, is by far the worst-hit, accounting for about 80 per cent of the confirmed cases.

The emergence of the variant, which is more transmissible than the original strain first detected in the city of Wuhan in late 2019, has seen the return of tough counter-epidemic measures.

Many cities have warned against non-essential travel, required proof of negative tests for those who do travel, and launched mass-testing for the virus.

Policymakers are under pressure to ensure that while populations are protected, economies are not excessively strained.

China’s overall economy is not invulnerable. It grew more slowly than expected in April-June, due to persistently high raw material prices, cautious consumer spending and a subdued real estate market.

“The Delta variant is the biggest test of China’s zero-COVID strategy since the initial outbreak last year,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

“But given the country’s track record in dealing with the virus so far, our assumption is that they will quash the outbreak before it gets out of control. Of course, doing so will come at some economic cost.”

Yangzhou, near Nanjing, has been battling rising coronavirus cases since last Wednesday. Many factories and logistics firms in the city of 5 million have been shut as employees joined queues of people to get tested, some up to three times a week.

“We cannot deliver goods because the delivery firm informed us that they’ve suspended their services,” said a manager of a toy factory surnamed Wang.

“In the past few days, many places have been gradually locked down. We were officially told to stop operations today, and all our employees didn’t come to the factory.”

TOURISM VULNERABLE

Tourism in some smaller cities could take a hit in August, usually a peak travel season due to the summer school break.

Zhangjiajie, where dramatic stone pillars inspired the Hallelujah Mountains in the 2009 blockbuster “Avatar,” has seen an outbreak, linked to Nanjing, traced to a theatrical performance at a tourist site on July 22.

Zhong Nanshan, a coronavirus expert who helped shape China’s COVID-19 response, told a conference on the weekend that he was not too worried about the ability of big cities, like Nanjing, to tackle the virus with their “excellent” control systems, state media reported.

But there were questions about the ability of smaller places, like Zhangjiajie, with limited resources when suddenly having to test and trace the 2,000 people in the audience for the show as well as their close contacts, he said.

Zhangjiajie, nestled in the mountains of Hunan province, has gone into a semi-lockdown, closed tourist sites and indoor entertainment venues, and told people to avoid unnecessary trips.

“All staff at our hotel must take nucleic acid tests every two days,” said a front desk attendant surnamed Li at the Zhangjiajie Huatian Hotel.

The hotel is not open to the public and its online reservation system is suspended.

A staffer surnamed Yin at Zhangjiajie China International Travel Agency said everyone at her agency had been sent home for a “vacation.”

“We’re waiting for the notice on when we can start working again,” she said.

(Reporting by Ryan Woo and Roxanne Liu; Additional reporting by Beijing Newsroom)

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