The Pandemic Depression
By Nayyer Ali MD
April has been a cruel month for the United States. Officially, 60,000 people will have died due to COVID-19, and taking into account the full death toll, that number is probably over 80,000. It is likely that between 6-10 million Americans have been infected, and America’s largest city, New York, has suffered over 15,000 deaths. While the human toll has been horrific, and looks set to go over 100,000 deaths in the next month or two, the economic damage has also been colossal.
Over 25 million people have lost their jobs in five weeks. Vast sections of tourism, food service, hospitality, and travel have been decimated. Education has been dramatically curtailed with almost all schooling from primary to university being online if it is conducted at all. Even hospitals and doctor’s offices are being impacted, as everything that normally earns income, including routine office visits and elective hospital procedures, are cut back. An economic expansion that began in the summer of 2009 in the wake of the Great Financial Crisis, finally came to an end in March of 2020.
The federal government has tried to keep the economy on life support through a huge variety of massive spending programs. Several hundred billion have been spent on loans to small businesses in exchange for them agreeing to not fire employees. Big corporations have also gotten loans and bailouts to keep them afloat. The Federal Reserve has purchased over three trillion dollars in government and corporate bonds, with plans to purchase even more. This is just flat-out printing of money, as the Federal Reserve can simply create as much money as it wants (it does so electronically rather than literally printing the cash).
The big puzzle is the stock market. From a record high of almost 3400, the S&P 500 index crashed all the way down to 2200 in just a few weeks as the massive implications of the pandemic became clear. But since then, the stock market has gone almost straight up and is back to 2900. This seems bizarre. In the last two major bear markets, the dot-com crash in 2000 and the Financial Crisis in 2008, the index lost over 50% of its value and took years to recover. This downturn is even sharper, with unemployment rising faster than ever experienced in American history. In 2010, the unemployment rate peaked at 10%, it is already over 15% and may go over 20% in this depression.
The stock market appears to be living on some sort of artificial sugar high fueled by the Federal Reserve and the massive government spending by Congress. It appears to suggest the expectation that this economy is going to bounce back dramatically and rapidly in the next few months, and so bidding up stock prices makes sense.
While trying to predict what stocks will do is often a fool’s errand, it doesn’t take much thought to realize that the economy is going to be very sick for a very long time. Until we have a vaccine, the economy cannot go back to normal. Large sectors, including restaurants, hotels, airlines, entertainment, movie theaters and movies, gyms, sports and music concerts will need to be shut down or very limited. All the people that work in those sectors will be unemployed or fearing for the future. Consumer confidence will be extremely low, depressing all sorts of long term purchases such as cars. The collapse of gasoline demand around the world has totally collapsed the price of oil, and the entire US oil shale industry is now no longer profitable and will face major cutbacks in investment and employment. The end result is that GDP is going to collapse sharply in the next three months, and any rebound is going to be modest and slow.
At some point the stock market will finally have to grapple with this reality. When that happens, we may see a second downdraft in stock prices as sharp as what happened in March, and perhaps take stocks even lower.
For Trump, he is pinning his reelection hopes on rapidly reviving the American economy. But that is just not going to happen. Even if Trump wants businesses to reopen, they are not going to do so if there are no customers. Until we have a vaccine, people are not going to get on crowded jets, or attend baseball games, or go to bars and crowded restaurants and movie theaters, or start buying big ticket items that require them to have faith they are not going to lose their job. The Great Recession in 2008 was considered the worst economic downturn since the Great Depression of the 1930’s. This one is going to be much worse than 2008, even if the stock market doesn’t think so yet.
