Virus remains key risk to near-term outlook - Capital Economics
US Economics

Virus remains key risk to near-term outlook

US Economics Update
Written by Andrew Hunter
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The upturn in coronavirus infections in the Midwest isn’t in itself a major concern, but a more widespread resurgence in cases over the winter would raise the risks of the economic recovery going into reverse.

  • The upturn in coronavirus infections in the Midwest isn’t in itself a major concern, but a more widespread resurgence in cases over the winter would raise the risks of the economic recovery going into reverse.
  • While Europe grapples with a second wave of infections, there are early signs that the US may be on the cusp of a third wave of cases, driven mainly by a growing outbreak in the Midwest. (See Charts 1 & 2.) Admittedly, that’s partly due to increased testing, with the share of positive tests rising only marginally. (See Chart 3.) There is also no suggestion yet of states tightening restrictions on activity, probably because new cases are still rising relatively gradually. But that could change if the virus begins to spread more rapidly.
  • A renewed round of local restrictions wouldn’t in itself be a major threat to economy. Although the impact of the new curbs on bars and restaurants back in July was evident in the high-frequency state-level data, they didn’t end up dealing much of a blow to the wider economy. The pace of recovery clearly slowed, but that was inevitable as the initial boost from the lifting of lockdowns faded. (See Chart 4.)
  • That was largely because the second wave, which was concentrated amongst younger people, proved far less deadly than the initial outbreak in March, allowing states to avoid draconian lockdowns. The next wave may follow a similar pattern, particularly with more effective therapeutics now available and the possibility of a vaccine being approved by early next year. Deaths have not yet risen noticeably and, while hospitalisations have started to creep up, they remain low. In any case, we had already been incorporating continued waves of infections and localised restrictions into our forecasts, which is a key reason why we expect growth to be much slower on average from here. (See here.)
  • Nevertheless, there is a clear risk of a more severe outbreak over the winter months. It may be no coincidence that some of the states seeing the sharpest rise in new cases – including Alaska, Montana and the Dakotas – are among the coldest in the country. As temperatures continue to drop, forcing more activity to take place indoors, this could trigger a more widespread upturn in new cases, potentially including a genuine second wave of infections in the Northeast. Alongside the winter flu season, that would raise the risk of hospitals becoming overwhelmed, and economy-damaging lockdowns being reimposed.

Chart 1: New Daily Infections & Deaths (7d Ave.)

Chart 2: New Daily Infections per 100k (7d Ave.)

Chart 3: COVID-19 Testing

Chart 4: Selected Activity Indicators (Feb=100)

Sources: Refinitiv, Covid Tracking Project, NY Times, Johns Hopkins


Andrew Hunter, Senior US Economist, andrew.hunter@capitaleconomics.com