Coronavirus’s second economic wave

The government’s massive economic support programs in response to the coronavirus pandemic are due to expire at the end of the month.

Those programs have played a vital role in keeping small businesses afloat during the worst recession in the past 90 years. They did so by a generous company loan initiative. They also have helped keep millions of Americans from plunging into poverty and financial ruin. They did so by providing workers with more generous unemployment benefits, a moratorium on rent and debt repayments, and one-time checks to lower income families.

Anyone who believes that the U.S. economy will not require further substantial economic support to replace those expiring programs has not been paying attention to the staggering surge in coronavirus cases in the southern and western parts of the country. Nor have they been paying attention to the rising tide of corporate bankruptcies and defaults that could turn into a veritable tsunami should the resurgence of the pandemic not soon be arrested. 

The current exponential rise in coronavirus cases in populous states such as California, Florida and Texas has raised the national rate of new infections to almost 50,000 cases a day. That number considerably exceeds the earlier April peak of some 35,000 cases. It has also prompted Dr. Anthony Fauci, the country’s leading virologist, to warn that, unless new health measures are adopted soon, we could see 100,000 new U.S. cases a day. 

The policy response to the first surge in the pandemic was to lock down large parts of the economy. That had a devastating effect on the economy as underlined by the fastest output decline on record and by a rise in unemployment to an April peak of 14.7 percent, the highest rate since the Great Depression. 

Over the past two months, as the lockdown was lifted, there has been a strong bounce back in the economy as Americans returned to work and as businesses reopened. Unfortunately, that bounce back is now threatened by the pandemic’s resurgence.

The Trump administration has made clear that it will not reimpose a lockdown in response to the pandemic’s new surge. But it is fanciful to think that this surge will not constitute a major headwind to the nascent economic recovery irrespective of what the government might do. Should the pandemic indeed spin out of control, can we really expect Americans to return to their pre-pandemic levels of travel, dining out, attending conventions and sporting events, visiting shopping malls and studying on campus?   

There would never have been a good time for the U.S. to be hit by a national resurgence in the pandemic. However, it is particularly unfortunate that this resurgence is occurring at the same time that the government’s economic policy support measures are expiring. If unemployment benefits are not renewed and if another reprieve on rent and interest payments is not extended, household spending will likely decline, and household bankruptcies and debt defaults will rise. 

More troubling yet for the economy is the likely spike in corporate bankruptcies and defaults that will come in the wake of the pandemic’s resurgence. This is especially the case considering that during the first half of this year, the corporate bankruptcy rate had already reached levels last seen during the 2008-2009 economic crisis.

It is not simply that the pandemic’s resurgence, coupled with the expiration of the generous corporate loan support program, is likely to push thousands of companies over the edge in the travel, restaurant and hotel space. It is also that a resurgence is likely to accelerate the trends already well underway for the U.S. economy to become more digitized and for more workers to choose to work remotely. That in turn is bound to create a glut in office space and shopping malls that will weigh heavily on the commercial property sector. 

At the start of the pandemic, among the more encouraging developments in the United States was the swift and bold bipartisan policy response to the ensuing economic crisis. Let’s hope that we soon will see another round of bold bipartisan policy making in response to the likely economic fallout from the pandemic’s renewed surge. Without such a response, there is the real risk that the U.S. economy’s impressive bounce back from its recent depths will soon falter. 

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.