COVID-19 and The EconomyCOVID-19
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Two Reasons Why COVID-19 Will Continue to Affect the Economy (And Two Reasons it Won’t)
Today I want to talk to you about COVID-19, and more specifically the economic fallout resulting from COVID-19. If you saw my recent video on the GDP, you know that the economy contracted significantly during the second quarter relative to the first quarter.
At that time the reports said GDP was down 32.9 percent on an annualized basis, although they eventually revised that estimate to 31.7 percent. Now just to clarify, this doesn’t mean that the GDP actually decreased by 31.7 percent, it means that if the contraction kept going down the path it went during the second quarter then we would end up with a decrease of 31.7 percent at the end of one year.
So the reality isn’t quite as bad as 31.7 percent might make it sound, but it’s still a big drop. It’s clear that the economy has slowed down relative to where it was in January or February.
And while unemployment has gotten better since what it was in April, it’s still pretty bad. I know a lot of you are concerned about this, maybe you’ve had your hours cut or you’ve been laid off, and we’re all wondering when the economy will go back to normal, or the new normal at least. So this piece is going to be all about how I think coronavirus will impact the economy through the rest of the year and even beyond. First I want to cover two reasons the economy could continue to struggle, and then I’ll go over two positive developments that could be signs of a quick recovery.
Two Reasons the Economy Could Continue to Struggle
1. Schools are reopening
First reason that the economy could continue to struggle is that schools are reopening. I published a video recently on the topic of reopening schools, you may have seen it, and yes there are pros and cons to both sides. But the reality is that putting more kids in contact with each other is inevitably going to have an effect on cases.
Yes we can encourage them to socially distance, yes we can have them go on certain days, we can do a lot of things like that, but states or counties that opt for in-person education are going to have trouble minimizing cases. You may have seen some of the photos from schools that have already reopened, kids are packed in, they’re not all wearing masks, and ultimately it’s going to be difficult to strictly enforce social distancing rules in that environment.
Sure most kids who get coronavirus will be fine, younger people tend to have milder cases, but that won’t stop them from spreading it to other people who may be more vulnerable. And we’ve already seen some schools reopen and then close back down again once the virus starts spreading.
Overall there are good reasons to consider reopening schools, I don’t want to say it’s right or wrong, but in places that choose to reopen it wouldn’t be surprising to see more cases. And from there, it will be harder to sell the idea of coming back to work in-person, and states could go through the same process we saw in Texas, for example, where they tried to reopen and they had trouble keeping the number of cases under control.
So every time we try to open back up without being fully prepared, there’s a chance that the virus will start to spread and we’ll be forced to go back to some kind of lockdown. And we’ll see how reopening goes over the next few weeks and months, maybe it will be manageable, but I think it could be an issue during the winter.
There has been a lot of research on this topic and some studies seem to indicate that kids of all ages can spread the virus, and in fact that kids over ten spread it just as much as adults. So even though COVID-19 isn’t usually as serious for children as it is for adults, we can’t ignore the consequences of putting kids into classrooms together when the virus can spread through surfaces and other common forms of contact.
2. Relief is starting to run out
Along with schools reopening, another really critical issue here is that our relief programs are starting to expire throughout the United States. If you’re watching from another country maybe things are different where you are, but here in the US there hasn’t been much since the CARES Act was signed on March 27th. That bill included stimulus checks at the rate of $1,200 for most adults and $500 for most dependents, but those went out in April so it has already been over four months.
The CARES Act also provided an extra $600 in weekly benefits for every American on unemployment, but again that provision expired around the end of July. According to the Washington Post, after those benefits ran out the average person on unemployment went from $930 a week to $330 a week. So these were the two main sources of financial relief for the majority of Americans, and we still haven’t received a concrete plan for a second stimulus bill.
Now there have been on and off rumors about a second stimulus, but if you’ve been following that story you know that most of those developments are just political theater. As I mentioned earlier in the article, unemployment was still above 10 percent in July, so there are a lot of people who need the government to support them right now while businesses are still closed down.
That’s a lot on its own, especially right now, but even beyond those two problems we’re also going to see a growing number of evictions throughout the fall and into next year. The CARES Act put a 120-day moratorium on evictions for people living in buildings with mortgages backed by the federal government or a government-sponsored enterprise, Fannie Mae or Freddie Mac for example. So even that didn’t cover everyone, in fact the Urban Institute estimates that it only covered about 28 percent of rental properties, but it still made a difference. And many states and cities developed their own relief plans on top of what was passed at the federal level, so overall millions of people were shielded from eviction at least for most of the summer.
Unfortunately that 120-day moratorium only lasted through July 24th, and with evictions back on the table millions or tens of millions of tenants could be at risk of losing their homes. Again without any financial relief from the federal government and without businesses opening back up, it’s just going to be difficult for people to cover their rent along with other obligations.
And sure landlords couldn’t evict during that time, but that doesn’t mean rent stopped accumulating. So tenants are responsible for making up any rent they missed, and that just isn’t going to be possible in some cases.
Now of course this is a terrible problem, nobody should be worried about getting kicked out on the street because they can’t pay rent, especially right now, but a wave of evictions would also affect the entire economy. Of course landlords want to find tenants who can pay, and usually when a landlord evicts a tenant it’s because they think they can get more money from someone else.
But during the pandemic the issue is that there won’t be the same supply of tenants who can pay, which means landlords are going to have trouble making their mortgage payments, and well if you were following the real estate market leading up to 2008 you probably understand why this could be a real problem. So overall government relief is crucial when you’re dealing with a crisis like this one, and it will be tough to get the economy running smoothly if we don’t pass a robust stimulus along with some protections for both tenants and landlords.
Two Positive Developments That Could be Signs of a Quick Recovery
1. A vaccine could be developed by the end of the year
Those are some of the main reasons the economy could continue to struggle over the next year or two, but now I want to talk about a few good signs. Of course the big question about coronavirus is how long it will take to develop a vaccine, and a widely available vaccine would be the best thing right now with respect to both the economy and public health.
During the RNC, Trump said that we will “produce a vaccine before the end of the year, or maybe even sooner.” That’s a little optimistic, I don’t think we can be sure about that right now. There’s a lot of conflicting information on that progress, it’s hard to predict when a vaccine will be ready, and even at that point it will take time to produce enough for everyone in the country, let alone the world.
Now with that being said, I don’t want to overstate things, but there are some vaccines in development that could eventually be approved for broader use. I highly recommend the New York Times vaccine tracker if you’re interested in this topic, and as of October they’re monitoring a total of 59 vaccines at different stages of the testing process.
If you aren’t familiar with that process, I don’t want to make this a medical article, but essentially every new vaccine has to go through several stages before being used on a larger scale.
Vaccines are first tested on animals, and based on those results they can advance to phase 1. In phase 1 they test it on a small group to make sure it’s safe and make sure it has potential, then during phase 2 and 3 they can start testing it on more and more people, at that point they’ll be able to identify side effects, study results for different groups, things like that.
And eventually after phase 3, if the results were promising of course, the vaccine can be approved for limited or full release. So this isn’t something you hear about every day, a vaccine moving from phase two to phase three isn’t exactly at the top of the news cycle right now, but every vaccine that advances to the next phase is another potential immunization.
Right now the tracker says that there are technically five vaccines with limited approval, but some of these were approved by the Russian and Chinese governments and there are concerns that they are moving too quickly and ignoring potential safety issues. But even putting those aside there are also 11 vaccines in phase 3 trials from teams around the world, and a few of them could be approved in the near future.
Pfizer, for example, is working on a vaccine called BNT162b2 which they expect to submit for approval as early as October, and if it’s approved they plan to produce up to 100 million doses by the end of 2020 and 1 billion by the end of 2021. Of course this is all speculation right now, I can’t say that there’s definitely going to be a vaccine by the end of the year or anything like that, but there are some promising vaccines moving through the testing process, and an effective immunization would change the course of the pandemic really quickly.
2. Cases are down
So I don’t know what’s going to happen with a vaccine, I’m sure there are still a lot of regulatory hurdles to jump through, but even aside from that the case count has been encouraging recently. Obviously I don’t know how it’s going to go in the future, as I mentioned schools reopening could change the situation, but the current development has been a gradual decrease since around the end of July.
If you haven’t heard of rolling averages, essentially they take the average of the last three days or seven days to reduce the impact of any outliers. The US tends to count fewer cases on Sundays, for example, so using a seven-day average can give you a better picture of the overall trend.
And if you look at that graph you’ll see that it peaked on July 25th at 69,330, which is around three times what it had been during most of May and June. Yes we were testing more, but there was also an uptick in cases, and you can see that in the rolling average for deaths, which peaked a little more than a week later on August 4th at 1,177.
Now our current case count isn’t as low as it was in the second half of May or the first half of June, but we’re still down significantly from the peak at the end of July. Since that peak of 69.330 the rolling average slowly dropped down to around 42 or 43 thousand toward the end of August, and then it started to creep up again to around 50,000 in October, but keep in mind that that’s still a lot less than it was a couple months earlier.
So yes we still have work to do, but we are starting to contain the virus at least a little more effectively, which is obviously a great sign in terms of reopening businesses and getting back to work. Again I have no idea what’s going to happen after I publish this article, maybe schools are going to make things worse in the winter, maybe we get a vaccine, there’s a lot that could happen. But both cases and deaths consistently decreased throughout August, yes it was slow progress but it was still progress. Of course the turnaround there is concerning but hopefully it won’t get back up to those August levels
OK everyone thanks for reading to the end of the, I’m sure there’s a lot more I could have mentioned but right now I think these will be some of the most important factors in the fight against coronavirus in terms of public health and in terms of the recession. I would highly recommend starting a budget if you’re concerned about your financial situation. I actually cover some of the basics in a video on my channel, so you can click through to that if you want to learn more about creating your first budget. Thanks again for reading and see you next time.
Logan is a practicing CPA, Certified Student Loan Professional, and founder of Money Done Right, which he launched in July 2017. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.