Hopes for effective coronavirus vaccination programs in 2021 propelled both the S&P 500 and the Russell 2000 small cap index to record highs on Monday. But on the ground in the US, accelerating infections and rising hospitalization rates prompted more state and local governments to order additional restrictions on activity in a bid to slow the spread of the virus. The localized and targeted nature of the new controls will mitigate the economic damage they inflict. However, given the possibility of stricter measures to come, the risk of a mild quarter-on-quarter contraction in fourth quarter US GDP is rising, along with the prospect of downward earnings revisions as analysts pare back their earlier optimism.
The latest phase of the pandemic in the US has seen daily new infections rise to double the rate at the peak of the summer second wave. Hospitalizations have now also exceeded the second wave’s high, with daily deaths approaching the summer’s peak (see the chart below). Moreover, unlike the summer’s wave, which was concentrated in the Sun Belt states, the current rise in infections is affecting almost the entire continental United States.
In response, state and local governments across the country are tightening their controls on activity. Most, however, are avoiding blanket restrictions and are instead targeting higher-risk activities, with policies varying significantly from state to state, and even county to county, depending on local conditions.
At the extreme end of the spectrum, New Mexico has reintroduced a two-week stay-at-home order, with residents advised to leave home for essential trips only. Elsewhere, authorities remain reluctant to impose such sweeping controls, and are instead aiming to limit social gatherings, especially those involving extended close-range contact indoors. For example, the tightest of California’s four levels of restrictions, which under Monday’s “emergency brake” now covers 41 of the state’s 58 counties, bans nearly all indoor gatherings, while allowing most other economic activity to continue.
Clearly, these targeted restrictions will most heavily affect the hospitality and entertainment industries, slowing the consumption of services, with the impact potentially greater than during in the summer’s second wave because of the scale and severity of the current phase of the outbreak. But governments are unlikely to impose restrictions that severely curtail the provision of services that require little personal contact or slow the production of goods. And because companies and consumers have both shifted to transacting online, goods consumption may not suffer greatly either.
These factors are reflected in the latest high frequency data. Indicators for sectors that are directly affected, such as the OpenTable measures of seated diners and the Bloomberg consumer comfort index, have deteriorated marginally, but no more so than during the summer wave. Meanwhile, series that cover the broader economy, such as the New York Federal Reserve’s weekly economic index and initial jobless claims have remained unaffected, despite the current surge in infections and hospitalizations (see the chart below).
This suggests that although the latest phase of the outbreak is considerably more severe than the rise in infections experienced over the summer, on the current evidence the economic impact may not be much worse.
As a result, although we are moderating our expectations for fourth quarter GDP, our base case remains for a slowdown or temporary halt in the US economic recovery. Having said that, the risk of a mild quarter-on-quarter contraction in GDP is clearly rising as the pandemic worsens.
