Good Reasons for Optimism: Economic Outlook for the U.S. Economy

Even though you might not have any worries about dying from COVID-19, you are wise to worry about its economic implications.

After all, we know for sure that some people are definitely going to be out of work - especially those in non-essential services, travel and live entertainment fields. As far as I can tell, the best numbers out there are predicting we will hit peak U.S. deaths on April 13, 2020. Apparently, the number of deaths will drop to almost nothing at all by the end of June 30, 2020. This means that draconian measures to protect the public by sheltering in place will likely continue at least until the end of May. See the chart below:

Theoretically, the economy might bounce back even sooner if political leaders adopted a strategy where we would isolate the elderly who are most at risk and then let everyone else go on about their business. This way many people will get the virus, most will not even know they had it, and we would end up with a population which is effectively immune from its effects. This is indelicately called "herd immunity." After the herd immunity is in effect, we would expect the elderly and those at greatest risk could come out of their homes and safely mix with everyone else.

This mixing would be all the more safe if we continue to see outstanding progress in the treatment of COVID-19.  On the positive side, we are already seeing how existing treatments - a combination of existing anti-malarial and anti-biotic drugs - may be used to effectively cure the virus, reduce its duration and dramatically reduce deaths.


In the long-run, of course, we will be in great shape because we will have a vaccine that will protect all of us from COVID-19. Unfortunately, the process of creating a vaccine will require about 18 months due to the testing involved. Apparently, this testing is more needed than you might expect because of the possibility that COVID-19 will mutate into something else which cannot be harmed by the vaccine or that the vaccine has some disturbing side effect which might make it worse than the disease.

Largely due to the matters described above, I do have an optimistic take. When I see the people around me in a panicked frame of mind, it seems to me that many of them are imagining an unrealistic scenario where COVID-19 becomes a sustained, unrelenting killer for years on end. This chilling vision is just not a practical reality. It is silly to worry about something that out of line with our historical experience.

On the economic front, I think the pessimists are not showing much faith in our government or our economic system to handle this matter.

Above all, we will not be seeing everyone experiencing what happened in New York City. After all, elsewhere in the country we shut down travel quickly. My wife and I have been sheltering in place for over two weeks now, so we are doing our part to stop the spread of the virus. Likewise, plenty of people will still have jobs and income including government workers, people living on retirement pensions, and those who can effectively work from home...including most of us grant writers

Moveover, certain early theories which made COVID-19 seem more frightening have been debunked including the idea that it floats in the air for a long period of time or the bizarre idea that ordinary masks won't work to stop it.

As I review the economic projections, I'm confident that although COVID-19 will harm the economy it will not produce a profound negative impact. I'm certainly not expecting two quarters of negative growth in the economy. This, by the way, is the working definition of a recession. Why?

First of all, the economy is basically strong. Oil prices are at historic lows. Federal government regulations will be reduced as long as Donald J. Trump remains in office. In a financial crisis like this, we see demand is reduced, but there is no fundamental harm to the economy as you would see in a bank and investment financial sector crisis. Under present circumstances, we should get relief quickly. I suspect that the minute the COVID-19 transmission rate falls beneath 1.0 ...meaning it is dying out...you will see the economy and hiring roaring back. If there is a recession, it will be less deep and will rebound more quickly than if we were dealing with the aftermath of a shooting war, dealing with oil price increases, or enduring a real estate bust, or experiencing financial crisis as we were in the Great Recession of 2008-2009.

Next, it looks like the U.S. economy is better positioned to ride out the COVID-19 crisis than other countries. After all, the US economy is less trade-reliant than some other countries, such as Japan or Germany, which will help to shield us from slowing of external demand.

Third, it seems undeniable that this crisis will harm corporate earnings and negatively impact job creation and unemployment. While these factors will reduce the beneficial aspects of consumer demand, there are reasons to think that consumer demand might drop less than we would normally expect. If parts of the economy are hurting, we can expect those with cash or secure income sources to cash in on the slower economy as they engage in buying of inexpensive properties and consumer goods. Even for those laid off from work, they will have unemployment benefits to lean on. There will also be charities out there providing food and other free services for those who are out of work. There will also be a new federal program which will forgive loans to charities and small businesses provided they can document that this money was spent on paying wages and salaries to their employees.

The folks over at Wells Fargo, for example, still seem bullish on the economy. I reviewed some of their financial guidance and found this snippet regarding the new CARES Act signed into law by president Trump last Friday:

An overriding theme through all these provisions is direct assistance to those whose incomes or revenues are under pressure from the pandemic, and greater flexibility for how and where the Federal Reserve may shore up financial markets. The recent increase in legislative tempo has encouraged financial markets, insofar as the Act allows workers and businesses to bridge the next few months. Most of the provisions of the CARES Act expire between September and December 2020, however. If it takes beyond the third quarter to see a peak in the virus, Congress may need to return with another package.

Ultimately, we believe that the federal government will extend, as necessary, and the economy should rebound by late 2020. Even a strong rebound is possible, once more typical spending rates resume across the economy. Our 12-month outlook is for a rebound in economic growth, earnings growth, and valuations, which should support a broad recovery in equity prices. Yet, beyond the next two years, the implications of today’s strong fiscal and monetary response is likely to include a strong potential for higher tax rates and somewhat higher interest rates, depending upon how much additional economic aid ultimately is added to counter the economic fallout from the virus.

For more on how Drew & Associates can help you tap into that government funding and comply with all the federal requirements, click on this link.

Fourth, I should also mention that there is also a political cycle that will benefit the economy. It usually performs better during an incumbent president's re-election campaign.

The worst thing to do, in my view, is to let fear get the better of you and to slack off on your efforts to bring in business and generate grant letters of inquiry and proposals. Remaining in action is the best possible guarantee that you will not participate in either the health crisis or the economic crisis caused by COVID-19.