By Christophe Barraud

The first estimate of U.S. 3Q growth marked history with GDP jumping by 33.1% QoQ annualized, following a record 31.4% decline in 2Q. Supported by this sharp rebound, the level of economic activity is now only 3.5% below the pre-crisis level (4Q 2019). However, the positive momentum should reverse as soon as 4Q amid coronavirus resurgence.

Before all, it’s important to highlight that the U.S. economic recovery has clearly lost momentum since August in a context where the federal government’s CARES Act programs for the most part expired at the end of July.

First figures for October also raised concerns with new auto sales dropping for the first time since April and nonfarm payrolls rising at the weakest pace since the economy reopened in May.

Recent weakness can be attributed to Covid-19 resurgence in cooler regions. As a matter of fact, Homebase, a firm specialized in tracking high frequency data, “indicated a more pronounced decline across their three metrics (business open, employees working, hours worked) beginning in the first week of October.” It added that “Northern states in cooler climates saw sharper declines than their southern counterparts.”

 

The situation will worsen in November as several states, such as Georgia, Maine, Maryland, Nebraska, Nevada, New Jersey, Oregon, Rhode Island, Utah and Wisconsin recently implemented restrictions to contain the spread of the coronavirus. Yet, worst is coming and I expect that most states will be forced to implement stricter restrictions including local lockdowns in the coming weeks. The health situation is particularly worrying and there is no doubt that it will deteriorate further. Using a 7-day moving average, my proxy of new cases normalized for testing already points to an imminent spike of hospitalizations well above the previous record high.

The problem is that the number of new cases will keep rising steadily at least in the next 2/3 weeks before potentially reflecting the impact of recent restrictions (which look insufficient). Americans were laxist because of the presidential election and I would not be surprised if rallies and celebrations lead to more infections. Furthermore, temperatures are expected to fall ahead of the winter, which should favor contagion and potentially lead to an exponential growth of new cases (as it happened in late September in Europe).

In the meantime, although the newsflow concerning a Covid-19 vaccine developed by Pfizer Inc. and BioNTech SE was positive as it prevented more than 90% of symptomatic infections, the general public won’t have access to the vaccine until February at the very earliest according to the New York Times. President-elect Joe Biden also noted that widespread vaccination will not happen for “many more months”. In other words, it won’t prevent states to implement restrictive measures that should be similar to what we observed in April.

The timing is crucial and even if several restrictions could be delayed after Thanksgiving (Nov. 26), authorities won’t be able to wait until Christmas before acting. The risk is that hospital capacity could be reached in several areas as it has been the case in Utah. Governor Gary Herbert said the state’s health-care system is so taxed by the Covid-19 pandemic that hospitals are rejecting patients from other states.

“We’re having to turn away people from Nevada, from Idaho and from Montana,” he said. Similarly, he said patients from the Four Corners region of Utah have been turned away from hospitals in Colorado Springs, Colorado, “because they have the same problems” with overcapacity.

Elsewhere, the Oregon Health Authority is also facing a jump of COVID-19 patients in hospitals. Dana Hargunani, the health authority’s chief medical officer, made a clear warning.

“There are limitations to what Oregon’s healthcare system can handle,”… “Even with regional planning and the hard work of all of our hospital partners, we cannot handle ever growing high daily case counts and widespread hospitalizations.”

Therefore, in a context where the economic recovery has already lost momentum, upcoming drastic restrictions will probably result in another GDP contraction as soon as 4Q.