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Jaw-dropping stats and what a vaccine could do for the economy

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Despite the country slowly opening back up, the economic impact remains staggering and the outlook for recovery? Bleak.

Ned Hill, a professor of economic development in The Ohio State University’s John Glenn College of Public Affairs, updates us on the latest numbers and what we can expect going forward.

The U.S. Bureau of Economic Analysis released its Gross Domestic Product in late March. What was the economic message from that?

The economy did worse in the first quarter (January to the end March) of this year than originally thought. The quarterly GDP estimates come out over three months – the original estimate followed by revisions over the next two months as more data rolls into the Bureau of Economic Analysis. Typically, the first announcement gets the most press because everything after that is old news. However, this year the COVID-19 economic shock is broad, deep and unprecedented, so what happens in the revisions is important.

I focus on the changes in GDP from the end of last quarter of 2019 (October through December) to the end of the first quarter of 2020 (January through March) on an annualized basis. The economy switched from a modest growth rate of 2.1%, to a negative 5% growth rate. This is a jaw-dropping swing of over seven percentage points in three weeks or a drop of 2.3% per week!

Why do you say jaw-dropping?

There are two reasons. First, macroeconomic growth rates tend to change slowly, by tenths of a percent. Second, there is every reason to believe that while the macro economy was slowing in January and February, it was by tenths of a percent. The decrease started after the first week in March. The economy was pushed off of a cliff by COVID-19 and crashed over a three-week period.

I confess that the percent change number that gets batted around in the press and that I am using now is not straightforward. First, it is seasonally adjusted, so that normal monthly swings in hiring and spending are taken into consideration by the statistical models. Second, the number is annualized, meaning that it has a spreadsheet-like what-if scenario built into it. The number starts with the actual seasonally adjusted percent change in GDP from the last quarter of 2019 to the end of the first in 2020. Then it annualizes that number – essentially multiplies it by four, and answers the question: What would the annual growth rate be if the economy’s performance stays this way for a year? Twelve months from now that extremely large rate of decline will improve as the economy comes back online. 

No matter this quibble, the drop in GDP is historic and the recession associated with COVID-19 will go on for awhile.

How long?

I think the recession will end before 2023, but be immediately followed by slow growth in GDP and no growth in jobs for a half-year to a year. Looking back at the Great Recession, job growth did not begin until April 2010, while the recession ended in June 2009. The Great Recession lasted for 18 months and the jobless recovery went on for another nine more months — a total of two-and-a-quarter years went by before the economy was on the road to a decade-long expansion in jobs.

The COVID-19 shock was deeper and the uncertainty over the virus will last until a vaccine is discovered, demonstrated to be safe and effective, manufactured, distributed and herd immunity established.

There are 95 potential vaccines in the earliest stages of development. Here is what the experts say as to when a vaccine could be available.

  • The National Institute for Allergy and Infectious Disease’s Dr. Anthony Fauci stated that a vaccine can be available in 12 to 18 months, giving a window from late spring to the end of 2021.
  • Johnson & Johnson partnered with Catalent to enable a 24-hour, seven-day-a-week production schedule for its vaccine candidate by January 2021.  The trouble is that the vaccine has not begun trials.
  • BiopharmaDive’s reporter noted that Geoffrey Porges, an analyst at SVB Leerink, wrote in an April 21 report to his clients that “A two- to three-year timeline, then, is a more realistic estimate for when a vaccine will be widely available to the public … In the remote possibility that an approved, effective, safe general use vaccine was available a year from now, it would still take several years to confer sufficient 'herd immunity' to prevent endemic spread of COVID-19."

A caution to remember is that medical history has examples of drugs that were rushed to market and ended up killing or harming people. Nothing about drug discovery is certain and rushing a faulty vaccine into use will cause incalculable damage. Optimistic claims are coming from drug companies looking to attract capital while political pressure is building to find the silver bullet so that life can get back to normal. This is an environment where fakery and quackery will thrive and where mistakes will occur.

What does all of this have to do with the macroeconomy and the length of the recession?

Society will adapt to the virus as time passes.  Workplaces and work routines will change to remote work and greater distancing. The economy will begin to rebound but there are two looming events that will turn the recovery into a “W-shaped” recession – meaning there will be a second shock – instead of the hoped-for “V-shaped” recession. First, the public sector employment and its supply chains will begin layoffs in July as new budget years begin – this has already begun. Then there is a real prospect of a re-occurrence of COVID-19, possibly coupled with flu in the early winter. This will have a significant negative impact on any recovery.

Here are the building blocks that get me to steady recovery in 2023:

  • Public sector employment shock July-September 2020
  • Possible reoccurrence of COVID-19 with flu November 2020 to March 2021
  • Possible vaccine spring 2021 to December 2021
  • Ending recession requires announcement of successful completion of Phase 3 trials in 2022
  • Inoculations to achieve herd immunity 2022 to 2023
  • Consistent job growth in mid-2023.

At that point, as I wrote last time, the nation will have to confront a long list of economic policy issues.