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Virus Surge Could Wallop the Economy Again

Michael Rainey
·3 min read

Analysts at JPMorgan Chase are predicting an economic contraction in the first quarter of 2021, driven by the fall surge of Covid-19 and new restrictions on businesses imposed by state and local governments.

The U.S. economy is projected to shrink by 1% in the first three months of the new year, the analysts said, following estimated growth of 2.8% in the fourth quarter of 2020 and recorded growth of 33.1% in the second quarter.

“While the economy powered through the July wave, at that time the reopening of the economy provided a powerful tailwind to growth,” the JPMorgan economists wrote. “The economy no longer has that tailwind; instead it now faces the headwind of increasing restrictions on activity. The holiday season — from Thanksgiving through New Year’s — threatens a further increase in cases.”

Calling the outlook for the winter “grim,” the analysts said the coronavirus will be an unavoidable factor for the economy in the months ahead. “One thing that is unlikely to change between 2020 and 2021 is that the virus will continue to dominate the economic outlook,” they wrote. “Case counts in the latest wave are easily surpassing the March and July waves.”

Most Wall Street economists are still predicting modest growth in the first quarter, although their outlooks may change as the severity of the coronavirus surge becomes apparent. Dallas Fed President Robert Kaplan highlighted the possibility of negative growth Friday. “We’ll have to see what the fourth quarter looks like,” Kaplan told Bloomberg News. “It is possible we could have negative growth if this resurgence gets bad enough and mobility falls off enough.”

Benefits cliff will be a factor: “The economy will be operating without a safety net in January,” Bank of America economist Joseph Song wrote in a note to clients Friday. As we’ve told you previously, multiple emergency pandemic assistance programs established by Congress in March will expire at the end of the year, and Song says the sudden withdrawal of fiscal support will be felt in the broader economy.

The loss of emergency unemployment benefits on December 26 could knock 1.5 percentage points off of GDP growth, Song estimated. The loss in aggregate income from the unemployment benefits cliff would come to roughly $39 billion, while another $8 billion in income could be lost as workers exhaust their state benefits during the first quarter.

The termination of other relief programs – including the moratorium on evictions and the suspension of student loan payments – will add to the headwinds, Song said. Congress could eliminate the drag, however, by passing another stimulus bill, and Song expects to see a spending package worth between $500 billion and $1 trillion soon after Joe Biden is sworn in, setting the stage for positive GDP growth in the second quarter.

White House insists on a rosier outlook: White House chief economic adviser Larry Kudlow said Friday that the economy is not slowing down in the face of a resurgent virus. “Housing is booming, consumer spending is booming, automobiles are booming, just booming,” Kudlow told Fox News. “It is a strong V-shaped recovery ... there are pandemic risks, virus hotspot risks, I get that. All I'm saying is what we know on jobs and housing and retailing and cars and other areas, the economy is very hot.”

Treasury Secretary Steven Mnuchin was a bit less optimistic. “What the economy needs is now more fiscal support,” he told CNBC Friday, while pledging to work with lawmakers to hammer out a targeted coronavirus relief bill now that the election is over.

“I can tell you Mark Meadows and I will be speaking with Mitch McConnell and Kevin McCarthy this morning,” Mnuchin said. “And we are going to come up with a plan to sit down with Pelosi and Schumer and try to get a targeted bill done for the people that really need it. And hopefully the Democrats will work with us.”

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