‘Second Wave’ Should Not Derail the Economic Recovery

posted by Michael Lewis on November 25, 2020 - 9:05pm

Overreactions by Some Governors (and Perhaps President Biden) May Force a Short Contraction Near Year-End; This Would Be Followed by a Big Spring Rebound – Still Reach a New GDP Peak by 21Q3

The second wave of COVID-19 is crashing over the entire United States and many other countries. Still, there is good reason to believe that this COVID-19 resurgence will take less of a human toll than the first wave (though it will still be pretty bad). Much harder to gauge, however, are the macroeconomic impacts. Just as at the start of the outbreak, the economy will be only as strong as the government allows it to be.

Back in March, mandated lockdowns in nearly all states pushed real growth into the red for 20Q1 and caused a wrenching -32% collapse in 20Q2. Now, some, including advisors to President-elect Biden, are demanding far more restrictive limits be imposed nationwide. A few governors are publicly fretting that “they may have no other choice” (Such rhetoric, past conduct shows, means they have already decided to impose severe lockdowns).

While recognizing the substantial downside risks to the economy from such shutdowns, FMI remains optimistic, relatively so for the near- term and outright upbeat for the medium term. We continue to expect positive real growth for 20Q4 and a robust rebound for 21Q2. Early 2021 remains in question: if shutdowns cascade across the nation, as they did last spring, the economy would decelerate sharply. Real GDP growth could turn negative in 21Q1. If this occurs, however, the spring rebound would be even stronger as those restrictions are inevitably eased (and as vaccine distribution ramps up incredibly quickly). Either way, we continue to expect a new real GDP peak in summer 2021, just as we have been forecasting since the outbreak began. It may well be a much wilder ride than we had hoped.


The resurgence in COVID-19 is dominating the headlines (not that the virus ever moved off the front pages since the outbreak began). Much of the story is missing or obscured, however.

First, and most important, COVID-19 vaccine inoculations will begin within the next few weeks; hundreds of thousands of Americans, mostly emergency workers, will get doses by the end of this year, millions will get one of several effective vaccines by the end of January. The director of Trump’s Warp Speed program estimated this week that the U.S. should achieve effective herd immunity by this May, a combination of the vaccines and those who retain immunity after recovering from exposure. The Warp Speed folk have been consistently correct about vaccine development. Skeptics have been spectacularly wrong, including those who predicted it would take a few years to reach this point.

Second, positive tests are overstating the crisis. Since the beginning of October, positive tests have nearly tripled, reaching new record highs. Yet, the number of deaths attributed to the virus have only doubled and remain well below their spring peaks, some -30% below (though the latest

Since October 1, the number of positive COVID-19 tests in the U.S. has nearly tripled to record highs. Yet the number of deaths from the virus has only doubled and remains well below its spring peak. The testing data are distorted by both the increase in the number of tests and by the growing number of false positives as tests flag people who are no longer contagious. Deaths, and hospitalizations, are the better gauge of the outbreak. The number of tests performed is dramatically higher and rising. Also, as Dr. Fauci has admitted, the tests are calibrated poorly; some positive readings reflect only remnants of the virus that are no longer contagious. Based on deaths and hospitalizations recorded, the outbreak is surely getting worse, but not as fast as testing suggests.

Third, hospitalizations are less serious now. The number of daily hospitalizations has reached a new peak. They are up some +30% from their early May (and early August) peaks. Yet, the spring peaks were met with anguished cries that hospitals were over-whelmed even after having ended all “non- essential” services to focus solely on COVID-19 patients. Cities were racing to convert convention centers into emergency COVID-19 wards (few of those beds were ever used, though the facilities were converted using union labor and plenty of overtime). Today, such pleas of shortages of hospital beds are few and far between.

The composition of hospital patients has changed this time. More younger people (under 60) are getting tested and then going to hospitals with some symptoms. They pass the threshold for admittance, but their cases are relatively mild, and they are released fairly quickly. Compared to the +30% increase in COVID-19 hospitalizations from spring peaks, the number of ICU beds taken up has risen only +12%. Moreover, those beds are now distributed across much of the country instead of just a few states.

Fourth, the profile of COVID-19 fatalities has also not changed. The lion’s share of deaths is still those of advanced age, most who also have serious underlying health problems. Close to half are 80 or older. Though most media reports do not mention this very salient fact (and have not throughout the crisis), younger people, under 60 that is, in good-to-reasonable health almost always recover, 99.9% of them. Many in this group never even have any symptoms.

Fifth, as FMI has noted before, the public is much better prepared. Masks, gloves and hand sanitizer, all in short supply last spring, are freely available now. Hospitals have plenty of personal protective equipment.

Finally, viral outbreaks follow social networks. Once a given network becomes saturated – all “members” are infected, recovered, otherwise immune, or protected (masks/social distancing) – the infection peters out. This is the basis of Farr’s Law, the bell curve that has successfully predicted the end of every viral outbreak. These spikes too will come to an end, sooner or later. Because so many people do not realize that they are infected, this virus would likely crop up again, as they have done, until herd immunity is created. Vaccines will speed that process over the next several months.


Prior to the resurgence of the virus, the U.S. economic fundamentals were fine and still are. Pretty good, in fact. Unfortunately, that means very little for the near-term. All depends on the magnitude of government restrictions. So far, most governors are exercising restraint, compared to this past spring at least. Rather than ordering all “non-essential” business closed, they are just advising people not to patronize those businesses. A good portion of the public is ignoring them, as shown by the millions flooding airports and expressways for Thanksgiving (much fewer than the usual holiday but still a considerable number). Most are wearing masks, using hand sanitizer and exercising degrees of social distancing never before attempted.

Meanwhile, eight months into the outbreak, businesses and consumers have adjusted, shifting consumption from restaurants to take-out, movie theaters to video streaming, brick-and-mortar for online shopping, etc. Left to their own devices, the economy will continue to revive. If governors do repeat past excesses, the slowdown will be acute but not so intense as 20Q2 and equally short-lived. As vaccine distribution ramps up rapidly, the U.S. should achieve effective herd immunity by this May.