How is the US economy coping with the pandemic?

Coverage of the economy can often be very confusing, but at the moment it is the worst I can remember. Many numbers are quoted which are very dramatic but extremely hard to understand or piece together into a consistent overall picture of what is happening. We hear that the last quarter was the worst since World War 2, yet the stock market is soaring higher. Focusing on the US, let’s look at just the key elements.

Consumer spending fell

Consumer spending has been the huge driver of the fall in the economy. The headline number is a drop of 35% which sounds very dramatic. Whilst it is large, it is important to note that the US reports annualised numbers which makes it seem even bigger. i.e. the actual fall in consumer spending during the quarter was around 9%, but the number is reported assuming a fall of 9% every quarter which takes it to a fall of 35% over the whole year. If you think this is confusing, I agree with you. To simplify, let’s look in $ terms:

  • US GDP is ~$21trn per year (which is $21,000 billion)
  • This is $5,250bn per quarter
  • 70% is consumer spending so $3,675bn (i.e. by far the largest part)
  • Consumer spending dropped by $382bn which is over 10%!

What elements of spending fell?

Spending on goods did not fall. We can see this in the recent retail sales numbers. Despite shops not being open, people have been buying as many goods as they did before, which is why this has been a good time for online retailers like Amazon and firms selling goods such as Apple.

The fall in spending came entirely from a collapse in services spending, which is twice as large a component as goods and so much more important for the economy.

Did spending fall because income fell?

This would make sense but is not in fact true. Personal income rose significantly during the quarter.

How did incomes rise during a crisis?

This is surprising but it was from the size of government benefits and transfers.

Income from pay fell by $260bn but benefits (e.g. $600 extra per week in unemployment benefits) and transfers (e.g. $1200 stimulus checks) more than made up for it. In fact, total benefits and transfers were $600bn so incomes ROSE by $340bn.

These numbers are already significant, but even they understate the amount of government support in the past few months. Another program called the Payment Protection Program, the PPP, has given out over $500bn to businesses, nominally in the form of loans but in practice they do not have to be paid back (i.e. they are grants or gifts.)

The total rise in incomes is best seen as the total of these programs i.e. $340+$510 = $850bn

If we include other effects such as lots of tax payments being deferred then the extra amount of money in the bank accounts of Americans is over $1,000bn.

Income up and spending down

We have seen an extra $1,000bn in the bank accounts of Americans. The excitement of the stock market from seeing big tech profits of $28bn in the quarter should be thought of in that context.

The fall in spending of almost $400bn cannot be blamed on a drop in income.

What happens next?

A pessimistic view is that the drop in spending on services is directly due to fear of the virus and so does not recover until the virus is under control. From comparing US states, and looking at Sweden against its neighbours, we have seen a similar drop in spending on services whether they were in lockdown or not.

An optimistic view would be that the pandemic is over and everything will go back to normal. I think it is clear this is not what is happening in the US.

Another optimistic view is that Americans will have saved $600bn this quarter and can spend it now. This is a possibility, but it is perhaps more likely that the extra savings we have seen are due to extremely poor targeting of the transfers which have gone to more affluent business owners whose spending will not be impacted. Kanye West apparently received over $2m and I am not sure this is going to drive his future spending patterns.

A more pessimistic view is that the current quarter will likely not have nearly the same amount of stimulus, so we may see a far worse outcome. In addition to changes in behaviour due to avoiding the virus we will have a large drop in income to drive spending lower.

US Covid Update

In my last post, I said that if Covid was progressing as before in the US, then the rise in cases would lead to a rise in deaths with a lag of 2 weeks or so. This would mean that we would see daily deaths in Florida, Texas and Arizona combined double to around 400 before the end of the month.

Unfortunately, this is exactly what has happened.

This means that hoping it will just go away is not effective as a public health or economic strategy.

Covid infections update

In the June 21st update, I showed a chart with the US states I was most concerned about. Florida, Texas and Arizona were showing worrying early signs of increases, while other states such as New York were keeping control of the virus. Since then the situation has developed as I feared.

You could interpret this chart as the UK doing a good job and I would certainly agree it shows the positive effect of the lockdown, but I would also argue that this is a warning against complacency. Florida for example opened their bars in early June and 6 weeks later we can see the consequences.

Yet anti-lockdown commentators cite the lack of large increases in the number of deaths in these US states as a cause for celebration. During the outbreak in New York, deaths rose at the same time as positive case results as in the graph below. Some argue this shows the virus is different this time, perhaps less virulent, perhaps we know how to treat it now, maybe it’s less deadly during the summer.

Unfortunately, this is mainly a misunderstanding of the statistics. The biggest reason deaths have not risen is that they have not risen yet. For an individual case, there is obviously a time period between getting infected with Covid, when you can test positive, and dying.

During the first outbreaks in London and New York, most tests were being done on people already very sick, perhaps on admission to hospital. Essentially, we only began to notice the virus once people were already dying. Without widespread testing across the community, we saw no lag between reported cases and deaths but given more comprehensive testing systems, I would expect this time difference to be larger now.

As cases in these problem states started to rise after June 21st i.e. 18 days ago. I would expect to see the death rate to start rising around now. Since this is the first time we have had significant test data in advance of the deaths it is not easy to make a confident projection. We do not know the lag we should use, we know positive tests but not the number of people infected who have not been tested and we do not know the mortality rate. Below I use a simple projection with a 2-week lag between positive tests and deaths, and a case mortality rate of 2% which is roughly what it was before the recent spike. In this projection we might expect deaths per day total in Arizona, Florida, and Texas to reach 400 per day in a couple of weeks’ time as in the chart below.

There may indeed be a lower mortality rate with improved treatments as we learn more about the disease. There is also a positive demographic effect in the short term as the recent cases have been concentrated in younger people who have a much lower mortality rate. This does not actually affect the overall mortality rate of course but it will make it look less deadly at first glance. If the death rate does not rise over the next few weeks, then I will revisit this debate to see if there is something new actually happening with Covid.

Does a lockdown harm the economy?

The political right has principally argued against lockdown on the grounds that it harms the economy. Sweden has often been the target of their praise, as an example of a country which took the sensible route and did not panic, allowing the economy to largely carry on as before with people staying safe by following common sense. We now have enough data to compare Sweden to similar countries with different policies.

Denmark enacted a strict lockdown, seeing an initial sharp drop in consumption with credit card volumes dropping over 20%.

Sweden did not have a formal lockdown but still saw a drop of 15% in card payments. It was notable that photos in the press often showed happy Swedes drinking in Stockholm, but even without a lockdown the data showed that people’s behaviour did indeed change with many scared to go to restaurants and shops.

Where the paths of the two economies have really diverged is in the aftermath.

Denmark with its early and strict lockdown was then able to be one of the earliest countries to relax measures. They have seen a virtually complete recovery in their economy with retail sales already above last year’s levels and even restaurants only 10% lower.

Sweden, by contrast, has seen very little bounce at all. This chart shows how household consumption is stuck around 10% below the levels of last year.

Credit card payments compared to last year also show a huge gulf between Sweden and its neighbours Denmark and Norway, as this chart from EVA shows


The obvious conclusion is that the Swedish experiment has not only left them with ten times the deaths of their neighbours (and still rising), but also the continued high prevalence of the virus has left the population scared and lacking confidence to go about as before. Whilst their neighbours can relax and go back to normal, the Swedes are left in a perpetual semi-lockdown state.

As we look around the world, this is great news for countries that have pursued timely and effective lockdowns. It is not good news for the US which opened the economy without controlling the virus. The evidence from Sweden is that this will lead to a prolonged and deeper recession. For the UK, we are relying on Boris’ gamble that we will not see a resurgence of the virus despite our lack of a viable test and trace process.

Lockdowns have not depressed the economy. The virus depressed the economy and lockdowns are the means to get it back on track.