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U.S. coronavirus infection rates remain stubbornly high, even as some parts of the country report downward trend lines. Anthony Okolie speaks with Leslie Preston, Senior Economist, TD Bank, about rising COVID-19 cases and the risk they present to the economic recovery.
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- Leslie, let's start with the big picture around US infection rates, which still remain stubbornly high despite some recent positive downtrends in parts of the country. What's the latest data telling you about the pandemic and the state of the US economy?
- Well, what we've really seen throughout this pandemic is that the state of the economy and the progress of infections are really inextricably linked. When we saw infections surge in many parts of the country in late June through early July, we saw a lot of high-frequency economic indicators turn down.
So at the national aggregate level, really the rate of infection has improved in more recent weeks, but it's still at a very high level. Just to compare to Canada, the US has about 125 infections per million people over the past week. In Canada, that number is 12. So we're just dealing with a much more prevalent rate of infection in the United States.
And what this means for the economy is that the recovery in the economy is much more fragile because as we've seen in July and August, as you get these increasing rates of infections in certain areas, you do see the economic indicators and mobility indicators weaken.
- And what about US consumers? How have they changed their buying habits due to the rise in US infection rates?
- Yeah, you know, I did sort of give a sneak peak in my last answer there, but we did see in the states that had the biggest surges in infection rates through July, we did see a remarkable shift in various high-frequency indicators, particularly on measures of mobility, which with all of us carrying around smartphones, we're able to track pretty well in terms of how much consumers are moving. And we did see in regions that had the biggest surge in infections, we did see mobility decline.
And this was corroborated in some of the other indicators we're watching like the OpenTable restaurant reservations. Some of these areas of the country like Texas and California, Florida had seen a big surge in reservations with OpenTable when their economies reopened. But as infections rose, you really saw those reservations drop off. So consumers did respond quite strongly to the rise in infections.
- And I want to talk about the US labor market. In your report, you highlighted the need for headline unemployment to capture shadow unemployment. What is shadow unemployment, and why is it significant?
- Well, just for starters, we economists are always talking about shadow unemployment, whether we're in the midst of a pandemic, and that's basically because the official measure of unemployment doesn't capture people who aren't actively looking for work. In order to be classified as unemployed, you have to have been actively searching for a job fairly recently, and this is a particular challenge at the height of the pandemic. With many industries just entirely shuttered, many workers who were laid off just couldn't look for a job. You were stuck in your home, and your industry wasn't really hiring.
So really, it-- when you just look at the unemployment rate, it understates the degree of unemployment in the economy. Now, this has improved in June and July. The number of underemployed has fallen. But we economists do like to get the fullest picture of unemployment, and we have seen that you need to measure it more broadly to really get a sense of the impact.
- And last week we saw the number of Americans filing for unemployment benefits rose above 1 million for the second consecutive week. What's the risk to the labor-market recovery if Congress fails to reach a coronavirus stimulus deal?
- Well, the risk to the labor market really happens through the channel of consumer spending. Now, as you mentioned in the last question, we have an incredibly elevated number of people who are collecting unemployment benefits in the US. As of mid-August, there are about 27 million people collecting unemployment benefits, and under the CARES Act that was signed back in late March, all of those individuals were getting an extra $600 per week in addition to their state-level benefits. That ended at the end of July, and Congress, as you alluded to, has been trying to negotiate some sort of extension to that, perhaps at a lower level.
So basically as of August, these 27 million Americans are getting $600 less per week. We expect that to show up in weaker consumer spending in August and into September if we don't get more assistance from Washington. So if consumers are spending less, that reduces demand for workers all through the economy. So if we see consumer spending weaken, which in the high-frequency data we are seeing consumer spending in August slow in the United States, we will worry about the unemployment rate remaining elevated for longer.
- So given all we know today, what's your outlook for the US economy in the second half of the year?
- Well, I think it's important to distinguish there really are two phases to the second half of the year. We're coming to the tail end of the third quarter, and the third quarter really is the rebound phase. We're tracking right now at 27% annualized rebound in real GDP growth in the third quarter. And regardless of a loss of momentum in August, this is pretty much baked into the math. You saw a strong rebound in May and June, which sets up momentum for the third quarter.
What we're getting more concerned about and the surge in infections is really putting at risk is growth in the fourth quarter, just the way the quarterly math works out. Now, we're currently forecasting 3 and 1/2% growth in real GDP in the fourth quarter. Now as recently as our June forecast, that was closer to 6%. So we have reduced our growth expectations in the fourth quarter, reflecting this summer surge in infections and more cautious consumer behavior that we've seen come out of that.
- Leslie, thank you very much for your time.
- My pleasure.
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- Well, what we've really seen throughout this pandemic is that the state of the economy and the progress of infections are really inextricably linked. When we saw infections surge in many parts of the country in late June through early July, we saw a lot of high-frequency economic indicators turn down.
So at the national aggregate level, really the rate of infection has improved in more recent weeks, but it's still at a very high level. Just to compare to Canada, the US has about 125 infections per million people over the past week. In Canada, that number is 12. So we're just dealing with a much more prevalent rate of infection in the United States.
And what this means for the economy is that the recovery in the economy is much more fragile because as we've seen in July and August, as you get these increasing rates of infections in certain areas, you do see the economic indicators and mobility indicators weaken.
- And what about US consumers? How have they changed their buying habits due to the rise in US infection rates?
- Yeah, you know, I did sort of give a sneak peak in my last answer there, but we did see in the states that had the biggest surges in infection rates through July, we did see a remarkable shift in various high-frequency indicators, particularly on measures of mobility, which with all of us carrying around smartphones, we're able to track pretty well in terms of how much consumers are moving. And we did see in regions that had the biggest surge in infections, we did see mobility decline.
And this was corroborated in some of the other indicators we're watching like the OpenTable restaurant reservations. Some of these areas of the country like Texas and California, Florida had seen a big surge in reservations with OpenTable when their economies reopened. But as infections rose, you really saw those reservations drop off. So consumers did respond quite strongly to the rise in infections.
- And I want to talk about the US labor market. In your report, you highlighted the need for headline unemployment to capture shadow unemployment. What is shadow unemployment, and why is it significant?
- Well, just for starters, we economists are always talking about shadow unemployment, whether we're in the midst of a pandemic, and that's basically because the official measure of unemployment doesn't capture people who aren't actively looking for work. In order to be classified as unemployed, you have to have been actively searching for a job fairly recently, and this is a particular challenge at the height of the pandemic. With many industries just entirely shuttered, many workers who were laid off just couldn't look for a job. You were stuck in your home, and your industry wasn't really hiring.
So really, it-- when you just look at the unemployment rate, it understates the degree of unemployment in the economy. Now, this has improved in June and July. The number of underemployed has fallen. But we economists do like to get the fullest picture of unemployment, and we have seen that you need to measure it more broadly to really get a sense of the impact.
- And last week we saw the number of Americans filing for unemployment benefits rose above 1 million for the second consecutive week. What's the risk to the labor-market recovery if Congress fails to reach a coronavirus stimulus deal?
- Well, the risk to the labor market really happens through the channel of consumer spending. Now, as you mentioned in the last question, we have an incredibly elevated number of people who are collecting unemployment benefits in the US. As of mid-August, there are about 27 million people collecting unemployment benefits, and under the CARES Act that was signed back in late March, all of those individuals were getting an extra $600 per week in addition to their state-level benefits. That ended at the end of July, and Congress, as you alluded to, has been trying to negotiate some sort of extension to that, perhaps at a lower level.
So basically as of August, these 27 million Americans are getting $600 less per week. We expect that to show up in weaker consumer spending in August and into September if we don't get more assistance from Washington. So if consumers are spending less, that reduces demand for workers all through the economy. So if we see consumer spending weaken, which in the high-frequency data we are seeing consumer spending in August slow in the United States, we will worry about the unemployment rate remaining elevated for longer.
- So given all we know today, what's your outlook for the US economy in the second half of the year?
- Well, I think it's important to distinguish there really are two phases to the second half of the year. We're coming to the tail end of the third quarter, and the third quarter really is the rebound phase. We're tracking right now at 27% annualized rebound in real GDP growth in the third quarter. And regardless of a loss of momentum in August, this is pretty much baked into the math. You saw a strong rebound in May and June, which sets up momentum for the third quarter.
What we're getting more concerned about and the surge in infections is really putting at risk is growth in the fourth quarter, just the way the quarterly math works out. Now, we're currently forecasting 3 and 1/2% growth in real GDP in the fourth quarter. Now as recently as our June forecast, that was closer to 6%. So we have reduced our growth expectations in the fourth quarter, reflecting this summer surge in infections and more cautious consumer behavior that we've seen come out of that.
- Leslie, thank you very much for your time.
- My pleasure.
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