Ongoing COVID-19 Surge To Have Limited Economic Impact

Summary

• The ongoing COVID surge is likely to have limited economic impact: the economy is already ‘pandemic-proofed’; the virus is less deadly; risk aversion remains stable; red states worst-hit represent only 40% of GDP.
• Some collective immunity seems to be building up: states that experienced large excess mortality earlier this year are experiencing lower levels now.
• With COVID becoming endemic and large financial support from Congress unlikely, states must de-escalate their policy response. The forthcoming vaccines will provide them cover.

Market Impact

• Long equities and bonds as the recovery will require less fiscal support to keep going than consensus expects.

The Economy Is Already Pandemic-Proofed

While new cases have been surging since late summer, mobility has not declined and the recovery has continued (Chart 1). This suggests businesses have found ways to recover while coping with the risks and regulatory constraints associated with the pandemic.

Medical Risks Have Declined

Mortality has fallen from spring levels. This is due to a combination of better health care, virus changes, growing immunity, and better measurement. And it is the case whether measured by the case fatality rate (CFR) or by excess deaths relative to historical averages. Excess deaths tend to be a more reliable indicator since they are not biased by tests sample selection or methodologies or death attributions.

Lower mortality is a global phenomenon (US vs Europe: A COVID Comparison in Charts, 23 November 2020). For instance, the ratio of globally confirmed deaths to cases was 1.5% in October, against 6.1% in April. Of course, the global case fatality rate is probably overestimated since cases are likely to be undercounted. Iceland, Luxemburg and Denmark, which have run the most tests relative to their population, had a CFR of 0.1% to 0.4% in October.

Risk Aversion Remains Stable

The reaction, rather than the virus itself, has hit the economy. Mobility is much more tightly correlated with the economic uncertainty perception index, a measure of risk aversion, than with deaths, cases or even with government regulation (Can the Recovery Continue Without New Relief?, 23 September 2020). The uncertainty index has remained rangebound since July, despite the increase in cases and deaths. This could reflect the public becoming immunized against the barrage of sensationalist and context-free news.

COVID Is Hitting Red States Harder, but Their Economies Are Smaller

Contrasting spring, this time around red states are getting hit harder (I define red states as those with a GOP governor, since the COVID response is determined at the state level). Those represent only about 40% of US GDP and population. Despite the case surge, excess mortality has lowered relative to the summer in both blue and red states. Yet it remains higher in red states.

Interestingly, the number of confirmed cases relative to the population is currently the same in blue and red states. This partly reflects more testing in blue states but likely also that blue states have developed some form of immunity and are experiencing less severe symptoms (see below). Additionally, large excess deaths earlier in the year in blue states could imply increased resiliency. That is, COVID could have brought deaths forward as well as added to them.

Some Immunity Has Been Built

States that experienced high excess mortality earlier in the year tend to have lower mortality now. This relationship seems to hold in both blue and red states. Also, as mentioned above, COVID seems less lethal in blue states. This is possibly because populations in blue states, which were more exposed earlier in the year, have acquired some form of collective immunity.

The Policy Response Is Becoming More Efficient

Since February, unemployment has increased on average by 3.3% in blue states and 2.3% in red states. This is possibly due to a more heavy-handed policy response in blue states. However, with the elections having failed to produce a blue wave, state officials know to expect only limited support from Congress. As a result, they are likely to weigh carefully any further regulatory tightening, especially in blue states where medical risks lower than in red states.

With COVID now endemic, the pandemic’s endpoint is herd immunity. Policy’s role is to figure out how to reach it for the least economic and social cost. There is now growing evidence that lockdowns only have a limited and temporary impact on the pandemic’s progression. This suggests that earlier policies of blanket, months-long shutdowns were inefficient. In this context, the new vaccines offer a cover for policymakers to de-escalate their responses. The scheduling of the first immunizations in December is therefore further indication that the policy response to what is effectively a seasonal surge in an endemic virus will get lighter.