Gavin Newsom aims to reverse the spike in Covid-19 cases in California by shutting down bars and indoor restaurants.
His decision is based on a simple insight: as spending at bars and indoor restaurants rises, so — eventually — do cases of Covid-19.
The economic implications of this relationship are stark. Until everyone has been injected with an effective, long-lasting Covid-19 vaccine, I think it would be wise to keep bars and indoor restaurants closed. Otherwise, the rapid rise in Covid-19 cases could overwhelm the healthcare system.
Moody’s Analytics chief economist Mark Zandi told me July 2 that unless policymakers take action “the economy will be stuck in quicksand and threaten to go under.”
In the meantime, investors ought to stop expecting a V-shaped recovery. Instead I think they should look for a reverse square root symbol or a string of Ws.
How Gavin Newsom’s Success Shifted Into Reverse
In the early months of the Covid-19 outbreak, California was the first governor to issue a statewide shelter in place order. While other states began reopening in May, California remained in lock-down, according to the Wall Street Journal.
However as Covid-19 cases stabilized, counties such as Riverside and Orange began allowing businesses to reopen — defying California rules. With May unemployment in the state at 16.3%, the sixth highest in the nation, Newson said in a June 15 news conference, “You can’t be in a permanent state where people are locked away.”
In that conference, he also predicted that reopening the state would boost the number of cases.
He was right — but I doubt he anticipated the speed and severity of that increase. July 1, weeks after allowing counties to reopen as they chose, California’s coronavirus statistics indicated that the demand for Covid-19 treatment was rapidly outstripping the supply. How so?
- 45% increase in coronavirus cases this week. On June 29, 7,000 people in the state tested positive for new coronavirus with 6,000 new cases on June 30 — the highest level of the pandemic. On June 28, Los Angeles County — with 25% of the state’s 40 million people — recorded a record 2,9o3 new infections.
- Strained health care system. With hospitalizations up 50% in the last week, California’s health care system is getting strained. By July 1, “Sacramento County was almost out of open ICU beds.” Imperial County patients were being transferred to other locations “because the local health system is overloaded,” noted the Journal.
Newsom is shutting parts of the state back down. On July 1, he mandated the closure of many bars and indoor restaurants, movie theaters, zoos, and museums in 19 counties — representing 70% of California’s population, according to the Journal.
Bars and Indoor Restaurants As Powerful Coronavirus Vectors
At the risk of oversimplifying, in California and other states, opening up bars and indoor restaurants is a major cause of a rise in cases. 500,000 people in LA County — with rising case numbers — visited its bars the day after they reopened. In San Francisco, “where infection rates have stayed comparatively low,” bars and gyms remained closed, according to the Journal.
Bars and indoor restaurants are ruthlessly effective places for the Coronavirus to spread due to “their prolonged close contact and loud talking,” according to the Wall Street Journal.
Indeed, with a three week lag, a rise in restaurant spending predicts an increase in virus cases, according to J.P. Morgan Chase economist Jesse Edgerton.
Using anonymized data from his employer’s Chase credit-card customers, spending was strong for weeks and then last week suddenly dropped — with a slightly more pronounced decline in states like Arizona and Florida with the fastest growth in Covid-19 cases, the Journal explained.
From V-Shaped Recovery to A Reverse Square Root or W-Shaped One
While the economy looked to be enjoying a V-shaped recovery between mid-April and mid-June, in the last two weeks of June, consumer spending “flat-lined — resembling the reverse image of the square-root symbol (√),” according to the Journal.
The next leg of the economy could be a downward one — in the shape of a W. As Aneta Markowska, chief economist at Jefferies, told the Journal, “There’s a clear decoupling in activity between these hot-spot states in the Sunbelt and the Northeast where activity continues to improve. Texas, Arizona and Florida have not just leveled off but are outright contracting. [For them,] what began like a V is morphing into a W.”
I think the economy could be worse — looking like a string of connected Ws until a Covid-19 vaccine is widely adopted. States eager to contain the rise in Covid-19 cases will reimpose strict social distancing measures. This will again throw workers who were recently called back to staff restaurants, bars and other retail establishments out of their jobs.
Unless unemployment checks or other stimulus payments are forthcoming, the unemployed will cut back on consumer spending — which in normal times accounts for some 70% of economic growth.
Indeed, hiring stopped in the last half of June, according to data from small business scheduling software supplier Homebase. If hiring stops in July, household income could be hit with a double whammy: loss of employment and the expiration of “enhanced unemployment-insurance benefits,” according to the Journal.
Zandi Is Less Optimistic Than A Month Ago
On June 5, I interviewed Zandi who told me that he thought the recession bottomed out in May.
Things have changed for the worse in the last month. In a July 2 interview, Zandi told me that he is less comfortable with the idea of a V-shaped recovery. As he said, “Yes, the recession likely hit its nadir in May. Nearly all of the economic statistics began to turn up beginning in May, and have very clearly improved in June. This includes employment, retail sales, home sales, and industrial production. Having said this, the risks of a double-dip or W-shaped recession are high given the re-intensification of the virus and the real possibility that lawmakers don’t agree to another significant fiscal rescue package in the next few weeks.”
His most likely case strikes me as less bad than this W-shaped recession. “A reverse square root is an apt description of what this recovery will look like. A deep initial drop in economic activity as the pandemic shut businesses down, strong, but partial recovery as businesses reopen (this is where we are now), and then more-or-less flat until the pandemic is over (there is a widely adopted vaccine or effective therapy),” Zandi told me.
He is putting pressure on government policymakers to keep things from getting worse. “As long as we are in the pandemic, the economy will not be able to kick into full gear and is at significant risk if the infections re-intensify. With social distancing impairing business activity, and businesses struggling to survive and grappling with the uncertainty about the pandemic, the economy will be stuck in quicksand and threaten to go under without additional help from policymakers,” he concluded.
Should You Take Your Profits?
In my view, if the social distancing causes the number of Covid-19 cases to stabilize, politicians will again face pressure to reopen the economy.
And that could restart the cycle of openings, rising Covid-19 cases, and closing back down — operating like an accordion until the disease is contained.
If you are the kind of investor who thinks that stocks should go down if economic prospects are weaker than most people anticipate, you should take your profits.