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Economic Epidemic

The economic epidemic is delivering uncertainty to such an extent that the equity markets fell at unparalleled speed. The economic decline may be higher than the great depression, and unemployment may reach 30%. With a vaccine delivery at least a year away, the viral pandemic is creating localized economic epidemics in different sectors of the economy. The challenge for politicians is to prevent economic epidemics from becoming a pandemic in the US and globally. The answer is proverbial: an ounce of prevention avoids pounds of cure. Unfortunately, the current path for the US would mean that the proposed stimulus bill is insufficient, and the equity market may require further discounting. Critically, the goal must be to ensure that this is a challenge of this time, not one that endures for a generation.

Source: Photo by Sonder Quest on Unsplash

Measuring Up. While the magnitude of the economic impact in unknown, we do know that it is massive. The acceleration of unemployment claims is unprecedented. Whole sectors of the economy shutter as a third of the US population is in home isolation. There is not any economic comparable for the speed and scale of this shutdown. At best, we can deduce the financial toll through the impact of lost wages.

National income captures the growth of the economy minus the consumption of fixed capital (i.e., depreciation). The income is not all salary, but an aggregate of other components that includes corporate profits, taxes, and non-salary compensation (i.e., health care). The result is that actual wages account for about 43% of total income, and results in about $9 trillion of wages. This calculation gives us a measure of what could be the full impact on consumption.

Employment sectors contribute to the total income because of their varying numbers of employees and wages. For example, Information and Utility workers enjoy the most substantial wages while having the smallest number of workers (exhibit1, upper left). A more insightful way is to measure the total wages paid by the sector. The size of the circle in the exhibit measures the economic impact. The exhibit clearly shows that the Professional Services sector is the most significant contributor, while Education & Health is not far behind. The sectors included below account for over $7 trillion of compensation, with the remainder accruing to various levels of government workers. Thus, we can use these tallies to estimate the economic drag from the different measures to mitigate the virus.

Exhibit 1. Employment, Wages, and Income by Sector

Source: Federal Reserve Economic Database and CRM calculations.

Many Paths. To understand the economic impact, we need to frame out the plausible mitigation scenarios. The options to reduce the effect of the virus are not numerous because of the 'community spreading' of the disease. Typically, isolation of the infected to help slow the disease is viable; however, we don't know everyone who is contagious, so it's impossible to contain the virus. While there are several containment strategies that we discussed in a prior post, there are effectively only four options right now.

  • Do Nothing - Lets the virus run its course.

  • Close Everything - Restrict all movement outside of the home for two months.

  • Social Distancing - Ensuring people keep at least six feet apart and limit gathering in groups.

  • Case Isolation - Case isolation of the infected and home quarantine of their household members.

These strategies vary in their containment ability and their duration (exhibit 2)