Why the US Economy Isn’t Ready for a Second Wave of Coronavirus

The economy has yet to fully recover from the initial wave of the coronavirus pandemic — many Americans are still out of work, and numerous businesses have already closed or are currently struggling to stay afloat. If a second wave hits, the blow to the economy could be devastating, Federal Reserve Chairman Jerome Powell said at the National Association for Business Economics annual meeting. Here’s why the U.S. economy could suffer greatly from a second wave of the pandemic.

“COVID-19 cases might again rise to levels that more significantly limit economic activity, not to mention the tragic effects on lives and well-being,” Powell said during the meeting.

The U.S. economy relies on consumer spending, so a downturn in spending could have major ripple effects.

During the initial wave of the coronavirus, policy intervention — including direct payments to households, forgivable loans to small businesses and an extra $600 per week in unemployment benefits — “muted the normal recessionary dynamics that occur in a downturn,” Powell said. Typically, lower consumer spending leads to additional layoffs.

If a second wave comes and there is no policy intervention, more layoffs are to be expected.

Powell noted that the pandemic has not affected everyone equally: “The initial job losses fell most heavily on lower-wage workers in service industries facing the public —job categories in which minorities and women are overrepresented,” he said. “Combined with the disproportionate effects of COVID on communities of color, and the overwhelming burden of childcare during quarantine and distance learning, which has fallen mostly on women, the pandemic is further widening divides in wealth and economic mobility.”

A second wave could widen these divides even further, he said.

“A long period of unnecessarily slow progress could continue to exacerbate existing disparities in our economy,” Powell said. “That would be tragic, especially in light of our country’s progress on these issues in the years leading up to the pandemic.”

Just as the first wave of the coronavirus led to a drop in the financial markets resulting from lockdowns, a second wave could have a similar effect. A new wave of lockdowns could flatline economic activity, which is bad news for investors.

Although the economy showed signs of recovery over the summer, those gains have slowed down — and could slow down even further if there were to be a second wave.

“The outlook remains highly uncertain, in part because it depends on controlling the spread and effects of the virus,” Powell said. “There is a risk that the rapid initial gains from reopening may transition to a longer than expected slog back to full recovery as some segments struggle with the pandemic’s continued fallout. The pace of economic improvement has moderated since the outsize gains of May and June, as is evident in employment, income and spending data. The increase in permanent job loss, as well as recent layoffs, are also notable.”

Powell noted that the Federal Open Market Committee has had to rethink its framework for conducting monetary policy, as the economy has not lived up to previous estimates.

“There has been a decline in estimates of the potential or longer-run growth rate of the economy and in the general level of interest rates, presenting challenges for the ability of monetary policy to respond to a downturn,” he said.

In September, the Organization for Economic Cooperation and Development said that a second wave of the coronavirus would be bad news for the global economy. The organization predicted that a second wave would cause the global GDP to drop by more than 7.5%, and about 40 million more people would lose their jobs, Fortune reported. 

In September, St. Louis Fed President James Bullard said that he does not believe a second wave of the coronavirus would push the U.S. economic recovery off track, Reuters reported. He noted that fatality rates were unlikely to reach the level that came with the first wave because of improving treatments and individuals making more efforts to protect themselves.

“I expect this rebound to continue in the U.S. as businesses learn how to produce products and services safely using simple, existing technology,” Bullard said.

Although the economic outlook could be grim in the event of a second wave of the pandemic, the Organization for Economic Cooperation and Development noted that economic impacts could be mitigated by countries taking extra precautionary measures to slow the spread, including the widespread use of masks, banning large gatherings and increasing testing, CBS News reported.

“Countries can prevent a second pandemic wave, and a consequent lockdown, if they implement comprehensive packages of public health interventions,” the OECD said.

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