US economy stares at a double dip

Basic problem is coronavirus

This could be wishful thinking. The basic problem is the novel coronavirus, not the need for the Federal Reserve-induced liquidity injections or the temporary support of a fiscal package. Monetary and fiscal measures can temper financial markets' distress, but they can do little, if anything, to resolve the underlying health security issues weighing on the real economy.

With the US remaining in the grips of the pandemic, the case for sustainable recovery looks tenuous. While rebounds in production and employment underscore significant progress on the supply side of the economy, these gains are far from complete. Through July, non-farm employment has recouped only 42 percent of what was lost in February and March, and the unemployment rate, at 10.2 percent, is still nearly triple the pre-COVID level of 3.5 percent. Similarly, industrial production in July remained 8 percent below its February high.

Healing has been even more tentative on the demand side. That is especially the case for key components of discretionary consumption－notably, retail shopping, as well as spending on restaurants, travel and leisure. Full participation in these activities－all of which entail face-to-face human contact－implies health risks that most of the population is unwilling to take, especially given elevated infections, the lack of robust therapeutics, and the absence of a vaccine.

Plunge in spending on virus-sensitive sectors

To put the pandemic's impact in perspective, consider that transportation, recreation, restaurants, and accommodations－the most COVID-sensitive segments of consumer demand－accounted for 21 percent of total household expenditure on services in the first quarter of 2020, before the pandemic hit full force. Combined spending on these categories plunged at an 86 percent annual rate in real (inflation-adjusted) terms in the second quarter.

The monthly data through June underscore the lingering headwinds from these important segments of discretionary consumption. While combined consumer spending on durables and non-durables bounced back to 4.6 percent above pre-pandemic levels (in real terms), household spending on total services－by far, the largest component of total consumption－has recouped only 43 percent of its lockdown-induced losses.

On balance, this points to what can be called an asynchronous normalizationa partial recovery that is drawing greater support from the supply side than from the demand side. The US is hardly unique in this respect. Similar outcomes are evident in other economies－even China.

But the asynchronous normalization of the US economy is very different in one key respect: the US administration's abysmal failure at containing the virus not only underscores the lingering fears of infection, but also raises the distinct possibility of a new wave of COVID-19 infections. While there has been a reduction in the incidence of new cases over the past month, the daily infection count of nearly 48,000 in the week ending Aug 20 was more than double the pace recorded in May and June.

Consumers' fears unlikely to subside

Together with a death rate that has averaged a little more than 1,000 per day since late July－and is projected to remain at that level for the rest of the year－this elevated pace of infection takes on even greater importance as a predictor of what lies ahead. Consumer fears－and their impact on pandemic-sensitive services－are unlikely to subside in such a climate and could well intensify if a new wave hits.

Therein lies the case for a double dip. Partial and asynchronous normalization in the aftermath of the worst economic shock on record signals lingering vulnerability in the US economy. And failure to contain the virus underscores the distinct possibility of aftershocks. This is precisely the combination that has led to previous double dips. Yet frothy financial markets are wedded to the narrative of a classic V-shaped recovery. The rhymes of history suggest a very different outcome.

The author is a faculty member at Yale University and the author of Unbalanced: The Codependency of America and China. The views don't necessarily represent those of China Daily.

Project Syndicate