Fears of double-dip recession rise alongside COVID-19 cases

A sharp spike in COVID-19 cases across the U.S. is threatening the economic recovery and increasing the odds of a double-dip recession.

Daily coronavirus infections surpassed 100,000 for the first time earlier this month; since then, they have surged past the 150,000 mark. At the same time, congressional leaders appear increasingly unlikely to strike a deal on another COVID-19 relief package, even as another round of key unemployment benefits is set to expire in the coming weeks.

Economists across the political spectrum have consistently warned that sustained growth is dependent on getting the coronavirus under control, with many now viewing the rise in infections with heightened concern.

“It’s alarming, to put it mildly,” said Beth Ann Bovino, chief U.S. economist at S&P Global. “If this spreads and governments are forced to go back to lockdown measures, this very fragile recovery is sure to fail.”

Earlier in the year, S&P Global forecast several scenarios for the economic recovery. The baseline scenario, which would lead to a 4 percent decline in gross domestic product, assumed Congress would pass a limited $500 billion relief bill and that the winter spike in COVID-19 would be under control.

Instead, there is no coronavirus relief package, and cases are surging.

“Everything that is happening now, the risk of a resurgence in COVID-19 as well as policymakers walking away from stimulus negotiations — those two factors are what my team had feared would happen,” said Bovino.

Without improvements on either front, a bigger economic contraction is likely, to the tune of 5.1 percent.

“It wouldn’t be as large as what we experienced in the first half of the year, but it would be a double dip,” Bovino said.

The jump in coronavirus cases can affect two crucial aspects of the economy: business operations and consumer confidence.

In Europe, several countries have reimposed severe restrictions or resorted to a second round of lockdowns in an attempt to ease the strain on hospitals.

President Trump has been vehement that he opposes lockdowns at any level of government, and President-elect Joe Biden’s transition team has indicated it would favor targeting hot spots instead of the nation as a whole.

“I think of this as a dimmer switch, not an on-and-off light switch,” Celine Gounder, who is advising Biden on his COVID-19 response, said in a CNBC interview Friday.

“I think we need to close only those things that really are contributing to the spread,” she added.

Already, states such as Michigan, New York, Oregon and Virginia have announced they will impose more restrictive measures to curb the spread of the virus, limiting the number of people who can gather in one place and restricting hours or capacity at bars, gyms and restaurants.

Ben Ayers, senior economist at Nationwide Insurance, said those kinds of steps would help avoid a double-dip recession, as well as avoid the kind of full-scale lockdowns that much of the country saw in April when the pandemic took hold.

“My estimation is that there’s not much of an appetite for anything that severe, so we see the downside as slower growth but not a double dip,” he said.

“The odds say that once an expansion starts, it’s really hard to slow the economy so quickly,” he added.

New Mexico, however, ordered a two-week shutdown on Friday, a sign that more severe restrictions could soon be in place elsewhere.

Even without government restrictions, the increase in cases can spook consumers, prompting them to stay at home instead of going out and spending money.

Consumer confidence dropped nearly 5 percentage points this month, almost entirely based on consumer expectations of what the economy will look like in the future, according to preliminary figures from the University of Michigan.

While consumers in the early part of the recession were bolstered by stimulus checks and enhancements to state unemployment benefits, those revenue streams from Congress have since disappeared.

Federal Reserve Chairman Jerome Powell has insisted that fiscal stimulus remains among the most important factors affecting the economy’s near-term trajectory.

But Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Mitch McConnell (R-Ky.) remain miles apart on striking a deal for more coronavirus relief.

Pelosi favors a $2.2 trillion measure the House passed in October, while McConnell wants legislation closer to $500 billion.

The prospects for a deal are dwindling, creating anxiety for millions of people who remain unemployed and thousands of struggling small-business owners.

A key small-business loan program, the Paycheck Protection Program, has expired, and federal support for state unemployment benefits has largely ended as well.

The remaining federal unemployment programs, for self-employed and gig economy workers, will expire on Dec. 31 without congressional action. Those two programs alone are covering 13.5 million Americans.

One bright spot, for those who have investments, is the performance of U.S. financial markets.

Markets this past week shrugged off moves by states to increase restrictions, with the Dow Jones Industrial Average rising 400 points, or 1.4 percent, on Friday alone, and the S&P 500 closed at a record high.

“We have an effective vaccine around the corner. The market is going to look through what we’re experiencing with that knowledge in mind,” said Nick Juhle, director of investment research at Greenleaf Trust.

Even if the economy slips, he said, markets are keeping their eyes on the long-term prize.

“When you think about the markets, we’re talking about publicly traded companies that we’re pricing based on future earnings,” he added.