This article was published by The McAlvany Intelligence Advisor on Wednesday, March 25, 2020: 

Analysts at Morgan Stanley predicted on Monday that the U.S. economy will shrink at a record-breaking pace of 30 percent (annualized) during the second quarter, and that the unemployment rate would surge to nearly 13 percent, up from the mid-three percent range.

This exceeds the pessimistic forecast from analysts at Goldman Sachs, who predicted a 24 percent decline in GDP in the second quarter.

The good news from MS assumes that the coronavirus outbreak peaks in late April, and is followed by a sharp rebound in economic activity in the third and fourth quarters and on into 2021.

The president is determined to make the bank’s prediction come true. He insisted over the weekend that, “we cannot let the cure be worse than the problem,” and that, “we have to open our country.” This has turned the conversation to the possibility that that reopening could begin in weeks, not months: “I’m not looking at months, I can tell you right now,” he said on Monday.

He added: “Our country wasn’t built to be shut down. America will again, and soon, be open for business. Very soon. A lot sooner than three or four months … a lot sooner.”

He then suggested that the remedies implemented to contain the coronavirus might have been excessive: “We have a very active flu season, more active than most. It’s looking like it’s heading to 50,000 or more deaths. That’s a lot. And you look at automobile accidents, which are far greater than any numbers we’re talking about [from the coronavirus]. That doesn’t mean we’re going to tell everybody: no more driving of cars. So we have to do things to get our country open.”

The keys to keeping the patient alive are timeliness of the rescue, its sufficiency, and the cooperation of the states.

The economy is like a patient on life support: small businesses that make up more than half of it can only survive without oxygen (cash flow generated by customers) for a very short period of time. For a human, it’s four to six minutes without oxygen before he expires. For a small business, it’s more like a month or perhaps two before it becomes insolvent.

The sufficiency of the financial support being offered, already in place, and being debated in the Senate at the moment, is estimated to top six trillion dollars. Not having travelled down this road before, it’s pure speculation about whether that’s enough to keep the patient alive until the customers return.

If Morgan Stanley is right, what would that rebound look like? And what would be the long-term effects of the coronavirus scare?

First, the president would be pushing on a string. He has rightly pointed out that the primary responsibility lies with the states. Sixteen of them – Delaware, Louisiana, Kentucky, Ohio, New Jersey, California, New York, Connecticut, Oregon, Pennsylvania, Iowa, Michigan, Washington State, Massachusetts, Hawaii and Virginia – have locked down their economies following decrees by their governors. All but one (Iowa) are run by Democrats whose lust for power and control over people is likely to keep them in lockdown far longer than necessary.

Any suggestion by the president that they relent and rescind their mandates is likely to be met with scorn or indifference.

On the other hand, the other states are far more likely to enjoy an early renaissance from the shutdown as citizens will come out from hiding – sheltering in place, or “house arrest” as some are calling it. Each state will decide on its own just how it will reopen itself for business. It’s more than likely that the reopening will take place in stages, with the businesses least likely to spread the virus opening first. Seniors and those with compromised immune systems will be protected.

So the recovery will take place slowly, over time. Some are suggesting the aftereffects of the shutdown will still be felt a year from now. But as this writer and others have suggested, the country is likely to be stronger, safer, healthier, and better for the experience.

Telecommuting will be enhanced and embraced as a more efficient and safer way of doing business. Business meetings that took place face-to-face will increasingly happen online.

Telemedicine/telehealth will expand, allowing patients to be treated from home by health professionals who have their health histories available at their fingertips.

Supply chains will be rebuilt, emphasizing local and national sources and away from international ones subject to manipulation and blackmail. Manufacture of pharmaceuticals and nutritional supplements will increasingly be done inside the country, with some suggesting that Puerto Rico – once a thriving economy thanks to its importance in that industry before the laws were changed – will be a primary beneficiary.

Lower prices for oil will serve as a tax-free bonus to drivers, as will lower taxes levied on employees working from home since they will be able to take various tax deductions not previously available. And they will serve as additional incentive to replace or retrofit coal-fired plants with ones using lower cost (and lower emission) natural gas. So the air will be even cleaner.

Contributions to retirement plans will be buying more shares of great American countries that are now selling at significant discounts.

Homebuilders will continue enjoying the boom thanks to lower interest rates. And refinancing of existing debts at lower rates will serve as another tax-free bonus to citizens.

In all, the benefits following the coronavirus shutdown’s disruption are likely to be substantial, and permanent.

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Sources:

The McAlvany Intelligence AdvisorHow Will the U.S. Look After the Virus Is Contained?

The New York TimesTrump Says He Intends to Reopen Country in Weeks, Not Months

The New AmericanTrump Is Right: Don’t Let the Cure Be Worse Than the Disease

USA TodayThese states are ordering residents to stay home or shelter in place. What does that mean?

The New York TimesTrump Considers Reopening Economy, Over Health Experts’ Objections

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