WASHINGTON—The U.S. economy’s momentum has reversed in recent weeks as spikes in coronavirus cases have forced a series of renewed stay-at-home orders and business closures.
While states such as California, New York, and Michigan have begun to ease restrictions, economists are still pessimistic over the near-term outlook. It will be months before access to vaccines is widespread enough to help bring the pandemic under control and allow economic activity to rebound, according to forecasters.
The U.S. economy shed 140,000 jobs in December 2020, the first time since the labor market recovery began in May 2020. Unemployment claims remain elevated as restrictions on restaurants, bars, and other businesses pressure employers to slash jobs. Another 900,000 Americans filed for initial jobless claims last week.
“The recent sharp rise in initial weekly jobless claims caused by renewed shelter-in-place mandates and business closures is thrusting the U.S. labor market recovery into reverse,” Scott Anderson, chief economist at Bank of the West, said in a note to clients.
California played a big part in the labor market downturn last month, according to Anderson.
The Golden State recorded 52,200 job losses in December, accounting for 37 percent of the national total. The unemployment rate in California rose to 9.0 percent—compared to 6.7 percent nationwide—due to large job losses in the accommodation and foodservice industries.
The surge in virus cases and colder weather conditions are causing consumers to avoid shopping, eating out, and traveling. Retail sales were down 0.7 percent month-over-month in December, marking the third straight month of declines. Restaurant and bar sales saw a 4.5 percent drop from November, and sales were down more than 21 percent from the same period last year.
The U.S. economy is expected to see additional job losses in January as a result of the slowdown in economic activity. Analysts believe a fiscal policy response will continue to provide some support until the economic recovery gains steam.
Congress approved in December a $900 billion relief package, including a $600 direct payment to many Americans, three months of $300 weekly extra unemployment insurance, and a new round of Paycheck Protection Program (PPP) loans for small businesses.
In his first week in office, President Joe Biden announced the “American Rescue Plan,” with a headline value of $1.9 trillion to kick start the next round of stimulus talks in Congress. The administration’s new plan would send checks of $1,400 to individuals.
“These protections can lead to some generous outcomes,” Carl Tannenbaum, chief economist at Northern Trust, said in his weekly economic commentary.
“Married households with two children, earning up to $150,000, would qualify for a hefty payment of $5,600. The majority of last year’s economic impact payments were saved or used to pay down debt, and with commerce still restricted, this would likely foster another round of saving,” he wrote.
Economists predict that a new round of stimulus, even if only partially enacted, would boost the economic growth forecasts for this year.
While a bigger fiscal stimulus and faster vaccination brighten the outlook for this year in the United States, a new wave of pessimism is sweeping Europe due to concerns about the new variant of coronavirus and its potential damage to the economy.
UK Prime Minister Boris Johnson warned last week that the new variant might be associated with a higher level of mortality.
Element Capital, one of the world’s largest macro hedge funds, also cautioned that continental Europe could face a deep economic blow as the variant spreads beyond UK borders. The fund’s head of markets, Colin Teichholtz, told Financial Times that markets and policymakers should be prepared for “a much worse” economic outcome as the damage from the pandemic is still far from over.
The new virus has been detected in more than 30 countries, including the United States. According to the Centers for Disease Control and Prevention, this variant exhibits rapid growth and could become the predominant variant in the United States by March.
It isn’t clear if the current vaccines will be less effective against the new variant.
Gita Gopinath, the IMF’s chief economist, described the current environment as “a race between a mutating virus and vaccinations.”
“And a lot depends on the outcome of this race. So, if we have better news on vaccinations, faster rollout, then things could improve much better,” she said in a Jan. 26 statement.
She cautioned, however, if virus mutations retard vaccinations, that could have an effect on the world economy.
The U.S. equity markets are trading near record highs. Investors see the new variant of the virus as “a known unknown,” according to Nick Reece, senior analyst and portfolio manager at Merk Investments.
The new variant is “likely not going to impact the market in the same way the initial onset of COVID did back in late February and March last year,” Reece told The Epoch Times.
“With regards to the potential economic impact, the response, both from a health policy standpoint and fiscal relief standpoint, are fairly well known and understood,” he said.