For the US economy this winter, a Covid freeze and then a vaccine thaw

Economists trying to predict what the first quarter will look like have a seemingly impossible task. First, they need to have some idea how bad this latest wave of Covid cases can get. Second, they need to know what action people and national and local governments will take in response and how that might affect spending. Third, they must weigh how much relief will come from the federal government. Finally, and hopefully, they need to consider how much better things will look towards the end of the quarter as the weather improves and the introduction of the vaccine picks up steam.

Most forecasters believe that growth in the first quarter will be weaker than in the current quarter and that gross domestic product will remain significantly below the level of a year ago. But with so many moving parts to consider, some are looking for only a modest slowdown, while others think GDP will register a contraction, sending the economy into a double dip recession.

In fact, what could be more important is not what the GDP measurement in the first quarter – an average of the performance of the economy in the first three months of the year – looks like, but the course of the economy over the quarter . At that point it is possible to guess: really bad, then really good.

Really bad, because of what’s happening to Covid. During the week ending Thursday, 1.52 million new cases of Covid had been confirmed in the US, according to Johns Hopkins University, which was almost twice as many as in the first week of November. And 18,432 people died from the disease, making it the most deadly period of the pandemic.

Those numbers will worsen in the coming weeks as people go on vacation, spend more time indoors because of the colder weather, and as the sheer number of people now having the disease leads to new infections. The ensemble model used by the Centers for Disease Control and Prevention, which combines predictions from dozens of different epidemiological models, predicts that in the week ending January 9, there will be 1.76 million new Covid cases and 21,608 deaths.

There are already indications that the new wave of pandemics is weighing on expenditure. On Wednesday, the Department of Commerce reported that retail sales fell 1.1% in November from a month earlier.

A silver lining to the economy is that while Covid numbers are much worse than they were in the spring, the pandemic won’t be as damaging economically. “Behavioral changes have been made that allow the economy to cope with constraints and the rise of Covid,” said Bank of America economist Michelle Meyer.

Yet such adjustments have their limits. The dining arrangements that many restaurants have put together don’t work as well when it’s freezing, for example. And Covid fatigue – people getting tired of the safety measures – could help the economy temporarily, while causing more damage later on.

But as the winter progresses, Covid’s grip is likely to ease and the pace of economic growth could transition to really good. There are a number of reasons why.

First, if the calendar turns to 2021, any increase in Covid cases related to Thanksgiving and the December holidays will diminish. In March the weather starts to get warmer, allowing people to spend more time outside. New measures, such as improved testing regimes and the mask mandates for which President-elect Joe Biden says he will appeal, could bring things down. And last but not least, the combination of the number of people who have already had Covid, plus the millions of Americans likely to be vaccinated by the end of the quarter, could reduce the spread of the disease.

As a result, says UBS economist Seth Carpenter, “there will be a major change in behavior.” A wide variety of service companies that are the victims of the crisis could see demand return. People who have been vaccinated can finally take that flight to see family. More schools will return to personal learning, freeing up time for parents to work. And more broadly, seeing the Covid numbers, and knowing it’s not a false dawn with vaccines, will prompt people to spend more freely. Companies that see where things are going will hire and spend people in anticipation of the return of customers.

Unfortunately, the pandemic will not be completely over, and the degree of improvement in Covid cases by the spring will depend significantly on the measures taken between now and then, emphasizes Johns Hopkins epidemiologist Caitlin Rivers. There will likely still be millions of people out of work, and many Americans’ finances will be in dire straits. But things will look better than now, and that will be a start.

Write to Justin Lahart at [email protected]