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The Pandemic’s Long Economic Shadow

While mass vaccination points to an end to the COVID-19 pandemic in the next year or so, it does not provide immunity against longer-term economic damage. And research on the aftermath of previous pandemics suggests that the impact on supply and demand is likely to be far-reaching and profound.

NEW HAVEN – The outlook for economic and financial markets hinges on the interplay between two cycles – the COVID-19 cycle and the business cycle. Notwithstanding the true miracles of modern science that we are now witnessing, the post-pandemic economy is in need of more than just a vaccine. Extraordinary damage was done by last spring’s lockdown. Now, a second and more horrific wave of the coronavirus is at hand – not dissimilar to the course of the 1918-20 influenza outbreak.

In the United States, the adverse economic repercussions are evident in mounting jobless claims in early December and a sharp decline in retail sales in November. With partial lockdowns now in place in about three-quarters of US states, a decline in economic activity in early 2021 seems likely.

The history of the US business cycle warned us of the possibility of a double dip. Eight of the last 11 recessions featured just such a pattern. Yet financial markets still made a big bet on a V-shaped recovery. Investors were lulled into a false sense of complacency by reading too much into the dead-count bounce of a 33% annualized surge in real GDP in the third quarter, as initial lockdowns were lifted. But reopening after a sudden stop hardly qualifies as a self-sustaining economic recovery. It is more like a fatigued swimmer gasping for air after a deep dive.

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