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The Trump administration’s response to coronavirus could make the recession worse

President Donald Trump has not fully shut down the American economy out of fear it will deal a devastating financial blow. But that reluctance could ultimately exacerbate the economic pain of the coronavirus pandemic.

Trump has largely left it up to the governors to issue stay-at-home orders aimed at slowing the spread of the virus. Many, but not all, US states have done so.

Bank of America is warning that the United States, as well as Europe, has failed to learn the lessons from the success of more aggressive shutdowns ordered by governments in Asia.

“The US health policy response has been slower and weaker,” Bank of America economists wrote in a report published late last week. “The end result of these delays is a much bigger and longer shock.”

The shock has already been staggering. More than 10,000 people have died from coronavirus complications in the United States.

The economy is on pace to suffer an historic collapse this quarter. Millions of jobs have been lost. Unemployment could temporarily spike to “depression” levels, former Federal Reserve Chairwoman Janet Yellen warned Monday.

“This is a huge, unprecedented and devastating hit,” Yellen said on CNBC.

‘Ineffective response’ from the United States

Bank of America, citing an “ineffective response” from the US and other governments, is warning that hit will likely get worse.

The bank significantly downgraded its 2020 GDP outlook for the United States, calling for a plunge of 6%, compared with 0.8% previously. And it now expects a global recession that will be “considerably worse” than the Great Recession.

“Only this week did the Trump Administration admit to the scale of the problem and there is still not a consistent, aggressive national policy,” the bank said in its report, published last Thursday.

Here’s the problem: Economists say the experience in China, South Korea and other countries in Asia showed that the most effective policy is a strict lockdown at the national level. Yet Trump has refused to issue such an order.

“If a full shutdown is needed to bend the curve, then the weeks of partial shutdown are largely wasted,” the Bank of America report said.

And if those weeks are wasted, that will only drag out the impact on the economy and on human life. Each week of the shutdown cuts nearly 9% from quarter-over-quarter annualized GDP growth, the report said.

“For the economy, a delay means a rapid increase in the cost,” the economists said.

New York peaking?

US stocks surged Monday on glimmers of hope in the fight against coronavirus. The Dow spiked more than 1,100 points, or roughly 5%, on signs that the virus could be peaking in New York, the epicenter of the crisis in the United States. Hospitalizations in New York have also sharply declined over the past three days.

“This is great news and seems to confirm the intuitive success of social distancing efforts,” Cowen analyst Kevin Kopelman wrote in a Monday note to clients.

But there is reason to believe that the national picture could yet get worse before it gets better.

“In the United States, trends continue to deteriorate,” Matthew Harrison, a biotech analyst at Morgan Stanley, wrote in a report to clients Monday. “Mortality is growing exponentially and new ‘hot spots’ are developing in the interior of the country.”

Morgan Stanley: Social distancing for another 70+ days

The problem, according to Harrison, is the US response to the coronavirus pandemic.

“We would expect it to take longer in the US given the social distancing measures are not as robust,” Harrison wrote. “The containment measures continue to not be as strict as China which has delayed the time to peak.”

Morgan Stanley expects the United States to experience two peaks, one for coastal regions in around two weeks and then a second peak in the interior. The ultimate apex for the nation may not happen until mid-May.

As a result, the US economy may not enjoy a rapid reopening like the one Trump envisions and that many Americans are hoping for.

Social distancing measures are “unlikely to start to recede” for about 70 days from now, Harrison said, and these restrictions will likely “wax and wane as hot spots develop over the next 1-2 years.”

After initially pushing for a sudden reopening by Easter, Trump extended the federal social distancing guidelines until the end of April.

Some states have not issued stay-at-home orders

The federal government has taken several other steps aimed at addressing the pandemic, including building temporary hospitals in New York City, sending ships to act as floating hospitals and working with US states to help secure badly needed medical equipment.

“We will move heaven and earth to safeguard our great American citizens,” Trump said during Sunday’s press briefing.

Trump acknowledged that the next week or two will be very difficult: “There’ll be a lot of death, unfortunately, but a lot less death than if this wasn’t done.”

Eight governors have refused to issue statewide stay-at home orders — even though Dr. Anthony Fauci, the nation’s top infectious disease expert, has said these orders are the most effective way to stop the virus.

Trump has said he wants to leave it up to governors to decide what happens in their states.

“They’re doing very well, and they’re doing a magnificent job in running their states,” Trump said during a press briefing.

More aggressive financial response

The good news is that Washington has mounted a forceful financial response to coronavirus.

The White House and Congress enacted a $2 trillion stimulus package, the largest in history. And the Federal Reserve has moved swiftly to prevent a full-blown financial crisis by pumping in vast sums of money, rolling out lending facilities and slashing interest rates to zero.

That response should help blunt the economic damage caused by the coronavirus and hopefully set the stage for a more rapid recovery. But before that can happen, the health crisis must end.

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Economists: Be skeptical of any claim the U.S. economy will recover quickly

As the coronavirus wreaks havoc on the US economy, Americans should brace for a prolonged period of pain, not a swift recovery. The real damage of this crisis has just begun to emerge.

In just the last two weeks of March alone, nearly 10 million Americans filed for unemployment insurance. So in that time, about 6% of the US labor force lost their job. And consumers — the lifeblood of the economy — recently saw their confidence plunge to a 32-month low. Large parts of the economy have suddenly shut off, and turning them back on will not be a simple reversal of the switch.

Given the substantial uncertainty about the depth and duration of this downturn and the path to recovery, The Conference Board has mapped out three scenarios for the US economy. They range from a reboot in the coming months to a deep, long-lasting contraction.

We believe America should prepare for a long road to recovery. The likeliest scenario — specifically, for a situation where unemployment mushrooms to 15%, a record in modern American history — is the economy starts growing again by no earlier than September, and US GDP for the year contracts by 6%. For context, in 2019 — when the economy was humming — GDP grew by 2.3%. If American businesses prepare for this long, grueling haul, they can emerge from the crisis stronger. Expecting a rapid recovery that doesn’t pan out would only cause more pain.

1. In this scenario, we assume the pandemic will at least partially be controlled by social distancing efforts, which will flatten the curve of new cases throughout the next two to three months. While this would reduce the virus’s burden on the health care sector, it also means the economic damage would hurt a broader swath of sectors than in the other scenarios. Industries most sensitive to social distancing — especially the entertainment, hospitality, restaurant and airline industries — could shrink by 65% by the end of the second quarter. Wholesale, retail trade and manufacturing could decline by 20% to 25% over the course of three months. And even finance and business services could see a fall or strong slowdown in output.

While growth may eventually return during the fall and create a positive fourth quarter, we estimate that unemployment would remain high and could still be 15% by year’s end. The economy would shrink by 6% in 2020, which would mark the largest decline since 1946, when the economy dropped by almost 12% due to the demobilization from World War II and the sharp pullback in military production. Even then, our economy eventually transitioned back to a period of peace and prosperity. We, too, can come out of this stronger.

2. Our second scenario assumes a higher number of people will be infected by the virus, and the peak may not be reached until May. This situation could emerge if the precautionary measures to stem the rise in new cases are relaxed too soon before the curve really starts to flatten. Prematurely loosening the policies could backfire, resulting in many Americans having to enter full lock-down mode to avoid an escalation of new cases. Even if such restrictions eased during the summer, many people wouldn’t be able to resume their pre-crisis daily routines until June or even July.

In this situation, the severity of the economic contraction intensifies during the second quarter. And along with the sectors most sensitive to social distancing, it also hurts retail, wholesale trade and manufacturing much more than in the first scenario. While we could see a strong rebound — in other words, a V-shaped recovery — during the third quarter, the damage already done will cause GDP to fall sharply by 5.5% for the year. Unemployment could balloon to 15% or even more, although it might begin dropping off later in the year.

This V-shaped scenario comes with a big caveat: It has by far the most uncertain outcome. After all, if the outbreak runs out of control, the outcome could be much worse than we predict. Another risk of this scenario is that the chances of a resurgence of coronavirus cases during the fall increases, adding to the uncertainty. It’s the nightmare scenario for business planners.

3. Of course, we still hope for a more optimistic scenario that assumes new virus cases peak by mid-April across most of the United States, making a quicker reboot of the economy possible. But time is running out, and epidemiological data suggest it’s increasingly unlikely. And in the remote case that this scenario pans out, unemployment would probably peak at 10% by the end of the second quarter. Given recent data, we believe that the US unemployment rate is already at 10%.

We should resist the urge to go back to normal too quickly. If we persevere and plan for the future, we’ll come out better.

Bart van Ark is executive vice president and global chief economist of The Conference Board. Erik Lundh is a senior economist at The Conference Board. The opinions expressed in this commentary are their own.

Perspectives Bart van Ark and Erik Lundh

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Yellen says the Fed doesn’t need to buy equities now, but Congress should reconsider allowing it

Former Federal Reserve Chair Janet Yellen thinks the central bank is not in a position where it needs to buy equities but thinks lawmakers should give them more leeway for the future. 

“It would be a substantial change to give the Federal Reserve to buy stock,” Yellen told CNBC’s Sara Eisen on “Squawk on the Street.” “I frankly don’t think it’s necessary at this point. I think intervention to support the credit markets is more important, but longer term it wouldn’t be a bad thing for Congress to reconsider.”

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Californian edibles now account for 30% of all sales, up from 15% a few weeks ago

Retailers have reported a significant shift from smoking and vaping cannabis to consuming edibles during the coronavirus pandemic.

Californian delivery service Eaze said that edibles now account for 30% of all sales, up from 15% a few weeks ago. Sales of bud and vapes have decreased accordingly.

Sites like Weedmaps tell a similar story, as consumers seek consumption options that place less strain on their lungs.

The SARS-CoV-2 coronavirus causes a respiratory disease called COVID-19, which makes it difficult for people to breathe when it infects them. A Chinese medical journal reported that smokers experienced more severe symptoms than non-smokers after contracting the coronavirus.

That has inspired many cannabis users to switch to edibles or tinctures in order to eliminate any stress on the lungs. The National Organization for the Reform of Marijuana Laws (NORML) is among the trade groups urging people to avoid smoking and explore alternate ingestion methods.

The advice has been similar around the world. “Smoking presents unique risks in the context of COVID-19 due to the impacts on lung function,” said Dr Marta Rychert, senior research at Massey University in New Zealand.

She urged medical cannabis patients to switch to oils or tinctures during the coronavirus pandemic in order to reduce the risk of aggravating their lungs. Experts also advised against sharing bongs, vapes or joints, and to avoid drug dealers that have face-to-face contact with many consumers and regularly handle cash, as they have a high potential of transmitting the virus.

New Zealand is set to begin its medical marijuana program next month. It has just confirmed plans to reverse a law banning cannabis vaporizers, allowing distributors to import vapes and cartridges and sell them to patients.

However, patients are encouraged to opt against vaping in the immediate future as authorities battle to contain the coronavirus outbreak. The global death toll has now gone past 40,000 and there have been more than 800,000 cases worldwide.

Cannabis retailers have been deemed essential services in most US states and Canadian provinces, allowing them to continue trading, and they can expect soaring demand for edibles.

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Health Canada asks cannabis labs for assistance with COVID-19 testing

Canadian officials are turning to the cannabis industry to see if laboratories typically used to check for cannabinoids can be also used to test for COVID-19. 

In an email sent to licensed cannabis industry executives on Thursday obtained by BNN Bloomberg, Health Canada acting director general Joanne Garrah asked respondents if there was any spare lab capacity to assist the country with COVID-19 testing. 

“Health Canada is working to identify lab capacity that might be available across the country in various sectors, including at licensed cannabis production sites, to assist with supporting COVID-19 testing,” the email stated. 

“We are currently working to understand the specific needs and related questions, and we will be it touch in the coming days to request more information. If you have lab capacity within your facility and are interested in assisting, please notify us by email.”

Testing for the novel coronavirus has ramped up amid growing concerns of a bottleneck in identifying new cases of COVID-19. That delay may contribute to an incomplete picture of how the virus is spread, according to federal health officials.  

A Health Canada spokesperson confirmed the email exchange to BNN Bloomberg, but was unable to immediately disclose if any company took the regulator up on its request. 

Laura Gallant, a spokesperson at Aurora Cannabis Inc., said the company is looking into whether its internal lab has adequate capacity to provide Health Canada with COVID-19 testing. 

“We all think it’s an exciting opportunity and (are) quickly looking at whether our various lab spaces could meet needs,” Gallant said in an email to BNN Bloomberg. “We just have to do due diligence in terms of seeing if our resources will meaningfully help fill gaps HC is identifying, which is our hope.”

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