It goes without saying that the road to recovery from COVID-19 will be a long and arduous process. Much of the recovery hinges on when a vaccine comes to market, as that will likely help us return to our “normal” lifestyles.

How we define “normal” is likely to change, but the reality is people spend when they have the resources. As reported by the U.S. Bureau of Labor Statistics (BLS), the unemployment rate reached nearly 15% in April as COVID-19 intensified and placed both supply and demand shocks on the economy.

Supply shock: With shelter-in-place orders, producing goods and services became more difficult and time consuming (think groceries), which led to higher prices.
Demand shock: With so many laid-off workers and uncertainty, household spending for most was limited to the necessities (food and shelter), which led to a drop in overall consumption.

Rarely does an economy deal with both shocks simultaneously, but that’s exactly what happened this year.

Stimulus to the Rescue

Given the size and magnitude of COVID-19, it became evident that without immediate action from Congress, we were possibly facing a depression. On March 25, an emergency relief bill known as the CARES Act was signed into law. The CARES Act injected approximately $2.2 trillion (about 9% of U.S. gross domestic product) directly into the U.S. economy.

The goal was simple: provide immediate and direct assistance to American households and small businesses to help keep them afloat while stay-at-home orders were in place. The research conducted by the Penn Wharton Budget Model and The Center on Poverty & Social Policy illustrates the pivotal role the CARES Act played:

It kept approximately 12 million Americans out of poverty.
The poverty rate would have likely risen to 16.3% without the CARES Act (instead, it may have actually dropped from around 10% to around 8%).
GDP will be boosted by nearly $812 billion over the next two years (~5% increase through 2020).

It is important to note that additional stimulus funds are likely to focus on middle- to lower-income families, as they tend to be the most impacted. They are also the most likely to spend these dollars right back into the economy (groceries, clothing, day care, etc.).

While a majority of the funds were funneled toward immediate payments to households and businesses, some of the stimulus involved changes to tax code (e.g., elimination of 2020 required minimum distributions).

“U” or “V”

Much of the debate is whether we experience a U- or V-shaped recovery, although a W is also possible. Congress is in the works of passing another piece of stimulus legislation as we speak. It’s too early to draw any concrete conclusions as the real economic implications may not be felt until 2021.

A U-shaped recovery seems more likely because while things have been improving, unemployment remains high, COVID-19 hot spots continue to pop up, and a vaccine and its distribution aren’t likely until Q1 of 2021 at the earliest. A V-shape recovery seems very unlikely because we are so far from “normal” living at this point.

The real test will come this fall, as American households and businesses could largely be left to stand on their own. This is assuming there isn’t a third round of stimulus, which is not out of the realm of possibility.

If COVID-19 cases continue to rapidly accelerate or there is a delay/setback in a vaccine, another shock to the economy and markets is likely. While the rapid increase in the federal deficit has not been setting off immediate alarm bells, it is something we must continue to monitor since it could lead to an unexpected spike in inflation, and that could put a pause on the recovery.

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