As the economy moves into the second half of the year, economists expect to see a bounceback, but the resurgence in Covid-19 threatens to make that rebound less potent than expected.
More than a dozen states have now paused or rolled back some reopening activity. If the Covid outbreak gets worse, there is a bigger threat to the labor market, and the job gains in May and June could quickly turn to losses by July.
"If you're a bar in Florida, or Texas, or California, how do you handle two shutdowns?" said Michael Gapen, chief U.S. economist at Barclays. "I was hopeful we would buy a little more time and get into the fall before the virus started picking up again."
The U.S. is now reporting nearly 40,000 new infections a day, nearly double the 22,800 from mid-May, and they are mostly from states across the South and West. White House health adviser Dr. Anthony Fauci told a congressional committee Tuesday he is concerned that new U.S. cases could rise to 100,000 a day.
"We're worried about a second wave. We laid out what we thought would be rolling regional outbreaks. That doesn't have the same impact as the whole country but there's collateral damage," said Diane Swonk, chief economist at Grant Thornton. "People get afraid and more conservative. ...That fear has a big economic impact."
Gapen said the initial shutdowns were intended to stop the spread and allow time for testing capability to improve. "I'm sorry we weren't more effective in expanding testing. ... The only way to really mitigate the spread was to shut things down or to delay reopenings," he said. "The two policy choices we have right now is testing and mitigation. Until that changes ... we have this potential where we have a stop-start recovery."
The renewed outbreak also puts the focus on fiscal stimulus programs that are set to expire at the end of July unless Congress extends them. One of those is extended unemployment benefits, now giving the unemployed $600 a week on top of state benefits. Funding to help states cope with the cost of the virus would also be expected to be part of a phase 4 fiscal stimulus package. The Senate approved an extension of the small business Paycheck Protection Program late Tuesday.
The next stimulus plan may not move as quickly through Congress as the previous ones because there is a sharp difference in opinion on how much should be spent. Democrats in the House propose more than $3 trillion in spending, but Senate Majority Leader Mitch McConnell has made it clear he would not agree to more than $1 trillion. Congress has already laid out more than $2.4 trillion.
JPMorgan's Bruce Kasman, who heads economic research, said he expects Congress to ultimately agree to a package of about $1 trillion.
"The household sector got a lot of support. That's where the fuel for the recovery came from, but the corporate sector is damaged. It has had enormous access to credit to help it through," he said. "We disengaged the emergency measures in a way to prevent the crisis from becoming a lot more severe."
Kasman said the economy could begin to grow more slowly in the fourth quarter, with growth up 4.5% and another 4% in the first quarter.
He said the boost from policy will lessen, and he expects more cautious behavior from businesses and consumers because of the virus. "You have to do a lot of things to prevent policy from becoming tight. ... Part of that bounce is coming from there, and it's going to fade relatively quickly. By quickly, I mean six to nine months," he said.
The Fed has provided an unprecedented amount of monetary stimulus of its own, including asset purchases and liquidity support.
The most optimistic forecasts for the economy project a V-shaped bounce, with a steep drop in the second quarter and a jump back in the third quarter. The median forecast of economists surveyed in the CNBC/Moody's Analytics Rapid Update is for a 34% drop in the second quarter, and a less than V-shaped gain of 13.5% in the third quarter. For 2020, they expect a 5.6% decline in GDP.
Kasman expects a 30% second quarter decline, followed by a 20% rebound in the third quarter.
Gapen said he had anticipated there would be some setbacks, and he is not yet ready to change his forecast for a 40% second quarter decline, followed by a 27.5% snap-back in the third quarter.
Thursday's June employment report is expected to show 3 million jobs were added as employers rehired, on top of 2.5 million in May. But there are still nearly 20 million people collecting state unemployment benefits and millions more collecting under a federal program, as of last week.
"It looks like [hiring] was at its peak in May and slowed down in June. Now we have the resurgence of the virus and the pullback that occurred even before we had opening stopped and reversed" said Swonk. She expects just 2 million jobs were added in June. "This [employment report] is backward looking, and it underscores how hard it is to open."
Swonk expects the economy to move forward in fits and starts. "July is probably a negative month. We're slowing down again. July jobs will probably be negative. It illustrates how hard it is to come out of this, and it's a deep hole," she said.
The new worries follow a wave of optimism as a string of economic data was much better than expected in May and June. Retail sales were strong and the May employment report showed growth in jobs, rather than the more than 8 million payroll losses expected by some economists.
The positive data encouraged some economists to revise their forecasts, as the stock market also moved to price in a V-shaped recovery. As the economy bottomed in the quarter, the second quarter was good for stocks with the Dow up 17.8%, its best quarter since 1987.
So far, economists say they are not changing their forecasts, but they are watching the response to the spreading virus, including what is being done to stop it in the hot spots that span the South and West, from California, Arizona and Texas across to Florida and the Carolinas.
Goldman Sachs economists assert that if there were a national policy to wear masks, that would reduce the cases and eliminate some need for renewed shutdowns, which could otherwise subtract nearly 5% from GDP.
New cases have surged 40% in just a week, according to Johns Hopkins data.
Ethan Harris, head of global economics at Bank of America, said the V in the recovery now stands for virus and downside risks are growing, but the firm is not yet changing its forecast.
"Looking ahead, we expect some reversal in economic activity in the hot spots as rules are reluctantly reversed and people become more cautious," Harris said. "The current hot spots — Arizona, Texas, Florida, South Carolina, and California — account for 37% of US GDP and by the time the growth in the virus peaks, we assume roughly half of the country will be impacted. With half of the country slowly opening and half slowly closing, the economy could flatten out overall."