Thinking About an Economic Restart

Market Optimism Drivers:

• Investor sentiment has shifted positive despite plunging global growth estimates due to aggressive policy responses from US policymakers.
• The Federal Reserve has sharply increased asset purchases and created facilities to backstop credit markets beyond government-guaranteed sectors.
• Congressional fiscal support via the CARES Act and discussions of further packages have exceeded initial market expectations.
• Marginal improvements in viral data, including slower case growth rates and revised downward forecasts for fatalities and peak hospital usage, have reduced perceived downside risks.

Reopening Strategy Disagreements:

• One view advocates for rapid economic reopening to address severe unemployment, accepting the risk of renewed infection spikes.
• A competing, more cautious view prioritizes public health measures to avoid hasty increases in face-to-face interaction, citing safety concerns regarding the virus.
• Economists and epidemiologists lean toward the cautious approach, citing 1918 flu pandemic evidence that US regions prioritizing public health ultimately achieved better long-term economic outcomes.

Key Economic Indicators for Recovery:

• Initial jobless claims are identified as a primary metric due to their immediacy (released five days post-week) and status as administrative counts without statistical assumptions.
• Monitoring viral progression (improvement or deterioration) is deemed more critical than standard lagged economic indicators.
• The range of relevant indicators under current conditions is significantly wider than in normal economic cycles.

Assessment of Policy Responses:

• US monetary policy is characterized as exceptionally aggressive, utilizing rate cuts, Treasury purchases, and specialized facilities to maintain credit flow to the private sector and state/local governments.
• US fiscal intervention is rated as larger than anticipated, with a subsequent fiscal package expected to pass within the next several weeks.
• European fiscal stimulus is deemed insufficient relative to the US, partly due to institutional differences and automatic stabilizers but primarily due to a need for more direct support.
• Sovereign risk in the Eurozone remains a concern, particularly for Italy and Spain, necessitating further risk-sharing measures beyond current Euro group actions.