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The Economic Impact of Coronavirus on the US Economy

Updated on April 07, 2020 12:00 am
Covid & US Economy

In an effort to contain the spread of the coronavirus, governments all over the world are adopting stringent public health responses such as social distancing and lockdown measures. In the absence of the COVID-19 vaccine, the only known effective measure to fight the outbreak is social distancing.

And the consequence is the stalling of the global economy leading to a massive global recession. The UN estimates COVID-19 could cause up to a $2 trillion shortfall in global income.

Social distancing measures will be only highly effective if adopted before there is any large scale community transmission. In other words, missing the early window of social distancing can prove dangerous as the virus can spread rapidly. As it happened in Hubei province in China, Italy and the rest of Europe. Despite the warning by the Centers for Disease Control and Prevention (CDC) of severe spread within the US,  the early window of social distancing was missed because of insufficient testing

The US government in response to the COVID-19 crisis has sought $2.5 billion to accelerate vaccine development, provide treatment and procure much needed personal protective equipment (PPE) for the health workers. As of this writing the blog, the US now has the highest number of COVID-19 infected persons in the world with more than 205,000 cases and above 4500 deaths and still counting. Widespread lockdown in all major cities and rigorous social distancing to contain the outbreak has already halted economic activities. 

Rise in Unemployment

The freezing of the economy due to quarantines and lockdowns has resulted in the loss of jobs of millions of Americans. There has been a massive increase in the unemployment rate. The week ending April 5th, a record 10 Million Americans reportedly applied for unemployment benefits because of the coronavirus, crisis-highest number recorded in history.  Here is a real-time data crowdsourced by Candor

Freezing Hires
  • Weekly claims touched 665,000 during the global financial crisis. The number has already exceeded the job loss during the 2008 recession. The surge is expected to carry on further.
  • Many states and local authorities have banned all the non-essential businesses to curb the spread of the virus. Jobs with a high risk of layoff include sales, travel, production, food, and work where there is intensive contact such as stylists, airline attendants, and food and beverage service. Hotel occupancy, auto sales, restaurant spending, buying of homes, retail sales have fallen sharply from the pre-COVID 19 levels.

Manufacturing Lockdown

  • The Federal Reserve Bank of Dallas's Texas manufacturing outlook survey general business activity index dropped to -70 from 1.2 in March, lowest in the survey's history since back in 2004.
  • Manufacturing undertakings in eastern Pennsylvania, southern New Jersey, and Delaware have hit its lowest level since July 2012.
  • Goldman Sachs analysts see the US economy contracting 24% in the second quarter of 2020, a whopping two and a half times as large as the previous postwar record.

Stimulus Packages 

In order to keep the money flowing in the economy, President Donald Trump signed the Coronavirus Aid, Relief and Economic Security Act (CARES) into law. A $2.2 trillion stimulus package is the nation's largest economic relief bill, to give financial aid to individuals, families, and businesses. It will provide eligible taxpayers up to $1,200 for individual Americans, $2,400 for joint taxpayers and an additional $500 for each qualifying child. Eligibility is determined by an annual income limit and tapers off to $0 after the upper limit is met.

While tax-paying immigrants will be eligible for stimulus checks, international students on F1 visas and nonresident aliens will not be eligible. This also excludes those without Social Security numbers.

Nonresident alien is a tax term, not an immigration resident status. The Internal Revenue Service defines it as an immigrant who does not have a green card and hasn't passed the substantial presence test. This includes temporary visitors on a B2 Visitor visa.

The substantial presence test helps assess if the immigrant was actually in the United States over the past three years.

So, if you are an immigrant, you will get the stimulus check if the following conditions are met: 

  • If you are a resident alien
  • If you have a Green Card
  • You have been in the country for at least 31 days of the current year and 183 days over the last three year, including the current one
  • If you filed your taxes last year
  • Given the extension given for tax filing this year, the IRS is willing to consider anyone who files their 2019 taxes by the stipulated deadline

Also, read:

COVID-19 Lockdown: Your Top 5 US Immigration Questions Answered

Step by Step Guide: How to File For US Visitor Visa Extension During Coronavirus Pandemic

Tax Filing Deadline Extension

In response to the outbreak, the Treasury, IRS and the federal government have extended the tax filing deadline to July 15, 2020. Deadlines for filing federal income tax are automatically extended.

Most states have also announced extensions in the deadline for state income tax. However, there was no mention of other types of federal tax including gift tax, which are due by mid-April. As many households are in need of money, the taxpayers getting a refund are encouraged to file their taxes to get their money.

Such efforts won't be able to prevent an unprecedented fall in economic activity causing jobless claims to rise. As businesses shut down and suffer huge losses in revenue, companies have had to let go or furlough workers.

Decrease in Demand 

The slowdown in the US economy has also been directly affected by a lack of demand in the world economy and the disruption of supply chains. The stock market has dropped tremendously due to the outbreak of COVID-19 and the price war between Saudi Arabia and Russia. 

Lessons from China 

The fight against the coronavirus started in mid-January in China after the outbreak originated in the Wuhan city. The first two months of 2020 have been devastating for the Chinese Economy. It is speculated that other countries that are in the early stages of the outbreak might follow this path as well. 

  • Industrial production plunged by 13.5% from the prior year
  • Retail sales dipped by 20.5%
  • Services production dipped by 13.0%
  • The value of exports decreased to 15.9%
  • Fixed-asset investment is down by 24.5%

On April 8, lockdown at Wuhan is set to open, lifting travel restrictions and allowing commercial flights-excluding international routes. Cargo flights will be restarting their operations.

Although the Chinese government looks optimistic, it will take a while for the economy to get back into normal. The recovery is predicted to be slow and many economists expect China's GDP to decline in the first quarter of 2020- the country's first decline since 1976. Pacific Investment Management Co estimates a 6% contraction in GDP for the first quarter.

Hopes for Recovery 

President Trump is gearing up to open the economy and try to go back to pre-coronavirus with the ending of social distancing by mid-April, just in time for the Easter holiday. This plan has since been paused as the country is likely to witness an escalation in infected number and COVID-19 deaths. A recent poll by YouGov found that three-quarters of Americans say it is more important to save lives, even if the economy suffers.

Reactions

There is evidence that the cities that practice social distancing or lockdowns actually did better in terms of their economy in the year after the pandemics. Moderate social distancing has the potential to save well over a million lives as per a working paper published from Becker Friedman Institute for Economics of the University of Chicago. 

The lives saved are worth $8 trillion to the US economy. Saving lives and saving the economy go hand in hand in the long term. But as the economy takes a further dip, people are hoping for a middle ground between lockdown and just letting the virus run its course.

The US economic recovery will depend on how well people are practicing social distancing, how quickly COVID-19 testing is ramped up to be in the better position to tackle the virus spread, how much the government is willing to help businesses, and finally how confident people are to go back to their daily lives.

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