American economy versus Coronavirus
It was a month and a half ago – in other words, an eternity. On February 12, the Dow Jones broke a new record, at 29,551 points. The 30,000 point mark seemed to be close. Instead, the Wall Street star index crossed a few weeks later, and lowered, the symbolic threshold of 20,000 points, – a plunge of more than 30%, consequence of an economy in hibernation. In the United States as elsewhere, the recession is assured. The extent of it remains to be seen, and whether it will lead to a long depression. The colossal $ 2,000 billion stimulus package about to be voted on in Washington aims to prevent it.
*The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow is a stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States. Although it is one of the most commonly followed equity indices, many consider the Dow to be an inadequate representation of the overall U.S. stock market compared to total market indices such as the Wilshire 5000 or Russell 3000 because it only includes 30 large cap companies, is not weighted by market capitalization, and does not use a weighted arithmetic mean.
What is the impact of the epidemic on the American economy?
This Thursday, a first indicator will measure it: the Labor Department must publish the weekly number of new jobless claims. According to Goldman Sachs, the figure for the period from March 15 to 21 could reach 2.25 million. More than three times the historic record (700,000 registrations) in December 1982. Confronted with an unprecedented upheaval, economists are struggling to foresee the consequences. On Monday, the president of the Federal Reserve of Saint-Louis estimated that the unemployment rate in the country could reach 30%, and the GDP unscrew by 50%, in the second quarter. But a sign that all analysts are sailing by sight, their forecasts vary widely: Morgan Stanley sees GDP fall by 30%, Goldman Sachs by 24% and JP Morgan Chase by 12%.
What concrete impact on the Americans?
Almost half of Americans have health insurance through their employer. For millions of employees already or soon laid off, the loss of income will therefore be added to that of their medical coverage. There are several options for keeping it or purchasing a new one, but it is very expensive. According to the Kaiser Family Foundation, which specializes in health issues, the average cost of family insurance in 2018 was $ 19,600 (around € 18,000), 71% funded by the employer. To keep it, a sacked employee will have to finance it in full. To avoid a major increase in the number of uninsured (about 28 million in the United States), a dozen states, mainly Democrats, have relaxed the rules for taking out subsidized insurance.
The plummeting markets are also affecting the tens of millions of Americans who have invested in the stock market for their retirement, notably via the famous “401k” funds. Younger people have the luxury of being able to wait for a future rebound in the financial indices. But current or imminent retirees, who have seen their lifelong savings crumble in a few weeks, will have to reduce their consumption. What threaten the economic recovery.
What safety nets before the crisis?
The Covid-19 crisis and its multiple ramifications have highlighted as never before the shortcomings of the American social protection system. The cost of care (including for those with insurance) and the absence of compulsory sick leave have undoubtedly contributed to the spread of the virus, dissuading sick workers from consulting or isolating themselves. The United States is also the only OECD country not to guarantee paid leave. Almost a quarter of Americans (and 40% of those working part-time) do not have it, a puzzle for babysitting children out of school. As for unemployment insurance, it is not very generous. According to the Organisation for Economic Co-operation and Development, the average replacement rate compared to the last salary reached 57% after two months in the United States, against 64% in France and 70% in Japan. The weekly allowance is also capped, with wide disparities between states (240 dollars in Arizona, 504 in New York), as does the duration of compensation: twenty-six weeks in most states, less in ten of them like Florida (twelve weeks).
What does the recovery plan include?
On March 18, Donald Trump promulgated a law that grants two weeks of paid leave to sick employees, quarantine workers or the bedside of a loved one affected by Covid-19. It also offers up to ten weeks of paid leave (with two weeks of deficiency) to parents forced to babysit. However, this law has many flaws. Companies with more than 500 employees are exempt from the sick leave obligation, companies with fewer than 50 can obtain a waiver.
Actually the law protects only 20% of employees.
After several days of tough negotiations, the White House and Democratic and Republican leaders in the Senate agreed Tuesday night on a $ 2 trillion bailout, more than 9% of US GDP. This text could be voted on Wednesday in the Senate, before being adopted in the House and promulgated by Donald Trump. A mixture of non-repayable aid and loans, it provides $ 130 billion for hospitals, $ 250 billion for massive reinforcement of unemployment insurance and $ 500 billion for individuals, who will receive checks from the Treasury (maximum $ 1,200 per adult, $ 500 per child). A couple with two children earning less than $ 218,000 (€ 201,000) a year should receive $ 3,400. The plan also includes $ 350 billion in loans to businesses with fewer than 500 employees, and $ 500 billion in miscellaneous assistance to struggling businesses, including $ 61 billion for the airline industry.
Buoyed by the imminent vote on this historic stimulus package, the financial markets experienced a sharp rebound, the Dow Jones recording its highest rise (+ 11.37%) since 1933. “This package will pave the way for a good rebound in the second half, “said Donald Trump’s chief economic adviser Larry Kudlow, optimistic. For several days, the US president, concerned about his re-election in November, has expressed impatience with the paralysis of the economy. “We cannot let the cure be worse than the problem,” he said several times in a “health of Americans” versus “health of the economy” equation. On Tuesday, he promised to “revive” the business “quickly.” “I would love to reopen by Easter” (April 12), he said, despite strong reservations from doctors and scientists.