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Probing the prospects for a safe reopening

| July 24, 2020

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

It is safe to say that many states opened their economies too much too soon.  Some saw economic activity bounce back sharply as they allowed firms to reopen in stages.  But after hitting a certain point, the virus flared up in most states in the South.  Assuming these states get the virus back under control over the next month or two, the question will be whether their economies can reopen more fully or if there is simply a limit to freely and safely conducting certain activities until there is a vaccine or the virus is defanged.

Reopenings Hit A COVID Wall

When states began to reopen in late April and early May, there were fears that the virus would immediately flare up or that people would not go out and spend money on goods and services out of fear.  As it turns out, the early stages of the reopening went better than expected.  The virus remained under control through most of May, and economic activity rebounded more forcefully than anticipated in May and June.

However, once reopenings reached an advanced stage, as restaurants were allowed to ramp up indoor dining, and high-contact venues like bars, gyms, and nail salons reopened, the virus surged.

A recent report by Yelp formalizes the link between these activities and the flare-up in Covid. Yelp researchers measured expressed “consumer interest,” defined by such activity as page views, reviews, and posted photos on the Yelp site, for restaurants, bars and nightlife, and gyms from April to May.  This offers a proxy for how enthusiastically people embraced high risk activities immediately following reopening.

Then, the researchers calculated the percent change in COVID cases from May to June.  As it turns out, not surprisingly, the two gauges were pretty closely correlated.  The work shows the states with the largest interest in “consumer interest” in May, and the percentage change in COVID cases in those states (Exhibit 1).  Most of the states are in the South and Southwest and represent states that suffered a substantial outbreak in June, including Arizona, Florida, and Texas, as well as Georgia and South Carolina.  A few of the states appeared to fare better than their neighbors but, in fact, saw surging cases in July instead of June, such as Tennessee and Arkansas.

Exhibit 1: High “consumer interest” states

Source: Yelp

Conversely, states that were slower to reopen or where consumers were slow to embrace risky activities saw a much more benign spread of COVID (Exhibit 2).

Exhibit 2: Low “consumer interest” states

Source: Yelp

What happens next time?

Assuming the summer surge abates over the next month or two, states will have an opportunity to reset and choose how to move forward.  There are three broad alternatives that could govern how a second crack at reopening might go:

  • First, it may be that certain activities are simply too risky in a Covid world. Crowded indoor dining, packed bars, and gyms may just be too risky to allow. In this scenario, there is essentially a governor on the economy, or at least parts of it.  Reopening can only go so far.
  • The second narrative is that the reopening failed in the Southern states because people were not very smart about the virus. Most of those states did not see much community spread in March and April, and there was a broad sense that because they had not seen its effects first-hand, the virus was not to be feared.  Video from crowded bars with no one wearing masks or attempting to social distance were common in late May in that region.  Resistance to masks was widespread but has since faded though not disappeared entirely. It is quite possible that given a second crack at it, reopening could go further without hitting the Covid tripwire, if people are more willing to take appropriate precautions.  Even in this scenario, however, presumably, there would be limits to how much activity could occur in high-risk venues.
  • The third narrative holds that once Covid sweeps through a community once, there is a certain level of herd immunity that develops. This hypothesis would dictate that a surge in Covid was virtually inevitable in the South because people would be exposed at some point, regardless of the details of reopening.  Once Covid hits an area hard, however, a substantial percentage of the population achieves some level of immunity, and a second wave would be less potent.  It is doubtful that any portion of the country bigger than a few neighborhoods have achieved full-blown herd immunity, but, for example, antibody tests suggest that about one quarter of New York City residents have had the virus, which may help explain why the virus has failed to re-emerge in large numbers in the city.  Certain parts of Arizona, Texas and Florida may get to similar levels of immunity before the summer surge is over.  Further support for this hypothesis comes from Sweden, where the plan was to keep the economy mostly open and race to herd immunity as fast as possible.  While Sweden experienced more cases and more deaths than its neighbors, the virus has largely been tamped down in the country at the moment, with deaths in recent days down to nearly zero.  This narrative is the most forgiving of the three, as it implies that a second attempt at reopening could fare better regardless of how careful people are.

No one can say with much confidence which one of these narratives will govern the next few months.  Covid has confounded expectations at every step along the way and will likely continue to do so.  After all, it is a novel virus, and we have little to base our expectations on.

Vaccine

It looks increasingly likely that there will be at least one viable vaccine candidate that will be ready to seek regulatory approval by the fourth quarter.  If everything goes right and there are multiple effective vaccines in mass production by late in the year, then it is possible that the difficult problem of managing a rebooted reopening will only be an issue for a few more months.  Moreover, if vaccines fail but the level of community spread remains high, the U.S. may begin to approach herd immunity by early 2021.  Short of either of those scenarios, however, the key question for the economy over the next few months will be whether states can effectively manage a second reopening without sparking another surge in the virus.

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