St. Louis Fed's Bullard Discusses the State of the COVID-19 Crisis in the U.S.

NEW YORK – Federal Reserve Bank of St. Louis President James Bullard presented “The State of the COVID-19 Crisis in the U.S.” via webinar to the Economic Club of New York on Tuesday.

During his presentation, Bullard noted that macroeconomic news has been stronger than expected in May and June. He also noted that progress in managing the health crisis has been substantial, but COVID-19 has proven to be more persistent than many expected. However, the experience during the second quarter of 2020 suggests that simple risk mitigation measures, including ubiquitous masks, may be used to manage the disease effectively, he added.

“This suggests a base case in which the macroeconomy will continue to build on its momentum from May and June in the second half of 2020,” Bullard said. “The downside risk is nevertheless substantial, and better execution of a granular, risk-based health policy will be critical to keep the economy out of depression.”

Upside Surprise in May and June

The macroeconomic news for May and June seems to suggest that April will prove to be the lowest point of the crisis, Bullard noted. He pointed out that the Citi economic surprise index indicates substantial upward surprise in data releases for this time period, well beyond normal news variation.

Bullard also noted that employment has rebounded more rapidly than expected, which supports the idea that many layoffs were only temporary as firms adjusted to the pandemic.

“A back-of-the-envelope calculation suggests that there is room for a substantial decline in the official unemployment rate in the months ahead,” Bullard said.

In particular, he noted that if all of the unemployed who have identified as “on temporary layoff” are simply recalled in the next six months and nothing else changes, the official unemployment rate would decline to 4.5%. If this category instead returns to a normal value of 1 million workers and nothing else changes, the official unemployment rate would still decline to 5.1%, he added. “If this type of dynamic occurs in the months ahead, it is likely to be uneven,” he said.

Regarding GDP growth, Bullard pointed out that estimates for the second quarter have been revised upward. “While second-quarter growth is projected to show substantial contraction, forecasts have become less negative in recent weeks,” he said.

Successes in Health Policy

Bullard noted that current projections of fatalities in the U.S. are much lower than initial projections. He added that daily fatalities in the U.S. have declined about 70% from the peak level in April.

“COVID-19 is proving to be a persistent threat, so continuing risk mitigation is required to keep the disease under control,” he said.

Bullard then talked about how firms have been learning to run a business in a pandemic. He noted that work from home has proven to be a viable and powerful strategy for many businesses. In addition, the second-quarter results seem to show that essential retail services can be provided with low risk, as long as simple precautions are taken, he said.

“Firms and other economic entities have strong incentives to restore revenue streams and deliver products and services safely,” Bullard said. “This suggests that during the third quarter many firms will adopt proven risk mitigation activities pioneered by the essential services industries in the second quarter, including ubiquitous mask usage in contact situations.”

COVID-19: Mortality Risk Management

Bullard noted that U.S. citizens face many types of mortality risk. Right now, COVID-19 deaths are approaching the typical annual total for accidental injury, which is the third largest cause of death, he said.

Accidents of all types are associated with significant risk mitigation activities, including air bags, traffic regulations and fire codes, he explained, and deaths occur even with those mitigation strategies in place. While similar risk mitigation is not yet fully in place for COVID-19, it appears that ubiquitous masks would provide one important component, he said.

“The second half of 2020 will be a period of continued learning and adaptation to the new mortality risk in the economy,” Bullard concluded. “Simple risk mitigation strategies, including ubiquitous masks, hold the promise of delivering higher household incomes along with lower fatalities from COVID-19, thus improving along both dimensions.”