A 2nd wave of US virus cases will plunge the economy into a depression, Moody's economist warns
- A second wave of coronavirus cases would quash hopes for a swift recovery and push the US into a depression, Mark Zandi, chief economist at Moody's Analytics, told CNBC on Friday.
- States have begun reopening their economies to keep businesses afloat, but public health experts warn a return to pre-virus norms could drive a surge in new infections.
- Zandi defines a depression as at least 12 months of unemployment sitting above 10%. Labor market data released Friday showed the joblessness rate spiking to 14.7% in April.
- The US economy sits in "quicksand" until a vaccine can reverse damage to consumer confidence and business operations, Zandi added.
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What many view as the cure to the current economic downturn could spur a far worse outcome, Moody's chief economist Mark Zandi warned.
Several states have begun rolling back shutdowns to reinvigorate economies slammed by the coronavirus pandemic. The gradual reopenings are meant to keep businesses afloat and stem additional job loss, but public health experts fear a premature return to norms risks a second wave of infections. Zandi shares the concern, telling CNBC's "Trading Nation" that another outbreak would fuel a much slower recovery.
"We may not shut down again, but certainly it will scare people and spook people and weigh on the economy," he said Friday. "That would be the fodder for a depression."
Zandi defines an economic depression as a 12-month period with the unemployment rate above 10%.
Recent economic data suggests the US is already on its way to a prolonged slump. The Bureau of Labor Statistics reported on Friday that the unemployment rate spiked to 14.7% from 4.4% in April, with nonfarm payrolls sinking by 20.5 million. US joblessness now sits at its highest since World War II and is nearing peaks not seen since the Great Depression.
Hiring could bounce back starting in late May as businesses resume activity, the economist predicted, but lasting risk will weigh on economic activity for months to come.
"We're going to be in quicksand until we get a vaccine because of the uncertainty around the virus and the impact that it's going to have on consumers and businesses," Zandi added.
Where Zandi sees reason to worry, markets are pricing in a swift rebound from recent lows. Major US indexes have staged a steady rebound from March lows, with the Nasdaq composite recently erasing all year-to-date losses on strong tech earnings. The strong trends might be appealing to investors, but Zandi expects a correction before returning to past highs.
"The market is attaching a pretty high probability of a V-shaped recovery," he said. "I suspect that the script on this bear market is not over. We're going to have to see the market re-evaluate at some point."