Stock markets in the U.S. and Europe have fallen sharply so far this week because of worsening trends in the COVID pandemic. A rise in COVID cases imposes direct economic costs, and also increases the likelihood that economic activity will be disrupted — whether by new government restrictions on business activity, or by the individual choices of consumers, employees, and managers seeking to protect themselves from the disease. And unlike the first wave of the pandemic, this one is coming as we enter winter, so moving operations outdoors won’t be as useful a strategy to keep business going when case levels are high. This hurts the outlook for sales, employment, and corporate profits, and therefore stock prices.
At the same time, there is good economic news. Spending on durable goods was strong in September, beating expectations. Demand continues to be especially strong for new cars and new homes. As the Wall Street Journal notes, this is partly a reflection of pandemic-specific effects: A lot of consumers have adjusted their lifestyles in ways that make them feel they need an additional car or make them want to move to a different kind of home. The strong demand for cars also partly reflects pent-up demand from the spring, when car sales fell with many dealerships closed. But booming home and auto sales are, to say the least, highly unusual in the wake of a recession, and they reflect the unusual strength of consumer demand despite the overall economic weakness.
This is a reflection of the “K-shaped recovery,” in which economic conditions are rebounding sharply for some Americans while remaining poor for others. Persistent unemployment resulting from the COVID crisis has fallen disproportionately on lower-wage and lower-skilled workers, while more affluent families — whose consumption is greater and therefore does more to move overall economic data — are much less likely to be still affected by job loss, enabling them to spend on cars and homes almost as though the economy were normal.
A worsening COVID wave is likely to exacerbate the gap between the two recoveries by further inhibiting the return of normal employment levels in service businesses like restaurants. The promise of economic improvement to come months from now, when a vaccine is widely distributed and with higher-income households still well-positioned to consume, is reason for the stock market not to fall even further — and provides reason to believe the labor market will recover significantly next year, even for workers at the lower end of the income scale. But there is a lot of pain to be felt between now and then, in the economy and especially in the financial situations of lower-income households waiting on the job market’s recovery — without the enhanced unemployment benefits that eased economic conditions in the spring and early summer.