While the US economy has been staging a strong recovery from the COVID-19 pandemic, the challenge is far from over, says Franklin Templeton Fixed Income CIO Sonal Desai. She says the tug of war between the virus and the economy seems likely to continue until an effective vaccine is made available at scale.

The first stage of the US economic recovery has proved as strong as we expected—and more. Both the rebound in spending and the decline in unemployment have exceeded most analysts’ expectations. This owes in part to the timely and decisive fiscal support: while the economy was largely shut down, stimulus checks and enhanced unemployment benefits boosted personal savings to a record high. As some states and local governments began to reopen their economies in May, this stored-up financial firepower allowed households to unleash the substantial pent-up demand for goods and services accumulated during the weeks and months of lockdown.

The health of the recovery was soon tested by a second wave of contagion in July, when COVID-19 cases rose anew. The recovery showed an encouraging degree of resilience. The improvement in economic activity and employment slowed but did not kick into reverse. The second pulse of our Franklin Templeton–Gallup Economics of Recovery study, conducted in early August, showed that Americans’ willingness to engage in different economic activities, from shopping to travelling to going back to their places of work, was not set back by the resurgence of contagion.1 Our study also highlights that a majority of Americans intend to keep increasing their savings over the coming months, but not pay down debt: they remain prudent in the face of the health and economic uncertainty, but are again accumulating spending power to deploy once the uncertainty abates.2

This probably reflects the fact that the second wave of contagion was relatively more benign: compared to the rise in new cases, hospitalizations, intensive care unit use and deaths increased to a much lesser degree. New cases this time were more concentrated in younger age brackets, less vulnerable to serious health consequences. And, the health care system has learned how to care for those infected in a more effective and successful manner. As a consequence, in most cases policymakers have been able to respond with more localized and targeted restrictions rather than reverting to full-blown lockdowns.