Looking back at the financial impacts of the Spanish Flu pandemic

People worried about getting sick and public health officials argued about how to manage the growing problem. Some cities stepped in to close schools and other public places, regulate the hours of private businesses, impose limits on the number of people allowed on public transportation, and cancel sporting events. Families isolated in their homes and quarantined when illness was reported in the family. Eventually, despite many arguments on their effectiveness, some public health departments provided instructions for making and wearing cloth masks. And throughout all of this, many cities and public health departments were arguing the merits of various actions and, as such, responses varied across the country.

This probably sounds very familiar to all of us since the World Health Organization declared the COVID-19 virus a pandemic in March 2020. However, the discussion above is actually a description of life during the Spanish Influenza pandemic of 1918.

Given the interesting parallels between the 1918 pandemic and COVID-19 pandemic in terms of how daily life was affected, perhaps we should look at the economic consequences of the 1918 pandemic as well. Not surprisingly, experts are divided on their conclusions regarding the impact of the 1918 pandemic on economic outcomes. The analysis is challenging for a variety of reasons: poor data quality or sporadic data collection, annual data collection rather than monthly or quarterly data collection, and the end of World War I, which impacted both neutral countries and combatant countries, etc. Despite these challenges, economists have studied this issue for a century now. Below are some highlights from some of these studies:
First, after controlling for WWI combat fatalities, countries that had higher pandemic mortality rates had deeper recessions. For every 1 percentage point increase in the mortality rate, there was an associated 3 percentage point decrease in real GDP. This might be attributed to the fact that those less likely to survive the Spanish Flu were workers in their prime, versus the COVID-19 virus, which is more likely to hospitalize or kill older individuals.

Second, there was an approximate drop of 20 percent in industrial production in 1918 and also decreases in retail spending; however, these rebounded pretty quickly the next year. Interestingly, mail order businesses did see meaningful increases in sales—not dissimilar to our own experiences with COVID-19 and increased sales for Amazon and other online retailers.

Third, even though unemployment data was less available and not as reliable as it is now, there was a fairly large increase in unemployment in 1918, which quickly rebounded. Of course, it should be noted that there were no social safety nets such as social security or unemployment benefits in 1918.

Fourth, some studies claim that neither the US nor the UK stock markets declined in 1918, and many studies conclude the pandemic did not have much, if any, impact on stock market volatility on average. Compare this to the Dow Jones Industrial Average (DJIA), which lost approximately 37 percent of its value from February 12 through March 23, 2020. Similar to the results from 1918, the DJIA ended 2020 up by more than 6 percent despite the substantial plunge that spring. Company performance depends on the industry.

Take for example Peloton Interactive, Inc. (PTON), the maker of interactive home exercise machines, whose stock price opened at $27.20 on March 2, 2020 and closed at $120.47 on February 26, 2021. In contrast, the stock price for Carnival Corp. (CCL), the cruise line, opened at $32.71 on March 2, 2020 and closed at $26.75 on February 26, 2021 and was generally depressed for most of 2020.

Fifth, while the US economy, as a whole, was not overly hurt by the pandemic, some communities suffered much more than others in 1918. Similarly, in 2020 and 2021, there has been considerable discussion on the fact that predominantly minority communities are disproportionality hurting during COVID-19. This is especially true when considering lost employment income, food insecurity, and concerns over making rent/mortgage payments (data source: US Census Household Pulse Survey).

In summary, it appears that while the 1918 pandemic did affect the US economy (and other economies around the world), the negative effects seem to have been short-lived and had little effect on the US economy outside of 1918-1919. Will we be so lucky with the COVID-19 pandemic? Will the economic challenges resulting from COVID-19 be relatively short-lived? It is impossible to say, although many early results seem positive. These are very different times in terms of world events (e.g., shifting from a wartime to a peacetime economy), mobility of people, the ages of those who are most likely to recover, and societal safeguards such as unemployment benefits. What cannot be denied is that this has been a rough 15 months for most of us, and, like the Spanish Flu of 1918, the COVID-19 pandemic is one that will go down in history and be studied for years to come.

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