By Mark Schniepp
April 16, 2020
State governors first need to relax the emergency orders to shelter-in-home, and allow theaters, restaurants, bars, gyms, public gathering places, and sporting events to recommence under a responsible scenario where public health is generally protected.
How the nation and state recover is dependent on a host of assumptions that are rapidly changing. Consequently, my thoughts about this will change as new information is received from both the healthcare officials, the president and the governor. Here is how we are thinking about recovery today.
There will be a sequence of restarts that occur over time. First, office, industrial, and construction environments, then retail and restaurants. In some states, schools will reopen. Not so in California.
Within 45 days after ending the shutdown, we assume that most businesses are effectively open; guidelines on distancing are put in place restricting capacities at public gathering places and activities. Large public events like concerts and conferences will likely not occur.
Travel resumes, including air, train and automobile. If capacities are further restricted for modes of public transportation when business activity resumes, then this is likely to create queueing, frustration, social annoyance and possibly unrest.
Then within a month, we’ll be able to assess the degree to which the economy is being restored, how many workers are being rehired, and the extent to which consumers are returning to restaurants, bars, spectator events and classrooms even under an overlay of social distancing guidelines and protocols. If bankruptcies continue to rise, then capacity constraints and/or reluctant consumer behavior would be leading factors.
There will be some variation among U.S. states, or even counties, in the process of re-opening their economies. After all, some states never closed.
Continuing claims for unemployment insurance will drop precipitously over time. Grocery store shelves will look full again. Traffic will begin to increase on freeways and city streets will be congested again. Parking lots at shopping malls and airports will start to populate. All that toilet paper that everyone bought will end up selling for pennies on the dollar on eBay. Restaurants could be overwhelmed with pent-up demand, especially if distancing measures are adopted.
Hotel occupancy should quickly rise during the summer months as travel increases. But the appetite for travel will remain muted, especially on cramped airplanes and trains unless significant distancing practices are also adopted. Because of the stigma, it’s unlikely that there will be much demand for cruise ship travel.
All schools nationwide are closed. 55 million kids are at home. How can parents return to work if schools remain closed? This presents another bottleneck for the labor market. When schools open, student desks will be placed further apart. Face masks will be required. Lunchtimes will be staggered. Bus schedules may also have to be staggered to accommodate student demand and seat spacing. Assemblies, recess and gym classes need to be rethought. Sporting events will be limited, or eliminated.
The Unemployment Rate Will Remain Elevated
Similar to all recessions, there has been limited cash flows for firms during the current downturn. Consequently, many or most have faced difficulties servicing debts and making payrolls. Some employers simply go out of business, ending forever their relationships with employees. This leads to rising unemployment now and elevated unemployment during the recovery.
Other employers have continued to operate, but reluctantly sever their relationships with some employees because other options have proven to be more cost effective. Furthermore, customer volume may be substantially reduced or decision makers believe it will be. This also adds to increased levels of unemployment both today and in the near future.
New entrants into the labor force cannot find work because existing employers still operating are not hiring. This will boost unemployment simply as the result of the growing labor force.
Bottom line: The unemployment rate is extremely high today by historical standards, and it will remain elevated if the recovery is not “V” shaped, that is if it is not rapid and forgiving. Unfortunately, neither of these is assumed in our baseline scenario.
Scenario for Recovery
Gradual lifting of the Great Coronavirus Shutdown is the current source of debate. How and when? Unless a universal testing protocol can be put into place that yields immediate results, or the desired 60 to 80 percent herd immunity of the population is achieved, social distancing will be continued and there will be capacity limitations in public gathering places.
As the recovery of demand for goods and services rises, failed companies by definition cannot return, and those that continue to operate will now do so with fewer workers.
The nation along with the world will still need to wrestle with disruptions in everyday activities. There will be supply-chain hiccups and a strong potential for social unrest. All of these will hurt the labor market, consumer confidence and investor appetite for risk.
Until there will be a vaccine and everyone being tested, public health experts will tell us that future outbreaks are possible, and as a result, consumers will remain hesitant to resume their normal lives. There will be less travel, reduced shopping in retail stores, and in general, fewer people gathering in public places. This will limit total expenditure on leisure and hospitality, be it travel or people spending time in restaurants, bars, the gym, at theaters, and at sporting events. Consumer demand response over time will determine how the recovery evolves.
Full recovery will occur when everyone is tested for COVID-19 and/or a vaccine is developed. Until then, there is a low likelihood that the economy can bounce back strongly (the “V” scenario).
The recovery therefore takes the form of a leftward tilted L: a sharp and deep contraction followed by a meek recovery limited by consumer caution and reticence, and government required protocols that increase spacing, constrain capacities, and disallow dense human gatherings.
A Note on Housing
Contract mortgage rates are at, and will likely remain at or close to, historical lows. These ultra-low rates will help housing demand recover. But even under the best circumstances, the low financing costs are unlikely to create high demand for housing and mortgages. Consequently, affordability remains an issue.
In the past several years, the growth of housing hasn’t kept up with the growth in demand. As a result, prices have risen and have stayed higher. Supply constraints are most apparent in low- to mid-priced housing.
The mismatch of supply and demand along the California coast will keep prices elevated. For inland areas, the new normal will be closer to the old normal but sales will still be slower at the outset and fewer overall for 2020. Some concessions are likely because some sellers will have to sell, but we don’t anticipate meaningful declines in housing prices.
Mark Schniepp is head of the Goleta-based California Economic Forecast, an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.
Re-posted by permission April 17, 2020.