The emergence and continuation of the COVID-19 (also known as Coronavirus, or SARS-CoV-2) pandemic that first started to impact the U.S. economy in late January has unprecedented in its speed, scope, and scale. No industry sector has emerged unscathed and every household has faced the effects of being dislocated, furloughed, or serving as parent and teacher. The economic impacts of the pandemic have been likened to those of the Great Depression while public health and social commentators draw analogies to the Spanish Flu pandemic of 1918.
The Economy in Time of Pandemic: Thoughts on Recovery, the Remainder of 2020 and Beyond
It is both natural and convenient to draw analogies when faced with the unfamiliar. However, it is more likely that what the economy is facing is truly unprecedented as communities have never had to “pause” their markets either as quickly or for as long as was experienced from mid-March to mid-May. Many businesses were forced to close virtually overnight, facing an uncertain future as to when they would be allowed to reopen.
The reopening of the economy is equally unfamiliar as businesses rarely need to reopen at scale at the pace that they have, even those that routinely shut down for holidays or seasons. Adding to the anxiety in the economy has been uneven timing and pace of this reopening. This is both a function of policy and practice, once again understating the unprecedented nature of the COVID-19 pandemic.
The initial phases of the pandemic have exacted significant costs. More than 49 million Americans have filed for unemployment assistance. Wisconsin lost more than 300,000 jobs between March and June, including more than 100,000 leisure and hospitality jobs, 84,000 restaurant and bar positions, and 55,000 public sector jobs. The monthly unemployment rates of most counties in the region increased by ten to fifteen percent over the same period.
While circumstances seemed dire in early April and do again for some business owners, the first several months of the pandemic also brought stories of amazing resilience. Business owners are shifting strategies to serve customers and reach new markets. Communities have come together to serve the most vulnerable. And, banks like Investors Community Bank have provided capital, insight, and advice in a rapidly changing financial landscape.
The current state of the economy is as uncertain as the disease affecting it. Many fundamentals, such as consumer spending and prime lending rates, remain quite strong. Others, ranging from the condition of the labor market to the shakiness of many commodity markets point to the fragility of the current recovery.
The analysis below charts the current and future states of the regional economy as viewed through the lens of business owners that have responded to surveys issued by the Federal Reserve Bank of Minneapolis, U.S. Census Bureau, University of Wisconsin Oshkosh, and others. It is balanced against those economic indicators that illustrate where the greatest challenges remain, and where to find the most promising sources of recovery. It will chart both where we have been and where the next several months may lead us.
The University of Wisconsin - Oshkosh has partnered with the Wisconsin Economic Development Corporation to survey Wisconsin businesses each of the last four months to measure the impacts of the early phases of the pandemic with a specific focus on the period covered by the state’s Safer at Home order. In sum, more than 3,500 businesses have measured impacts, representing more than 65,000 employees from across the state.
Respondents have reported more than 21,000 positions, with the majority (18,800 positions) lost in March and April. This data suggests that companies were able to respond relatively quickly to the early shock of the pandemic and have focused in subsequent months of recovery. Businesses have generally managed workforce disruptions through temporary means such as furloughs and layoffs rather than permanent separations. This is both a function of the perceived temporary nature of the disruption as well as the enduring condition of the labor market. Businesses had experienced historical difficulties in hiring qualified candidates before the pandemic. These same businesses prioritized retaining their most prized staff members even while experiencing losses elsewhere.
Other losses varied by company size and time. The chart below aggregates inventory, income, and wage and productivity losses on a per business basis as reported by businesses in the region.
Source: COVID-19 Business Impact Survey, UW Oshkosh 2020.
We see that inventory losses narrowed since mid-March as companies have both found new ways to sell product, including expanding e-commerce, and have sourced new suppliers as many global markets have been disrupted. Conversely, wage and productivity losses have increased more recently as industry sectors that may be dependent on summer seasonal income, for example, find themselves understaffed. Income losses peaked in April due to the disruption of the Safer at Home order. This also highlights the delayed effects that we are now seeing as sales and marketing staffs were also sidelined over the spring, resulting at significantly lower sales and future order volume for many firms.
The impacts of the pandemic have been felt unevenly across industry sectors. We can see this both in the magnitude of losses as well as their ability to find needed assistance. Throughout the spring, the most urgent needs faced by most businesses were access to capital and customers. As such, those industry sectors most dependent on customer contact or personal interaction have been the most profoundly affected.
We have already noted the impact of employment losses in the hospitality sector. It is equally important to note the difficulty that many of these businesses have faced in getting assistance. Eighty-five percent of respondents to the UW Oshkosh survey reported seeking some form of financial assistance, such as a Payroll Protection Program (PPP) or Economic Injury Disaster Loan (EIDL). Yet, only 62 percent of respondents received assistance. Comparatively, only seven percent of manufacturers failed to receive assistance. This disparity has been confirmed in reports from the Federal Reserve Bank of Atlanta and National Main Street Coalition that suggest that small businesses in the retail and hospitality sectors are the least likely to have established banking relationships and received the lowest average PPP award.
Signs of Recovery
The national economy has generally improved in the past month, though it is unclear as to whether it will be able to maintain its early gains as several states have recently reintroduced stronger public health measures. Similarly, the stimulating effects of programs such as the PPP and EIDL are limited as many firms have already exhausted any funding received. Research from the Federal Reserve Bank of Minneapolis based on their monthly business survey confirms that business losses are significantly and negatively correlated with public health restrictions.
Still, there are signs of recovery. Consumer spending rebounded in May and is likely to continue to expand as retail options rebound. Manufacturing new orders are also on an upswing. However, the flow of new products is still constrained due to travel and trade restrictions. Residential construction and real estate markets are also improving and benefit from recent low interest rates.
There is also some hope in Congress that a fourth stimulus bill may be passed in the next several weeks, including an extension of federal emergency unemployment benefits and the possibility of a second economy-wide stimulus payment. Both would bring significant stimulating effects in the crucial back-to-school shopping season.
The recovery is not without challenges. Decisions regarding the coming school year will have marked impacts on the labor market, as at least thirty-two percent of all workers are not able to effectively work from home, based on a recent analysis from the Brookings Institution. As school districts announce their plans for fall, many parents will be seeking flexibility that may not be available.
A General Prognosis
The economy should experience a series of fits and starts as communities continue to deal with the uneven and unprecedented effects of the COVID-19 pandemic. These will persist until a widespread and reliable treatment or vaccine is available. As such, we should expect to see relatively high unemployment rates and negative GDP growth through the balance of 2020. Regional unemployment rates should fall below 10 percent by the end of the year, on average, as our healthcare and manufacturing-heavy markets continue to improve.
From a macro perspective, it is difficult to see the global and national economy fully recovering from the recession declared in February 2020 until the end of 2022, at the earliest. This is both a function of the magnitude of losses experienced in the past three months and the limits on fiscal and monetary stimulus tools available at the federal level. As such, businesses should expect the unexpected and be prepared to pivot as we continue through this unprecedented year.