Politicians hoping to jolt the economy back to life might be in for some disappointment when they discover governors can let businesses reopen but they can’t force people to patronize them.
This week, governors in states like Florida and Georgia are moving to reopen bowling alleys, nail salons, and dine-in restaurants in an effort to get economic life moving again. And an organized campaign by conservative economic interests is underway to lift restrictions faster in more places.
This will be an experiment, of course, but the best available evidence casts doubt on the idea that enough customers will return to make it possible for small businesses to stay viable without additional government assistance.
For example, we know customers began abandoning America’s restaurants before they were ordered closed, that the handful of states that have avoided broad lockdown orders are still feeling economic pain, and that huge swaths of the economy that have not been shut down are nonetheless experiencing a precipitous decline in sales.
The problem is a question of fear. Americans fear spreading or contracting infection, so much so that they’ve overwhelmingly participated in social distancing measures. They tell pollsters by wide margins that they fear lifting those restrictions too soon much more so than too late. They’re willing to stay put even if it harms the economy.
They also fear economic hardship. That’s led prudent people, even those left relatively unharmed by the downturn so far, to delay nonessential purchases, like new cars, appliances, clothes, and other goods.
Whatever choices state officials make about opening things up, there’s not going to be a vibrant economy until real steps are taken to address those dual sources of fear.
Restaurant bookings declined before shutdowns
The online reservation booking service OpenTable has thoughtfully provided the public with data on reservation volume in every city where they operate. The conclusion: There are some reckless people, but the typical human being is not that interested in risking her life for a dinner out.
This table shows, day by day, how much reservations and seated walk-ins fell from the day one year before in a range of domestic and global cities. And it demonstrates clearly that bookings were tumbling in all kinds of places before mayors and governors ordered their restaurants closed.
In Atlanta, for example, Mayor Keisha Bottoms announced on March 19 that she would ban in-house dining at noon on the following day. By that time, OpenTable bookings had already fallen by over 90 percent.
This is not purely an American phenomenon. In Ireland, the national restaurant association itself called for a closure order on March 16, citing overcrowding in some pubs. The government swiftly took their advice, but OpenTable bookings in Dublin had already fallen by 71 percent.
When states start to allow restaurants to resume sit-down service, some customers will come back. But it seems many won’t.
The restaurant business is competitive. It operates on low margins, with new restaurants infamously prone to failure. And as with many businesses, the fixed costs of operating a restaurant are relatively high. You need to pay rent and utilities, and you need to cover other overhead like insurance and the interest on loans you took out to get the business started in the first place. Forcing these businesses to stay take-out only indefinitely will force them to close without government help, but letting them reopen for sit-down dining only marginally changes the calculus as long as customers are wary of actually showing up.
I asked a half-dozen restaurant owners from DC to Austin to central Pennsylvania if their businesses could survive the 20-30 percent decline in bookings that OpenTable was showing before the shutdown started. The only one who thought he could owns the building he operates in, giving him lower operating costs than a typical restaurateur. To save the industry, governments need to actually address the virus. Until that time comes we need to put restaurants on life support — simply letting them reopen empty isn’t going to work.
“Reopening” won’t help large sectors of the economy
Beyond restaurants, the Trump administration’s relatively aggressive opening plan will still leave large segments of the economy largely shuttered.
In particular, Trump’s “Phase 1” plan — echoed by Republican governors — calls for white-collar workers to continue working remotely and calls for Americans as a whole to continue avoiding “non-essential” travel. Those are reasonable steps of caution that will continue to take a hammer to the economy. It can’t be fixed by reopening personal service businesses.
Hotel vacancy rates, for example, had already fallen by 25-50 percent as of mid-March while revenue per booked room fell by a third. This isn’t going to recover until people are told it’s safe to travel again. At $218 billion in annual revenue, the hotel industry is nearly triple the size of the combined hair and nail salon industries.
The $171 billion dollar airline industry is not currently shut down and thus can’t be “reopened” by fiat, but passenger volumes have fallen by 95 percent in the US. That’s an enormous loss to a large industry, plus secondary losses to related businesses like airport shops and rental car companies. As of a month ago, taxi companies in New York had lost two-thirds of their customers. And while New York City was unusually hard hit by the virus, it also has by far the lowest car ownership rate of any place in the country and thus the largest share of people who may have no better option than to hop into the back seat of a stranger’s car.
By the same token, the International Air Transport Association’s survey data indicates that just 14 percent of the public say they’re likely to resume flying as soon as restrictions are lifted — with 40 percent of the population saying they’re likely to wait six months or more.
Here’s the full chart on the @IATA survey showing that 40% of pax will wait 6+ months post-lock down before traveling. Note that it also shows slipping confidence from the February version. Not good news for airlines or associated industries. #AvGeek pic.twitter.com/c43cZHzFfX
— Seth Miller (@WandrMe) April 21, 2020
Travel businesses, in other words, are hampered by people’s reasonable fears of infection and aren’t poised to come roaring back the moment restrictions come off.
Similarly, while keeping office workers home wherever possible is sensible, it has inevitable knock-on economic consequences. Downtown lunch spots have no customers if nobody is working downtown. People don’t need to get clothing dry cleaned as frequently if there are no business meetings. And office management companies will shed janitorial staff if there’s nobody to clean up after.
And with large segments of the economy ailing, simple lack of money is going to be an increasingly prominent problem.
People are avoiding big-ticket items
Polling by CNBC in early April shows that 11 percent of Americans say they’ve lost their job during the pandemic and a further 30 percent have lost wages.
This is about to get worse. The Center on Budget and Policy Priorities predicts that state governments are facing a bigger hit to their budget than what we saw during the Great Recession of 2008-2009. Local government data is harder to come by, but it should be roughly in line with what states are seeing. When state and local governments lose revenue, they need to cut spending — furloughing workers or reducing benefits and widening the share of Americans who experience lost income. The same CNBC poll showed that 65 percent of Americans worry that their incomes will fall, and they should be worried.
What people do when their income falls— or when they fear that it might fall — is cut down on big-ticket purchases. They decide to forget about their plan to renovate the kitchen, and they hang on to their existing cars until they become completely unusable rather than upgrading.
This is what we’re seeing right now. New car sales are plummeting even though dealerships are still open to sell cars. Some of this could be the inconvenience or fear of going to a dealership, but dealers are trying hard to offer people good options for contactless home delivery and opportunities to test drive. Financing offers and other deals are excellent right now because inventory is piling up and dealers want to move it.
The problem is that one family’s spending is another family’s income. And while there’s nothing wrong with being prudent, a whole national cycle of prudence is self-defeating. One prudent family doesn’t buy a car, so the salesman doesn’t buy a fridge, so the appliance workers lose shifts. Declaring that we can all risk our lives to go to the movies next weekend doesn’t alter the basic dynamic.
Government help is needed
What proponents of a quick reopening are hoping for is a better economy that works without further stimulus or intervention. That’s just not realistic.
Even plans to “reopen” involve keeping large swaths of the economy on ice. The travel sector isn’t currently shut down but it’s almost completely collapsed anyway. Reopened restaurants and personal services like hair and nail salons won’t get all their customers back as long as the virus is still circulating. Devastation to state and local budgets is already baked into the cake. And many people are losing income and paring back on unnecessary spending, prompting further rounds of lost income.
There’s no way out of this that doesn’t involve curing the dual fears of infection and income loss. The former requires real public health victories, not just vague assurances. And the latter requires much more in the way of financial support for ailing businesses, local governments, and households.
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The US will need to spend trillions more as economy takes until 2022 to fully recover: CNBC survey – CNBC
The economy could take one to two years to rebound to full strength and the Federal Reserve and Congress, having already committed historic sums to fight the coronavirus pandemic, will have to commit trillions more, according to respondents to the CNBC Fed Survey.
With the Federal Reserve’s balance sheet already at an unprecedented $6.45 trillion, the 36 respondents see it rising on average to $9.8 trillion. The additional trillions will be added by the end of the current quarter, the respondents expect. Congress, having already committed about $2.5 trillion, is seen putting in an additional $2 trillion.
“My guess is that the virus itself will largely disappear within a year, but that the structural social and economic impacts will be with us much longer,” John Kattar, chief investment officer at Ardent Asset Management, wrote in response to the survey.
Jack Kleinhenz, chief economist for the National Retail Federation, said, “The policy response has been appropriate, but policy takes time to work its way into the economy and targeted sectors. … Many small businesses stand at risk.”
Despite the massive relief, respondents still see the unemployment rate rising to 19%, hitting that level in August. It’s expected to decline only gradually, to 11% by December and to 7% by the end of 2021. That would leave it at about double the rate before the crisis.
Second quarter of 2022
“With spiking unemployment and rising business closures … the prospects of a sharp rebound (is) far outweighed by the more realistic prospect of a longer-term structural disruption,” said Lindsey Piegza, chief economist at Stifel.
A 33% plurality believes the economy won’t be fully restored until the second quarter of 2022. But 19% believe it will be back by year-end and another 19% believe it can happen even earlier, highlighting a wide range of views about the speed and strength of a recovery.
“During the pandemic, production and consumption have been largely deferred and not lost,” wrote Rob Morgan, director of market strategy at US Energy Advisors. “This leads me to believe the economy will experience a V-shaped recovery beginning in the third quarter 2020.”
On average, respondents see gross domestic product falling by 24% this quarter, followed by a rebound of 4.7% in the third quarter and another strong quarter in the fourth. It won’t be enough to make back the losses in the first half. For the full year, GDP is forecast to decline by 5%.
Mark Zandi, chief economist at Moody’s Analytics, said a vaccine is essential for the economy to gain traction. “Until then, any recovery will remain something of a slog, characterized by halting growth and high single-digit unemployment. And even then, the economy won’t be in full swing and fully recovered until mid-decade.”
The Fed funds rate is seen remaining at zero for the rest of the year and rise to 1.9% in 2021. The Federal Reserve concludes its two-day policy meeting on Wednesday. Answers for CNBC’s Fed Survey from investors and economists were collected Thursday to Saturday.
The S&P is forecast to finish lower on the year at 2,844 than Monday’s close, and rise to 3,141 next year for a 9% gain by the end of 2021.
“I think the risk markets are anticipating a faster return to normalized economic conditions than we are likely to see,” says John Ryding, chief economic advisor at Brean Capital LLC.
Among the risks: Respondents place a 61% probability on a second round of contagion in the fall and winter.
White House reportedly considering another round of stimulus checks – Atlanta Journal Constitution
As the U.S. economy slowly reopens, Americans across the country are still grappling with job loss, furloughs and economic uncertainty. To combat the continued financial struggles some are facing, a White House official says the administration is “studying carefully” another $1,200 payment to citizens.
White House economic adviser Kevin Hassett told the media the administration is determining whether to provide those who qualify another round of stimulus checks, according to NBC News reporter Geoff Bennett. The additional financial support could be included in a phase 4 deal.
No word on when the package would be presented the House, but, with the virus still looming, House Majority Leader Steny Hoyer told the media Tuesday that the House will no longer come back next week after speaking to House physician, according to a tweet by Politico congressional reporter Sarah Ferris.
“We made a judgment that we will not come back next week,” Hoyer told reporters.
While the new stimulus checks are being considered, some Americans have not yet received the first round of checks. The IRS began cutting stimulus checks in mid-April. As of this week, about 90 million people have seen the economic bump in their accounts, according to economic news site Market Watch.
The hope is that the checks, which average about $1,200 a piece, will encourage spending and quell the financial pressure to pay essential bills as the COVID-19’s impact has shuttered manufacturing plants, retail stores and limited business hours for dozens of companies.
The IRS had distributed about 88.1 million stimulus checks as of April 17 and paid out $157.96 billion, according to statistics released April 24. That’s more than half of the $290 billion put aside for direct payments to individuals in the $2.2 trillion bill called the CARES Act.
Consumer confidence is still low
The Conference Board Tuesday reported that its consumer confidence index tumbled in the month of April, as millions lost their jobs and others feared for the current and future work conditions.
The Conference Board said Tuesday that its confidence index plunged to a reading of 86.9, down from 118.8 in March. The index is composed of consumers’ assessment of present conditions and expectations about the future.
The present conditions index dropped from 166.7, to 76.4, a 90-point drop that was the largest on record. The expectations index, based on the future outlook, improved slightly from 86.8 in March to 93.8 in April.
The numbers in the present conditions index “reflects the sharp contraction in economic activity and surge in unemployment claims,” said Lynn Franco, senior director of economic indicators at the Conference Board.
Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, said the confidence declines were worrisome because “consumers’ downbeat views about future income prospects can restrain consumer spending and the overall economy.”
Consumers drive about 70% of all economic activity in the U.S.
Many economists believe the country has already entered a recession that will be the largest economic disruption since the Great Depression of the 1930s.
The Associated Press contributed to this report.
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Goldman Sachs explains why stocks can keep rising even as a record-sized recession beckons – Business Insider
Drew Angerer/Getty Images
- Markets may continue to look past negative coronavirus news, especially if projections continue to show that the economy is expected to rebound after the pandemic, a Monday note from Goldman Sachs said.
- An analysis of GDP forecasts from the bank found that investors tended to discount the next two years of macroeconomic performance.
- Thus, metrics that focus only on growth over the next year “will overstate current valuations, given the large rebound expected beyond this year,” Zach Pandl, a cohead of global FX and EM strategy, wrote in the note.
- Read more on Business Insider.
Markets may continue to look past negative coronavirus news, especially if projections continue to show that the economy is expected to rebound after the pandemic, according to Goldman Sachs.
An analysis by the bank using changes to gross-domestic-product forecasts found that investors typically discounted at least the next two years of macroeconomic performance, a Monday note said.
That means that metrics that focus only on growth over the next year — such as multiples based on 12-month earnings expectations — “will overstate current valuations, given the large rebound expected beyond this year,” Zach Pandl, a cohead of global foreign-exchange and emerging-markets strategy, wrote in the note.
While the coronavirus-induced recession is set to be the deepest contraction in modern history, it’s also likely to be the shortest, Pandl said. Many economists expect that, after a dip in 2020, GDP will rebound in 2021 and 2022. By early April, consensus GDP forecasts incorporated a virus hit, down 4% this year. But forecasts are for 4% growth in 2021 and 3% in 2022 — an unusual pattern, Pandl said.
That means that more disappointing data in the near term may not weigh heavily on markets, as activity is expected to snap back “relatively quickly,” Pandl wrote. “The depth of the downturn matters much less than the duration of the recovery,” he said.
Goldman’s analysis came amid a stock-market recovery from March 23 lows. As US states weigh relaxing strict lockdown measures designed to curb the spread of COVID-19, stocks have slowly gained on optimism that the economy will soon reopen. From March 23 to Monday’s close, the S&P 500 gained about 29%, but it was down about 15% from all-time highs in February.
Still, many economists disagree that any rebound after the coronavirus pandemic will be a quick one. Instead of the sharp V-shaped recovery that Goldman is suggesting, many expect a rebound to take a softer U shape.
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