With measures to halt the spread of the novel coronavirus intensifying, the U.S. is embarking on its sharpest downturn since at least the end of World War II. The states where nonessential businesses are shut down, including California, New York and Ohio, account for more than 40% of U.S. gross domestic product.
Many of those workers and businesses will face severe constraints quickly, surveys suggest. In two weeks time—the period of a typical paycheck—many workers will struggle to make ends meet. After a month, more than half of them could be in trouble. At that point, a fifth of small businesses with lost sales could be on the brink.
The stimulus the Federal Reserve announced Monday, including its planned program to support lending to small and midsize businesses, will help. So, too, will the fiscal spending package Congress is hammering out—when it comes.
For the economy, the most important questions are how soon help will arrive, how ample it will eventually be and, above all, how long the coronavirus crisis will last. Between the big stimulus likely to come out of Washington and plans by lenders to extend loans or offer grace periods on payments, consumers and businesses can manage a shutdown lasting several weeks.
Beyond that is uncharted territory, and with the crisis at an intense point right now, few people are thinking that far out. Most economists think the economy will shrink more than 10% in the second quarter, at an annual rate, a larger decline than that at the start of the financial crisis and one that would mark the worst contraction since quarterly measurements began shortly after World War II. But most are assuming that by the start summer, the spread of the virus will have been contained and activity will begin to bounce back. That is no sure thing, with many epidemiological models suggesting containment won’t occur until later.
Govs. J.B. Pritzker of Illinois, Andrew Cuomo of New York and Gavin Newsom of California are among those who have told residents to stay home.
PHOTO: CHARLES REX ARBOGAST/ASSOCIATED PRESS; ANGELA WEISS/AGENCE FRANCE-PRESSE/GETTY IMAGES; RICH PEDRONCELLI/ASSOCIATED PRESS
Small businesses, which account for about half of U.S. employment, according to the Small Business Administration, are among those most at risk. In a 2016 study, researchers at JPMorgan Chase Institute, the bank’s think tank, found that the median small business had a cash balance that would last just 27 days. Some were operating closer to the edge. The median retailer had a cash buffer that would last 19 days. The median restaurant’s would last 16.
In a 2018 survey conducted by software and business-services provider Womply, 21% of small businesses said they would fail after a month without any cash flow. An additional 34% said they couldn’t last more than one to three months.
“Time is just ticking,” says Brad Plothow, who coleads Womply’s research group. “If it takes 90 days to get an SBA loan, for example, it may not be useful to you. You might be out of business by then.”
Many consumers can’t last very long without a paycheck, either. In a survey conducted last year by research organization NORC at the University of Chicago, 31% of working adults said missing a single paycheck would mean that they couldn’t cover necessities. An additional 20% said they couldn’t miss more than one paycheck.
Many households also carry substantial debt. Earlier this month, the Federal Reserve reported that overall household debt stood at a record $16.1 trillion at the end of the quarter. While overall debt to income ratios are down, that is because mortgages have fallen since the financial crisis. Lower-income households, which are less likely to have mortgages, have higher levels of debt than before the crisis, mostly made up of student and auto loans and credit cards.
While lower interest rates help homeowners, most working-class workers rent their home. Fed data show that as a share of income, non-debt financial obligations—a category that includes rents and lease payments—are higher than before the financial crisis.
Lower-income workers also lack the means to face periods of lost income. Among respondents to a survey conducted by the TIAA Institute and George Washington University making less than less than $25,000, 54% said they would be unable to come up with $2,000 in an emergency. Even among people earning in excess of $100,000 a year, 10% said they wouldn’t be able to raise the money.
“Ten years after the financial crisis, a quarter of people can’t deal with a shock,” said George Washington University economist Annamaria Lusardi, who designed the survey question. “They need help sooner rather than later.”
Industries employing low-wage workers play a big role in the U.S. economy. Food and beverage stores have seen a surge in sales and won’t be affected by a shutdown. But they employed a seasonally adjusted 3.1 million workers as of February. Restaurants and bars, many of which have been ordered closed, employed 12.3 million.
Even a giant stimulus might not quickly temper the downturn because government payments could take significantly longer to arrive than the two weeks the Treasury Department has optimistically forecast. Evercore ISI strategists and former White House and Treasury officials Sarah Bianchi and Ernie Tedeschi suggest six weeks is more realistic—and by that time many will have missed several paychecks.
‘Closed’ signs proliferated last week on stores, bars, restaurants, institutions and in Dayton, Ohio, a polling station.
Even then, consumers may use the cash to keep up with bills, or put it into emergency savings, rather than spend like they normally would. “If people are idle and businesses are closed, what are people going to do with the money?” asked economic consultant Joseph Carson.
Government efforts to support small businesses need to happen quickly both to keep them from failing, but also to maintain links between them and their employees, said Harvard University economist Lawrence Katz. Consumers are less likely to spend their stimulus checks if they fear they are facing long periods of unemployment.
Mr. Katz says the scope of what the government may need to do if the epidemic drags on may need to be unprecedented in most living Americans’ memory. When the U.S. economy entered World War II, government spending went into overdrive. Federal spending represented as much as half of gross domestic produce, but it kept the economy going.
Despite an unprecedented intervention over the weekend from the Federal Reserve, which cut short-term interest rates to close to zero and introduced emergency lending measures, the U.S. stock market fell sharply again on Monday. By the close of trading, the Dow Jones Industrial Average had fallen almost three thousand points—the worst single-day points loss in history—or thirteen per cent. The market is now down by almost a third from its peak, in late February.
Clearly, investors are spooked by the widening coronavirus outbreak and the likely impact of the public-health measures that are being taken to deal with it. But what exactly is going on in the markets and the economy? In search of answers to this question, I spoke on Monday with Ian Shepherdson, the founder of Pantheon Macroeconomics, a firm that advises Wall Street firms, hedge funds, and institutional investors.
Shepherdson, who was formerly the chief U.S. economist at the international bank H.S.B.C., said that some investors were alarmed by the fact that the Fed felt obliged to act just a couple days before one of its regular policy meetings, and that they were also fretting about the delay in getting both chambers of Congress to pass an emergency spending bill. But Shepherdson also suggested that there were other factors at play, including some psychological ones. “To be brutally honest,” he said, “I think a lot of people on Wall Street didn’t take the virus seriously enough until it was their towns where cases were being discovered and their kids who were being sent home from school.”
Now the virus is impossible to ignore, and so are its economic consequences. “It’s going to be catastrophic,” Shepherdson said bluntly. “This is an economy built on discretionary consumption.” He was referring to all the nonessential purchases that people make in their daily lives, things ranging from new clothes and appliances to personal services such as spa sessions, meals in restaurants, and Uber rides. According to Shepherdson, all this nonessential stuff amounts to about forty per cent of the U.S.’s gross domestic product. In other words, it is enormous, in terms of both its dollar contribution to the economy and the number of people it employs.
As of yet, we don’t have any over-all figures for how shutdowns and curfews and self-isolation are impacting spending, but there are some preliminary indications. Over the weekend, movie-ticket sales fell forty-four per cent compared to the previous weekend. Shepherdson has been monitoring the number of people eating out through the booking site OpenTable. On Sunday night, the amount was down forty-eight per cent compared with the previous year. He read out some of the figures for individual states: “Alabama: down thirty-eight per cent. California: down fifty-five per cent. New York: down forty-seven per cent. New Jersey: down fifty-six per cent. This is just unbelievable.”
That was when most restaurants were still operating. Now that many states, including New York and New Jersey, have ordered them to close, apart from making deliveries, business is going to fall even more dramatically. The same is going to be the case for countless other enterprises, small and large. As they shut down, many of them are going to furlough their workers or let them go permanently.
This will result in a sharp rise in unemployment and in negative G.D.P. growth—in other words, a recession. “The U.S. economy is shrinking as we speak—I have no doubt at all about that,” Shepherdson said. On Monday, some Wall Street economists suggested that the G.D.P. could fall at an annualized rate of five per cent in the second quarter of this year. Shepherdson believes the downturn could be even more severe than that, with the G.D.P. contracting at a rate of about ten per cent. A collapse in discretionary consumer spending isn’t the only danger, he noted. As businesses react to the crisis, they will likely postpone a lot of capital spending, too. “We have no information about that yet,” he said. “But it is definitely going to get hit badly, as well.”
To alleviate some of this damage, economists of many different political persuasions agree that the Trump Administration and Congress need to introduce a substantial stimulus package on top of the coronavirus spending bill that the House of Representatives passed on Saturday. How big should these measures be? “I am in the one-trillion-to-two-trillion-dollar camp, preferably by dinner time,” Shepherdson said. “I think they should be just throwing money at people and businesses that are in the front line. Cash has to be given out to households. Cash has to be given out to small businesses. Cash has to be given out to gig workers. I don’t know what the figures are for Uber drivers, but they are probably catastrophic.”
It’s not just small businesses that are being affected, of course. Airlines, hotels chains, and other corporate entities are hemorrhaging money. Shepherdson said that some airlines could go bust “very quickly” if they don’t receive some sort of aid. “People say don’t bail them out—they’ve made billions of dollars in profits and paid their senior executives enormous sums,” he said. “I’m very sympathetic to that argument. But we are going to need an airline industry in September. So bail them out and sack the C.E.O.s. You can’t think in normal terms. This is more like a wartime crisis than a normal economic situation.”
Shepherdson isn’t the only economist making an allusion to the emergency measures that governments make in a war economy. “The world is de facto at war (against the virus, rather than against each other—this is the good news . . .),” Olivier Blanchard, the former chief economist at the International Monetary Fund, tweeted on Monday. He went on to point out that, during the Second World War, the federal deficit as a percentage of the G.D.P. rose to twenty-six per cent, as the Roosevelt Administration spent heavily on armaments and other programs. “Let’s not be squeamish,” Blanchard added.
Shepherdson agrees. “This is not a normal economic event in any way, shape, or form,” he said. “You have to be willing to think what previously would have been unthinkable.” If necessary, he said, the Federal Reserve could buy the bonds that the U.S. Treasury issues to finance a massive economic support package—a tactic known as “monetization,” which also was employed after the Second World War.
“Why do we worry about monetization?” Shepherdson said. “Because we are concerned about hyperinflation, but that isn’t an issue now, and we have a much bigger problem in our faces.” If the economy slumps in the way he thinks it is about to, a lack of adequate financial support for people who are adversely affected could lead to social unrest. “The first job of the government is to prevent social breakdown,” Shepherdson said. “If ever there was a case when quick government action could do that, then this is it.”
