Update 443: The COVID Economic Experience
for Workers, Consumers, Employers, Investors
Your economic experience of the impact of the coronavirus will reflect your role in the economy. Are you an “essential worker”? Can you work from home? Can you find the necessities of life as easily or cheaply as before? Are you buying scarce or rationed goods, or a car, home, or insurance policy? How much disposable income do you have? Do you need to sell securities to raise cash? Are you able to bargain hunt and make a profit when all is said and done?
The disparity of impact reflects and exacerbates economic inequality. For those without work or resources, the situation is going from bad to worse, with the tipping point to improvement months away. For those with the wherewithal like investors, the low point has already come and gone. We examined the capital markets last time. Today, we look at the “real economy” — the condition of and trajectory for labor and consumer markets.
Good weekends, all…
On Wednesday, we discussed the financial markets’ fall and subsequent rise in the coronavirus crisis. But another 2.1 million workers filed for unemployment last week. In the last ten weeks, 40.7 million workers — over a quarter of the labor force — have filed unemployment claims. Meanwhile, consumption has plummeted. Spending is down 14 percent across the board, the steepest decline on record since 1959. The capital markets are not in crisis. Workers are.
When Will Workers and Wages Return?
As Wall Street returns continue to rise so does unemployment. In April, unemployment rose to 14.7 percent, higher than at any point since the Great Depression. In contrast with the capital markets, which are uniformly up from their COVID trough date of March 23, unemployment won’t decrease for months. CBO estimates that unemployment will hit a peak of 15.8 percent in Q3 before starting to decline.
Source: Congressional Budget Office
The CARES Act expanded unemployment insurance (UI). Yet, only a fraction of eligible workers are actually receiving UI funds. Compared to the 40 million claims filed, only 21.1 million unemployed workers are receiving UI benefits. State UI systems were overwhelmed at the outset, and many workers are still unable to file claims.
The State of the Sectors
Economic ramifications from the COVID pandemic are hurting some industries more than others.
- Hospitality (8.2 mil. jobs lost)
Last month’s Bureau of Labor Statistics (BLS) report showed unemployment in the hospitality and leisure sector at almost 40 percent. The Fed’s Beige Book, released on Wednesday, evaluated the continued employment decline in the hospitality and leisure sector as “especially severe.”
Expectations of a swift bounce back are increasingly unrealistic. As states and localities take tentative steps towards reopening, some sectors will gradually see consumer demand come back. But the resumption of long-distance travel and family vacations will mainly wait.
- Food Service & Retail (8 mil. jobs lost)
The unemployment rate in the food service sector jumped from eight percent in March to 35 percent in April. One in every four jobs lost in April were in food service. As states allow restaurants to reopen, food service workers will need additional protections.
Retail suffered a similar increase in unemployment, jumping from five percent in March to 18 percent in April. Those workers who remain employed are operating largely without adequate protections or pay. Several retailers that independently instated $2/hour hazard pay are now phasing out their programs.
- Manufacturing (1.3 mil. jobs lost)
Employment in the U.S. manufacturing sector has been steadily declining for decades, but the pandemic has accelerated this trend. Just during March and April, unemployment in the sector rose from 3.9 to 13.2 percent as domestic manufacturing ground to a halt. The Institute for Supply Management’s (ISM) index of U.S. factory activity indicates that domestic manufacturing has slumped to its lowest levels since the Great Recession. Factory employment has experienced its most rapid contraction since ISM began tracking the data in 1948.
Meanwhile, outbreaks at factories have sickened workers, many of whom must choose between working and risking illness or staying home and possibly losing their income. Of the thousands of workplace safety complaints OSHA has received over the course of the crisis, 20 percent are related to the manufacturing sector.
- Healthcare (2.1 mil. jobs lost)
Healthcare workers have been working without adequate personal protective equipment, and nurses have been forced to return to work even after being exposed to the virus. Twelve states have passed laws protecting hospital and nursing home executives and shareholders from liability should their decisions result in preventable transmission of the virus. Under liability immunity, healthcare workers have no legal recourse to hold their employers accountable should their safety be put at risk.
With most Americans under stay-at-home orders, consumption has taken a nosedive during the crisis. Certain sectors are particularly vulnerable while others show signs of recovering.
- Housing: Existing-home sales declined rapidly at the beginning of the crisis, falling 8.5 percent in March and 17.8 percent in April. The number of likely homebuyers declined about 15 percent. After initially falling 70 percent in some states at the beginning of the pandemic, housing inventory has partially rebounded and is now down about 20 percent year-over-year. Whether the housing market continues to recover largely depends on whether homeowners can make monthly mortgage payments after forbearance expires.
- Automobiles: Automobile sales fell by about 50 percent in April. Auto retail executives suggest that sales in May will be down 33 percent compared to May 2019. The auto sector stands to miss between 1.2 and 1.6 million sales through July.
- Food Service and Retail: Retail sales, including restaurants and bars, fell by a record 16.4 percent in April. Clothing and accessories saw the sharpest drop in sales with consumption dropping almost 80 percent last month. With malls shut down and restaurants only available for take-out business, consumer activity at department stores, restaurants, and bars declined by almost 30 percent.
The Bureau of Economic Analysis indicates that personal income increased 10.5 percent in April after accounting for government transfer payments from UI and the pandemic impact payments.
A Tale of Two Economies
The resources, long-term perspective, and innate optimism of investors, together with the Fed and Treasury liquidity programs, meant that COVID might destroy firms and jobs but returns are already returning. Capital markets have begun the recovery from their March 23 low. Main Street has gotten bounteous but mainly badly-conceived, poorly-targeted and ineptly administered relief.
Like a natural disaster, COVID is exposing inequities and making them worse. Going forward, corrective fixes to relief efforts to date and recognition of disparities can help prevent the government from aggravating the inequity.
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