There is an ongoing debate on whether mandatory lock downs are hurting the economy, or they are not. Part of those who are advocating for their right to remain open support the idea that Americans are a free people and that government should not interfere with their basic rights. The problem with this thinking is that at the present time there are many issues at play, from families wondering how they are going to pay their bills, to people who feel that governments have gone too far against their personal liberties. The situation remains highly fluid so what it fully means will not be fully understood for some time. As someone who studies economic markets and periods, I have been telling others that I feel that June is the pivot point. In June, I believe we will get a better feel for how the economy will recover – will it recover differently, or if it will not recover at all?
Many readers may not be ready to accept my scenario regarding the economic recovery. But let me show you where I am coming from. First off, I am a businesses owner, who has been in business for almost 30 years. In that time I have weathered many challenges from my clients going bankrupt to the United States shutting down our country’s borders during 9/11, to the Mexican Peso devaluing several times, to disruptive competitors popping up and ruining a good revenue stream for me – here’s looking at you Computer City.
Like you, with Covid-19, I did not foresee many of these economic challenges.
Business expects business owners to evolve to survive. Napstar disrupted the music industry. Uber disrupted taxi companies. The Internet deeply hurt the news industry. Part of being in business is responding to challenges. The economic challenges I have faced happened, but the global economy remained stable. Just like supply chains may be disrupted by national disasters, wars and labor movements, economic tsunamis are expected. Economic chaos is usually localized but when it becomes global – like the financial crisis – one knows best to change spending habits and hunker down and eventually things will return to normal.
But the Covid-19 pandemic has fundamentally changed the economic models across the board. It is now not business as usual. Will consumers consume again once the chaos subsides is the underlining and important question.
In the case of the Coronavirus, who knows?
There are many who continue to hold to the belief that once the country opens for business all will return to some semblance of normalcy. Many believe their jobs are still there, notwithstanding the numerous large-chain bankruptcies being announced lately.
They may be wrong.
The problem is not the closure of the economy but rather it is an issue of consumer confidence.
Unlike previous emergencies consumers haven’t just lost confidence but they seem to have also began to think of a new reality. One in which shopping online and consuming less is better. And fear.
Merrill Lynch put out a note about their view of the economy on May 19. In it they make the point that the economic chaos cannot be attributed directly to mandatory closure orders as many would suspect. Instead, the economic note points to a study by the University of Copenhagen that compared two countries – Denmark and Sweden and what effect their diverging social distancing policies (mandatory vs voluntary) had on their economies. The study found that both economies dropped by about the same; 25% in Sweden and 29% in Denmark, suggesting that the economic downturn is the result of consumer fears about the virus and not about government interference.
It makes sense that this would be true as one thinks about whether a mandatory closure versus a voluntary one ultimately goes to fear. But, interestingly, the study found that the voluntary social distancing resulted in a worse economy by about 4%. Again, this suggests that fear is the driving factor for the economic collapse rather than government lock down orders.
This brings us to the important question for June.
Will consumer fears about the virus lessen in June, or will they continue?
This is an important question because most state economies are attempting to reopen, begging the question of whether consumers will return.
Here in Orlando, where I live, the social distancing regulations have been somewhat relaxed for almost two weeks now. Gyms, hair salons and restaurants can be open, with social distancing guidelines. Florida never really enforced its shutdown orders as severely as other states, at least not in Orlando. People could be out in public. I was never questioned about whether I was an “essential” when commuting to and from my office.
Although shutdown orders are over, except for the social distancing guidelines, many restaurants are still only offering takeout orders. In downtown Orlando where my office is, only two restaurants are serving dining room service. The rest are either closed or offering take out only.
More importantly is that foot traffic is almost non-existent in downtown Orlando. Bank branches remain closed and many businesses seem to be closed as well. Commuting is also significantly down as well.
Although schools remain closed the commute is devoid of much traffic.
Anecdotally it seems that lifting stay-at-home orders did not reopen the economy to business.
Everything seems to indicate that people are not ready to get back to working regardless of what they are saying. More important is that mandatory economic closures by state governments do not seem to have had an impact on the economy.
As a business owner it is my belief that June will be the pivot point on whether the economy can recover in 2020 and if not, how bad will it be. What I am seeing and hearing from my clients and fellow business owners is that it doesn’t seem like the economy will recover, instead it looks like it is going to get worse over the rest of the year.
I plan to be exploring this issue further over the next few months as I have time to analyze economic data that is starting to trickle out. The first thing everyone should pay attention to is who is filing for bankruptcies in the coming months. We will learn much from the store closures.
The service industry like retail and restaurants makes up about 20% of the U.S. economy. Many large retail stores have either filed for bankruptcy in recent months or have shuttered their doors. That reality translates into lost jobs. Many restaurants seem to be focused on takeout orders instead of opening their dining rooms.
One of my favorite restaurants will no longer accept cash. As part of their stay safe program they have gone to a cashless payment system via credit or debit cards.
The few that have opened their dining rooms are limited to a fraction of their normal capacity due to social distancing guidelines. Considering that the majority of the restaurant’s workforce are waiter/waitresses and cleanup crews the resulting reduction of dining space translates into less labor needed. That means more workers out of a job.
Part of the desire to focus on takeout is fear. The restaurant owners fear the cost of a virus outbreak at their location, both in reputation and resulting lawsuits and it appears consumers are fearful of dining out. The fear means more lost jobs regardless of stay-at-home orders or not.
All these indicators point to the reality that the economy was shut down by fear and not by government orders. They also signal that if there is no cure for the virus consumers will not start to consume resulting in a depressed economy for a long time to come.
Thus, June is the pivot point. Will consumers remain hunkered down or will they start to consume? What happens in June will tell us what happens the rest of the year.
Right now, the reality is that it doesn’t bode well for the economy.