Life After the Lockdown

Jack Ablin Market Commentary

Hunkered down in the middle of a global COVID-19 war, American lives and livelihoods have been turned upside down. Even though we know that the virus threat will subside and economic and social life will eventually resume, societal habits, values and policies will undoubtedly change as a result of this crisis. Social Security, unemployment insurance and TSA security lines are three major policies and programs enacted in response to previous crises. Masks, hand washing and social distancing could be with us for a while. COVID-19 is arguably our nation’s leading cause of death at present, killing more than 1,800 Americans every day since April 7. By comparison, heart disease claims an average of 1,774 lives every day, and cancer kills 1,641. No one knows exactly how many Americans have been infected with COVID-19 so far; estimates range from three to ten per cent of the population, suggesting that nearly 300 million of us remain vulnerable.

Coronavirus will no doubt alter the way Americans live and work. We also know life won’t approach normality until we find a vaccine, reach herd immunity or harness an effective treatment. Experts speculate that over the next few months Americans could be divided into two classes: those who have recovered and are immune, and those who remain susceptible. The immune, in effect a privileged class, could return to work, travel and congregate. The immune segment of the workforce would be in high demand, possibly commanding higher pay for their unique status. The susceptible population, meanwhile, would remain sequestered and potentially unable to earn a living, tempting the most vulnerable to take a calculated risk of becoming infected in order to enjoy the benefits of the immune.

Economic Impact

The ultimate path of the economic downturn and recovery ultimately depends how long the virus lingers. New claims for unemployment benefits totaled 22 million over the last four weeks, which implies a 14+ per cent unemployment rate, given a workforce of 155 million. That number is expected to increase again this week. At the same time, Americans 55 years old and older – those considered most vulnerable as we begin relaxing social distancing restrictions – account for 40 per cent of retail spending, according to a recent Barron’s report. The fate of many businesses and industries will depend on consumers’ willingness to participate in an incrementally open environment. We will soon have real-time experience. Georgia Governor Brian Kemp announced Monday that certain businesses, including bowling alleys, body art studios and hair and nail salons will reopen this week. Tennessee Governor Bill Lee announced the vast majority of businesses in his state will be allowed to reopen on May 1. Alaska Governor Mike Dunleavy announced he intends to relax some of that state’s restrictions this week and allow some businesses, notably restaurants and hair salons, to reopen. We’ll be watching. According to a recent Pew Research Center survey, Americans are understandably reticent about mingling: more than 75 per cent of those surveyed indicated they would be uncomfortable going out to a restaurant, even if they were allowed to reopen tomorrow.

According to a Gallup survey, 22 per cent say they would resume their normal daily activities “immediately,” while about 70 per cent would “wait to see what happens with the spread of the virus before resuming,” and the balance would continue to limit their social contacts “indefinitely.”

How We Will Work

Roughly 22 million American workers are employed by professional services firms, and these companies could largely work remotely. In fact, 62 per cent of employed Americans currently say they have worked from home during the crisis, a number that has doubled since mid-March, according to Gallup. That success suggests employees who could work remotely will likely remain doing so for a while. Moreover, of those workers who have been doing their jobs from home during the coronavirus pandemic, 60 per cent would prefer to continue to work remotely as much as possible, even after public health restrictions are lifted. In contrast, 40 per cent would prefer to return to work at their workplace or office, as they did before the crisis.

Of course, there’s no substitute for in-person interactions, but our recent experience with teleconferencing and webcasting has made these forms of meeting and communication more acceptable in some cases than face-to-face meetings or conferences, particularly those that involve extensive travel. That spells trouble for conferences, their organizers and sponsors, and the venues that host them since it won’t be safe for people to congregate at large events until a significant portion of the population is immune to the virus.

Bottom Line: The new work paradigm will increase our reliance on technology firms such as Zoom, Apple, Google and PayPal. Trends also favor fintech firms which can offer banking-style transactions to smartphones and desktops. Demand for commercial office space could diminish as more traditional office work is done remotely. Companies might also rethink their need for regional offices if closeness to the customer could be achieved electronically. Thanks to longer-term leases, however, any near-term decisions will take years to play out in the marketplace.

The desirability of residing in big cities could be questioned if the proximity to one’s job is no longer a significant factor in determining where to live. Even before the COVID-19 crisis, large urban centers like New York, Chicago and Los Angeles were losing population; more than 90 per cent of all population growth since 2010 has shifted to the suburbs and beyond. Preference for larger homes, further away from urban centers has benefitted cities like San Antonio, Phoenix, Dallas and Fort Worth, which have enjoyed the largest population increases.

How We Will Shop

“Retail as entertainment” just had the rug pulled out from under it. If the public were to remain reticent about going out in public unnecessarily, even after being cooped up for a month, that would be trouble for our nation’s $3.9 trillion retail industry. It would be forced to transform – particularly brick-and-mortar stores, which have historically accounted for 85 per cent of industry revenue. Many retailers, like Neiman Marcus, PetSmart, Pier 1 and J. Crew, already under intense pressure going into 2020, may simply not reopen after the lockdown.

As many as 20 per cent of America’s workforce are employed in “high-contact industries” according to the St. Louis Fed. COVID-19 concerns could put jobs in many of these occupations at risk, at least through the end of this year. Personal service outlets, like beauty salons, rank among those industries with the highest interpersonal contact, and account for about 3 per cent of the workforce. Hair, skin and nail salons generated $5.2 billion in revenue in 2018, according to data-collection firm Statista. The lockdown has prompted frustrated customers to undertake their own hair, nail and skin maintenance regimens. Recent surveys suggest 40 per cent of Americans have had their hair cut at home, or plan to do so – although that doesn’t mean they liked the results. Notwithstanding a few buzzcut mishaps, Americans could grow increasingly comfortable with doing many of these services themselves.

While services will continue to gain share in the US economy, the segment of in-person services will decline in retail, hospitality, travel, education, health care and government as digitization drives changes in how these services will be delivered. That could prompt lower-skilled workers doing in-person service jobs to shift to essential services, like policing, firefighting, health care and food service.

How We Will Travel

As we’ve witnessed, both leisure and business transportation have and will continue to be profoundly affected, as companies will impose restrictions on “unnecessary” business travel. Leisure travel will be squeezed not only by the avoidance of certain modes of transportation – crowded planes and cruise ships – but also by the avoidance of destinations deemed vulnerable. Mumbai, for example, which would have been interesting to visit a year ago, might be off the travel radar for a while. Individuals, given the risks now involved, will seriously reassess their desire to travel, and are likely to at least partially reverse the past half-century’s trend of rising mobility.

American Airlines announced new social distancing policies on their airplanes by blocking half of their middle seats and allowing flight attendants to move passengers to maintain adequate distancing.  Nonetheless, airplanes are still extremely tight quarters and cabin air recirculates. Moreover, the airline business is not designed to operate profitably at 50 per cent capacity. Airports like Seattle-Tacoma International Airport, which typically hosts 1,300 flights daily, have seen their daily throughput plunge to 400 flights/day. We don’t expect normality, particularly for international travel, until 2022.

What Dining Out Will Look Like

Over the past few years, Americans have spent more money on dining out than on food prepared at home, comprising 51 per cent of households’ food budget. Last year America’s million-plus restaurants, bars and taverns generated $899 billion in revenues, according to the Restaurant Industry Association.  But the COVID-19 lockdown has rocked the industry, as food and drink spending at our nation’s restaurants and bars plunged 25 per cent year-over-year through March, according to US Census data.  That’s stunning considering most lockdowns didn’t commence until mid-month.

Maintaining social distancing in an industry that thrives on crowds and crowd energy will be challenging.  Restaurant giant Brinker, owner of Chili’s, Maggiano’s and On the Border Mexican Grill, reported a 65-70 per cent decline in same-store sales year over year through March. Diners may have to get accustomed to waiters wearing gloves and masks, reviewing disposable dinner menus and submitting to getting their body temperature checked upon entry. While takeout and delivery have been a lifeline to many restaurants operating during the shutdown, most aren’t set up to operate profitably this way.

Fast-food franchises, particularly those with drive-through windows, are best positioned to operate in the new environment, while salad bars and buffets may be a thing of the past, as diners grow increasingly wary of communal serving. Tables will be widely spaced. Even if bars and restaurants can open, strict limitations on capacity and social distancing will be enforced, begging the question: how would servers take orders and deliver food while maintaining 6-foot distancing? We expect the failure rates among bars and restaurants to spike over the next several months – in an industry driven by frequent table turnover and packed houses, how will they make money at 50 per cent capacity?

Bottom Line: The new restaurant industry environment clearly favors conglomerates over independent operators and fast food and quick service over fine dining, particularly those venues catering to the business community. Expect higher prices in response to investments in employee and patron safety measures. We expect the nation’s restaurant scene will not be back to full capacity until this time next year.

How We Will Gather

Spectator sports have been hammered – baseball’s spring training season was cancelled, and timing of the regular season is up in the air. Sports teams, their leagues, arenas and stadiums are scratching their heads as they rethink their strategy to deliver an exciting, yet safe, experience. Stadiums are considering offering hand sanitizer stations and possibly masks to their spectators. The idea of alternating rows and seats to account for social distancing has been tossed around by sports franchises, but it doesn’t consider the danger of crowding at entrance gates and in rest rooms.

Movie theatres, theme parks and concert venues will also endure a slow recovery as confidence is restored. Experts say it will take a while to get concert dates back on the calendar. In the meantime, music promoters like Live Nations have started livestreaming “virtual” sessions with musicians, which could potentially be monetized. Movie theatres, which have seen declining attendance, will have to delay their recovery plans to entice moviegoers back into theatres. It’s possible moviegoers never go back to the cinemas, preferring the privacy of home theatres to sitting for three hours in a crowded room full of strangers. Theatre company AMC, saddled with $5 billion of debt, said they have enough cash to get them through July. We don’t expect attendance by spectators and moviegoers to be back at full capacity until after year-end. That suggests the 2020-21 baseball and football seasons will be played to fields and stadiums devoid of spectators for the remainder of this year.

Wedding industry growth was impressive heading into 2020, even against a backdrop of fewer marriages. That’s because the betrotheds were spending way more on their celebrations. The average wedding celebration cost nearly $34,000 last year compared to $31,200 in 2014. At 2.2 million ceremonies, that amounted to about $75 billion last year. We expect couples to downsize spending on nuptials as they shrink their guest list for both economic and safety reasons. Not wanting to subject elderly relatives to unnecessary health risks, destination weddings will likely be off the table for a while.  We don’t expect a full resumption of the wedding business until mid-2021.

How We Will Learn

The teaching process with an instructor and students in a classroom has remained largely untouched for centuries. Despite long-time resistance waged against distance learning by teachers’ unions and the politicians they support, online learning and homeschooling now are being widely practiced in the shutdown. It will be nearly impossible to put that genie back in the bottle. Traditional classrooms will not become an endangered species, although classrooms will be reconfigured to maintain physical distancing within schools before they can reopen. Online learning will gain further traction among colleges and universities. Experts predict the emergence of a two-tier college tuition pricing policy where students pay a higher price for an on-campus experience affording interaction with professors and a cheaper, online educational experience, with both options resulting in the same degree.  Americans could question the benefit of a four-year degree altogether in a work environment that rewards specific skills. Already, companies like Amazon, AT&T, BMW and Capital One recruit nondegree-holders with job-specific certifications. We expect this trend, which had already been in place, to accelerate. We expect classrooms to be closed for the remainder of this school year and, unless there’s significant success with COVID treatments, the fall semester will likely be taught remotely as well.

The Impact on Manufacturing

The COVID-19 crisis has exposed the vulnerability of just-in-time supply chains with little or no inventory on hand. Just-in-time production might be able to withstand small disruptions, but the system has been crushed by the global business shutdown. This week, crude oil in the spot market traded below zero, thanks in large part to insufficient storage capacity. The economic system of globalization, fueled by the private sector’s desire to operate efficiently, far outran political globalization. COVID-19 is a disease of globalization. We expect political policymakers to strike a balance between the advantages of mercantilism and national security and self-reliance. President Trump on Monday announced a suspension of immigration in an effort to guard against the pandemic and to protect American workers.

We’ve written in the past about an American manufacturing renaissance, and we believe COVID-19 will accelerate trends that were already in place. The first order of business will be to domestically produce critical medical supplies and pharmaceuticals. Last year the US imported $5.5 billion of medical equipment and pharmaceuticals from China. Last week US manufacturer 3M needed permission from Beijing to export N95 masks from their Shanghai plant to the United States. We expect to see the emergence of domestic contract manufacturers to provide locally sourced supply. These small, regional technologically driven companies will harness robotics and 3-D printing to deliver customized goods.

Bottom Line: Americans should expect to pay higher prices for domestically produced goods. We also expect to see increased demand for small, regional industrial real estate serving manufacturers, warehouses and distribution centers.

Rest assured, our way of life will eventually return to “normal”, although the timing depends on our progress in treating and eventually eradicating COVID-19. But that “normal”, as we currently know it, will be altered by lessons learned during the lockdown and by new habits and customs that emerge. One thing is certain: we don’t expect people to remain sequestered behind locked doors forever. Humans are social creatures who thrive on interaction. On this note, I recommend that you read “The Book of Joy: Lasting Happiness in a Changing World” by Archbishop Desmond Tutu and the Dalai Lama. In it, Archbishop Tutu eloquently wrote: “We are wired to be caring for the other and generous to one another. We shrivel when we are not able to interact. I mean that is part of the reason why solitary confinement is such a horrendous punishment. We depend on the other in order for us to be fully who we are.”