- Market Commentary
- By Jack Ablin
- July 21, 2020
The Creative Destruction Wrought by COVID-19
Since the pandemic precautions hit the economy in March, nearly 20 million American workers have been sidelined. The leisure and hospitality industry saw 4.7 million lost jobs, the transportation and utilities sectors accounted for 2 million losses, professional and business services suffered 1.7 million layoffs and education lost 1.6 million positions, according to the Bureau of Labor Statistics (BLS). America’s collective workforce took a 3.5 per cent pay cut over the last 12 months through June, based on a combination of average hourly wage, hours worked and the number of people employed. The pullback reduced 3-year annualized income growth to just under 2 per cent before adjusting for inflation and government income support payments.
While many in the financial community are forecasting a “V-shaped” recovery, there’s growing evidence that the post-COVID recession could be protracted, particularly after government income support to displaced workers and small businesses expires. Researchers at the University of Chicago recently published a study anticipating a massive labor market reallocation as a result of permanent behavior changes post-COVID. They conclude that 32-42 per cent of COVID-induced layoffs will become permanent job losses as industries shift in response to changing consumer preferences. Job openings, as measured by the BLS, tends to support their view. There are currently four sidelined workers for every job opening; that’s up from one job opening for every unemployed American pre-lockdown. At the end of 2019, when the labor market was at its tightest in nearly 50 years, the ratio was essentially one for one, suggesting there is currently one job opening for each recently sidelined worker. That suggests that there is one job opening for every three sidelined workers post-lockdown.
How America works is undergoing a transformation. Based on data from several surveys, the authors of the University of Chicago study project that one out of 10 workdays will shift from business premises to homes for the workforce at large and one in five workdays will shift home for office workers. That’s a 20 per cent reduction in the time relatively highly compensated white-collar workers spend downtown, reducing both commuting time but also discretionary spending in urban areas. Prior to the pandemic, about 90 per cent of workers surveyed said they “rarely or never” worked from home. As of May 2020, 62% of working Americans surveyed said they worked from home.
The shift in where we do business will have broad implications for the way we will do business. Born out of necessity, virtual meetings have become the new standard, replacing, at least temporarily, face-to-face meetings, conferences and business travel. Working from home has had its benefits. According to the Harvard Business Review, since all-virtual work began, employee stress, negative emotions, and task-related conflict have all been steadily falling; each is down at least 10 per cent. At the same time, employees have experienced an approximately 10 per cent improvement in self-efficacy and their capacity to pay attention to their work. Businesses are investing in equipment and networks to raise employee effectiveness in working and meeting with customers remotely. Virtual meetings offer convenience, but have dealt a stunning blow to business travel. In 2018 American businesses spent more than $300 billion on travel. Even though business travel comprises only 12 per cent of airline seats, it drives 75 per cent of airline profits.
The online shopping trend accelerated under COVID and will probably not reverse after COVID. Many of the millions of households that have tried online shopping and delivery services in recent months value its convenience and safety, making the habit hard to break. As of May 2020, one-third of households used online grocery shopping services, causing US online grocery sales to surge 450 per cent from August 2019. Whole Foods hired additional staff and reconfigured stores to accommodate the increased demand for online shopping. Walmart and Amazon are investing in technology to facilitate online order fulfillment capabilities.
As office interactions move online, so have myriad medical interactions, thanks to the relaxing of Medicare reimbursement rules on telemedicine. Telehealth services are a safer option for healthcare providers and patients by reducing potential infectious exposures. Moreover, telemedicine reduces the strain on healthcare systems by minimizing the surge of patient demand on facilities and reduces the use of PPE by healthcare providers. Obviously, telemedicine can only address some patient/provider interactions, but the prospect of its widespread acceptance carries a strong potential for a reallocation of patients, revenues and workers across practices and clinics.
America’s urban areas could face a daunting adjustment period. The prospect of working remotely attenuates the attractiveness of downtown living. The prospect of one out of five workdays spent at home instead of the office could crimp billions of dollars of discretionary spending in downtown locations as individuals spend less buying breakfast, lunch, drinks and other services, like haircuts, convenient to their offices. Business spending on client and employee entertainment will likely be reduced. The impact on urban real estate, both residential and commercial, is already being felt as residential landlords in neighborhoods convenient to financial districts are cutting rents. Between 40-45 per cent of rental listings in downtown Manhattan reduced offering rents in Q2/20, according to StreetEasy, a New York City real estate app.
One in four of America’s restaurants will not reopen as a result of the prolonged lockdown, according to a recent study by OpenTable, the online restaurant reservation app. Restaurants lost more than $30 billion in sales during March and $50 billion in April, according to National Restaurant Association estimates. More than 12 million Americans worked in bars and restaurants in 2019, according to BLS. Secular trends in our nation’s industries over the last 30 years have promulgated a shift from goods-producing jobs toward service jobs. Until COVID-19 struck, food service employment was poised to overtake manufacturing employment this year. We expect the pandemic experience will stall, if not reverse, that trend.
On a more positive note, new post-pandemic jobs are emerging as companies and industries pivot to the new realities. Amazon, for example, has added 175,000 positions in response to the lockdown lifestyle since March, with plans to make 70 per cent of them permanent roles. Dollar General had hired 50,000 workers by the end of April to address increased demand and Instacart, the grocery delivery company, added 300,000 shoppers.
Our nation’s largest banks possess a unique perspective on many of the real-time indicators of the economic impact on the behavior of their consumer and business customers. Last week’s earnings reports offer some interesting clues to the future. Without Congress’s fiscal support for paychecks be prepared, the worst is yet to come. The five largest banks – JP Morgan, Citigroup, Bank of America, Wells Fargo and US Bank – have collectively set aside nearly $35 billion in loan loss reserves, adding nearly $10 billion this quarter, in anticipation of future defaults.
This figure is about $5 billion shy of the loss provision total reached at the height of the financial crisis. The credit issue is particularly acute since American consumers piled on record debt heading into 2020. At the time, the economy was on solid footing, the labor market was tight and nobody anticipated a global economic shutdown. Now, more than halfway through 2020, they’re bracing for lingering double-digit unemployment.
In the near term, government support and banks’ willingness to allow for loan deferments have postponed defaults. However, a new wave of COVID-19 outbreaks threatens to extend the downturn, as states take steps to reverse their economic opening plans. Congress is convening this week to extend the CARES Act, the $2 trillion aid package that, among other things, provided an additional $600/week to the unemployed. That legislation is set to expire at the end of this month. Fiscal support can’t continue indefinitely, and it’s the difference between the near-term paycheck replacements and long-term labor market dislocations that have bankers worried. Eventually, as support programs expire in the coming months, banks anticipate loan losses to accumulate as defaults rise. For now, credit loss experience has been relatively mild. As of March, loan delinquency rates were 2.3 per cent among residential borrowers. Commercial loan delinquencies, at 0.8 per cent, are currently situated at their lowest level since 2007.
The Fed is forecasting consumer spending to remain depressed into next year. The chance of a double-dip downturn could permanently scar the labor market. It’s safe to conclude that changing behaviors will force a reallocation of jobs in the post-COVID economy. National and local policymakers, recognizing the prospect of a shift in millions of jobs, should facilitate that transition by peeling back measures that inhibit labor mobility, like state-issued occupational licensing requirements, restrictive zoning that makes certain municipalities unaffordable and red tape that inhibits business formation. The COVID-19 experience will undoubtedly unleash new and innovative companies creating new jobs and industries designed to address consumers’ changing needs and tastes. Economists call it creative destruction.
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