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The Exponential Impact of Lowering Economic Activity
(Note: companies that could be impacted by the content of this article are listed at the base of the story [desktop version]. This article uses third-party references to provide a bullish, bearish, and balanced point of view; sources are listed after the Balanced section.)
When the economy shut down in response to virus containment concerns, tens of millions of workers were fired, furloughed, or faced salary reductions. Most of these jobs were held by lower-paying service workers who live paycheck to paycheck and now face tough spending decisions. Should they pay for groceries or medicine? Rent or clothing? The electric bill or the water bill? The government aid package will help for a while but is unlikely to fully offset the impact of lost wages. And, as rainy-day savings dry up, the effects of the shutdown are likely to continue long after the country has gone back to work. Below are several examples of secondary impacts of the shutdown.
Impact on Real Estate. The National Multifamily Housing Council estimates that 31% of U.S. renters did not pay April rent on time. That percent will most likely rise in upcoming months. In many areas, landlords are prohibited from evicting tenants, even if they could find judges to sign documents and sheriffs to accompany the eviction. The sudden drop in rental revenues will put a considerable strain on rental property owners who may struggle to make finance payments. The result could very well be a drop in real estate value.
Impact on Energy. Oil prices collapsed beginning on March 6th when OPEC and Russia were unable to come to an agreement to reduce production. The inability to reduce supply soon became overshadowed by an expected drop in demand related to the Coronavirus. Bankruptcies of smaller, highly-leveraged producers are inevitable. This, in turn, will lead to pressure on the financial industry, which will face the prospect of loan defaults and the takeover of assets with questionable economics.
Impact on the Government. The government has already agreed to a stimulus package in excess of $2 trillion, which is on top of last December’s projected annual deficit of $1 trillion. With tax receipts now likely to come in below previous forecasts, the annual deficit will undoubtedly be higher. When all is said and done, it’s likely that the federal debt will have grown 50% in the last four years from a level near $17 trillion to $25 trillion. Other nations are facing similar outlooks. With domestic GNP falling at the same time, it’s possible that the government stimulus could lead to bond rating downgrades.
Impact on Utilities. As customers fall behind on their utility bills, there will be a negative impact on the financial position of utilities. In theory, utilities could file to raise rates to recover these additional costs. However, doing so at a time when customers are facing additional hardships could prove unpopular.
Impact on the Entertainment Industry. The entertainment industry (restaurants, airlines, hotels, etc.) were among the first impacted by the virus, and the steps taken to contain the spread of the virus. The entertainment industry will rebound, but it is likely to be a slow rebound. Charles Dumas, the chief economist at TS Lombard pointed out, the human psyche takes time to heal. People who have become accustomed to social distancing are unlikely to suddenly start attending sporting events with tens of thousands of other people.
Impact on Retail. Malls are closed. Small shops have turned off their lights. Store have responded by pushing online sales and home deliveries. This has helped keep some revenue coming into the cash registers but may not be enough to pay the rent. Consumers are gaining a comfort level with buying more things online, and that won’t change when stores reopen. A shift toward online shopping that began years ago is likely to accelerate in the upcoming Christmas season.
Almost all industries are likely to see some impact from the economic shutdown long after employees have returned to work. Some, such as the entertainment, energy, and service industries, have already felt the effects. Others, such as the real estate, utility, and finance industries, are just starting to feel the secondary effect of the impact on the first industries. Other industries, such as manufacturing, will feel lesser effects once plants are restarted, which is not to say things will fully return to normal. As disheartening as it is to say, the effects of the shutdown are likely to be felt for years after the shutdown has ended.
Suggested Reading:Financial Services During Social Distancing
https://www.brookings.edu/blog/the-avenue/2020/03/16/for-millions-of-low-income-seniors-coronavirus-is-a-food-security-issue/, Annelies Goger, Brookings, March 16, 2020
https://finance.yahoo.com/news/coronavirus-fallout-onethird-of-americans-missed-rent-payments-in-april-135654889.html, Sarah Paynter, Yahoo Finance, April 8, 2020
https://finance.yahoo.com/news/saudi-u-russia-oil-deal-085717055.html, Christof Ruehl, Bloomberg, April 8, 2020
https://www.nytimes.com/2020/04/01/business/economy/coronavirus-recession.html, Peter Goodman, New York Times, April 1, 2020