Thoughts on the Economy Amid Covid-19: Do We Reopen?

Plastered across the news are varying opinions on “reopening” the economy. It is the click bait of this moment. The United States is unique and will recover, just know it will not happen overnight. The steps we did not take earlier to combat the virus caused us to be in this position of uncertainty. While I refuse to say “we must open” or “we must stay in lockdown,” I will say that we are not ready for either, but the consequences felt will be drastically different depending on the route taken.

Here are some quick takes:

1) Opening is nuanced, and not every business is prepared to reopen

2) Entire sectors of our economy may not recover

3) Even tech companies have hurt during this pandemic

4) Covid-19 is still a real threat, with no easy answers

There are no easy answers

“Reopening the economy” is too general of a notion. The phrase does not encompass the work necessary to rectify the complicated situation we are in. I personally view both the “reopen” camp and “keep locked down” camp as valid. Our society remains split because our leaders have no real plan to tackle this pandemic. The medical community maintains that Covid-19 is still a real threat. The virus remains statistically worse than most other causes of death during a one-month period. We need to take this seriously, and how we are combating it now is not even remotely to the level needed. 

I have yet to read any official research by either the medical community or economists that states we will return to “normal.” Most research points to the need for more testing, contract tracing, deeper research of the virus, development of a vaccine or medicinal therapy to counteract, and implementation of protective guidelines for how we reopen (i.e. social distancing, masks, etc.). The reality is that lockdowns did not slow down the infection but instead put it on a plateau. We are not at a point where there has been definitive statistical decline in the rate of infection or rate of death. Clear protective measures will allow us to open the economy strategically and sustainably, control the infection, and prevent lives from being lost. Experts and industry leaders have been saying this to our government leaders since the beginning of March, and some even since the middle of January. The problem is, there are currently a wide array of opinions of what the protective guidelines should be to control the virus.

(Disclaimer: I am not here to argue the epidemiology of the virus. I am not an expert nor an adequate researcher of the virus make up.)

Recovery is ugly

It is not as simple as just opening the economy. Our economy is fragile and intricate. Each individual business will have to answer: when will it be profitable and sustainable to reopen? Here are quick hits on some industries within our economy:

Farming and agricultural processing centers were hit hard during the trade tariff negotiations over the past 2-3 years. On average, farmers lost 30% of their revenue during tariff negotiations. During this pandemic, they have lost an additional 30%. In order to tread water, farmers are essentially being forced to sell to larger corporations. The processing centers have lost trade partners because of the tariffs, and some have shut down their plants because of coronavirus outbreaks. The outbreaks at facilities have caused production to slow down. That slowdown has caused shortages and demand spikes, and there will likely be ramifications to our local economies. For example, Costco and Target will not feel a supply shortage because they have plenty of meat and produce and can limit quantities per customer. However, local restaurants and even fast food chains who profit solely from the meat they sell will not be able to fulfill orders and will thus lose revenue. Unfortunately, the federal stimulus typically favors big corporations over small farmers. Profitability for small farmers has been taking hits for decades, and the last three years have exacerbated those losses. On top of it, this administration has started importing products to offset the costs of the rising demand. For example, we are starting to get beef from Brazil, a less regulated market, because production facilities in the United States have shut down. There is not a shortage of product available in the U.S., but the outbreaks at and subsequent closures of processing facilities have significantly slowed down beef production. We should expect to see yet a steeper decline in small ag and small manufacturers.

Businesses in the Restaurant and Entertainment industries likely cannot meet the standards to safely reopen. For example, Restaurant XYZ needs to have 100 seats available and serve 150 people in the span of two hours in order to make a profit. If they must cut seats available to 70 to meet distancing regulations, that will cut the amount of people they can serve over a two-hour period to 105 people, thus ending their profitability. Larger chains, and franchises backed by larger chains, can likely survive. It is the small coffee shop that cannot hire employees to just clean. It is the small shop that cannot afford protective gear and cleaners that constantly need to be refilled. Outside of the safety standards, there are other barriers to reopening. They will have to assume a drop in patrons, as many in states that have reopened are seeing. They will have to ensure they have the products necessary to complete their menus, though production plants have shut down. They will need capital to open and operate after having no revenue for over a month. We can expect to see 30-40% of this sector shutting their doors.

Tech was expected to be our saving grace in this economy. However, two of the giants (Apple and Amazon) posted poor numbers as their earnings lagged. This spooked investors and the economy, and the tech sector felt this blow in a season when they were supposed to be a rescuer of it. Tech can and likely will recover faster than most industries, but we now see they are not untouchable.

Gig Economy and self-employed are the industries that are likely to see the biggest decline. These small businesses were hit the hardest, have fewer resources to recover, and have even fewer options to recuperate revenue/clientele lost. Many will never come back. Numerous businesses recorded a 100% decrease in revenue for the month of April. Many saw 85-90% decrease in revenue. This puts them in very difficult positions with few options to continue even as the economy opens up again. Many have (or need to if not already) started to innovate how they do business. With a pro-longed downturn and lockdown, this sector needs a lifeline and consumer confidence to triple.

But when can the lockdown end?

There are a multitude of things to consider while discussing when to reopen. There is no one size fits all response. People are frustrated, and rightly so. 20% of our workforce has applied for unemployment, and this number does not even capture many of our self-employed/gig economy workers. Unemployment will continue to rise. Large corporations, and even some small businesses, have furloughed their employees. People want to work. People want to make a living.

People are also scared. This virus is a real threat. Consumer spending is down (that is what happens when you have 30 million people unemployed.) Consumer confidence is down. In areas where they have reopened (i.e. Georgia) many business are nowhere near the same level of consumer participation. A majority of consumers are not ready to patron businesses, even if those businesses are open. There is a cost involved in opening up your business and operating your business, and if you can’t gain back your patrons or gain new patrons, your business won’t survive and will go down spending resources it should have saved.

So, to state directly: we are not at a level of viability where reopening everything makes sense. Until there is a cohesive strategy, reopening will cost consumers and businesses too much. The government is trying to stimulate the economy by sending cash to businesses. However, even if businesses are saved but the consumer is not, the businesses will likely lose patrons and eventually shut their doors. It is nuanced, and to reopen when we are not ready could do far more harm.

We need to know more about this virus before we simply return. We will never return to where we were before Covid-19. The question many will face is when will it be profitable and sustainable to reopen? What this virus is doing, coupled with a lack of strategy to test, trace, and attack this virus, has done damage that we can’t return from. We cannot be locked down for this long and expect it to return to operating as usual. We also cannot open right now and expect to operate as if this never happened. The virus is still a very real threat, and recovery will be painful.

What you can do

Spend a lot less time on social media. Social media (more pointedly Twitter, Facebook, YouTube, and Instagram) are peddlers of anecdotal evidence that train us to believe something is true (with no research required!) This anecdotal evidence often confirms/affirms what we feel is true, but realistically the truth is far more nuanced and likely not universal. It is important to take what you see with a grain of salt and to research. I also encourage you to dialogue with people who think differently than you do. It challenges what you hear or read, and often creates a better perspective.

As always, cut expenses. We have a long recovery ahead, and if you want to participate in jump starting an economy, you will need capital. We have a long recovery ahead of us, and the hard parts are still on their way.

If you are in or near retirement, make sure to connect with an advisor. In this season, it is important to have a plan and stick to that plan. When it comes to investing, make sure your investments aligned with your goals.

If you ever need help, feel free to reach out and connect. The best advice I could give is to make sure you work with someone on your finances who will hold you accountable.

Morning Brew.

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