Do you wonder how the coronavirus pandemic is going to affect the economy and our businesses? Not how it will affect unemployment next week, or GDP this quarter, or even the stock market. Those effects are temporary and surprisingly unimportant. Of course, we are seeing skyrocketing unemployment. We are seeing huge shortfalls in the money the government is collecting from sales taxes, from income taxes, and even from ancillary taxes such as gas and hotel taxes, at a time when extra government spending is necessary.
Yes, we are seeing unprecedented drops in GDP and production. But these shortcomings are what the finance world writes off as “one-time charges” — isolated events that are unlikely to happen again. Yes, they affect your balance sheet. But they don’t have to affect your income statement, which is far more relevant to the recovery and snapback we all hope for.
Let’s dive into the real effect of the coronavirus on business and economics, how it’s shaping the world, and what kind of outlook we should expect after the situation clears. The economic shutdown we are performing brings near-term consumer spending and revenues for small businesses to a screeching halt. Again, the optimists are relying on the fact that when the virus disappears, things will snap back and spending will pick up right where we left off, or we will even see a surge of pent-up demand.
The problem is the longer we are in this situation, the more challenging it will be to snap back. Unemployment has already reached 14.7%. The questions to ask are: When we do recover, how easy is it going to be to put those people back to work? Will companies actually hire back every single employee, or will they realize some of the people don’t need to be brought back? With significant risk of further stalling in the economy, will businesses err on the side of hiring everyone back, or be thrifty and hire back only the most essential workers? The longer the shutdown, the more risk-averse businesses will be and the fewer people they will hire back.
Per a recent CNBC survey, 78% of furloughed people believe that they will be recalled. If that happens — and let’s be honest that people tend to be optimistic — that would still mean that 22% won’t be. 22% of 33 million people translates to over 7 million jobs disappearing. For context, the best job creation year that we have had since the 2008-09 recession was 2014, when approximately 3 million jobs were created. That means that we need everyone who expects to be recalled to actually get recalled and we need to replicate our best-in-a-decade performance for 2.5 years to be back to where we were. Plainly, we are going to be left in an economy with significant unemployment. And unemployed people don’t spend money.
The other side of the equation is consumer spending. How many people are going to decide to spend less after emerging from a crisis such as this? “I went without all this spending for months, do I really need to go back to spending at my previous levels immediately” or, “I should really save some money in case this happens again” may become common refrains. The longer the shutdown, the more likely we are to reduce our spending and for longer. This crisis is a wakeup call for many people that live hand-to-mouth or paycheck-to-paycheck. People are going to gravitate toward more conservative spending habits and that is going to drive down the “velocity of money.”
Our economy is based on hyperconsumerism. In fact, our GDP is roughly 70% consumer spending. Capitalism works best when the minute you get a dollar in your pocket, you spend it. And the minute the person you gave that dollar to gets it, they turn around and spend it, and so on. That is the velocity of money — the faster people spend the money they receive, the higher it drives up total GDP. If I make a dollar and it sits in my pocket for a year, that doesn’t help the economy. Savings at an individual level is healthy, but is not good for the economy as a whole. Capitalism, and our economy, wants you to spend that money and go make another dollar. That works driving up the economy and the stock market until we hit a disaster. Then when we have everyone suddenly not spending, the output of the economy is compressed very, very quickly. The leverage works both ways.
Coming out of this crisis, clearly 100% of the people are not going to change their consumer spending behavior. But many will and the cumulative effect of many people cutting back even slightly will put an enormous drag on the economy. That’s the real problem with the economy — not the actual effect of COVID-19. But rather the long-lasting effect on consumer spending is the more ominous effect.
We have not even addressed business spending. What happens to air travel, hotels, conventions, and restaurants? Do businesses require less office space? There are already anecdotal tales of that happening. Large companies are continuing work from home even after they are permitted to reopen. Are businesses expected to make large capital investments in the post-coronavirus climate? Will they build new factories? Open new plants? Realistically, all of these activities will continue, but we have to expect at least some sort of pace adjustment. And that pace adjustment — a slowdown in business demand and business spending — will ripple through the economy.
So the question is, how many people and businesses are going to change their spending habits and for how long?
Aaron Newman is a serial entrepreneur and the founder of CloudCheckr and BlocWatch.d