By Tyler Mondres
Consumption has long been the engine of economic growth. As such, consumer health will be key to limiting the depth and length of the COVID-19 recession. Consumers were generally well positioned prior to the health crisis, with historically low debt relative to disposable income. Social distancing, however, has affected US households unevenly. Those employed in industries that require people to gather in large groups or interact closely in person have been hardest hit, while those in industries designated “critical” and those with the ability to telework have been less affected.
Widespread layoffs, furloughs hit the country
Total nonfarm payroll employment fell by 21.2 million in March and April—wiping out all job gains recorded since the Great Recession—and more than 33 million people have filed for unemployment insurance in the last seven weeks. Widespread layoffs and furloughs have hit the transportation, entertainment, retail, and leisure and hospitality sectors the hardest. In fact, more than half of respondents to a recent LendEDU survey said their employment was affected by COVID-19. Those most affected earn less, on average, than others. While they make up a little more than a fifth of the total labor force, they account for only 12.2 percent of total wage earnings.
Households begin to tap savings, emergency funds
These workers have begun to dip into savings and emergency funds to cover expenses. Nearly two-thirds (63 percent) are worried about their bank accounts drying up—88 percent among those who recently lost jobs—and 39 percent of those with credit cards expect to take on more debt than desired to stay afloat. The Federal Reserve’s Survey of Consumer Expectations shows substantial deterioration in households’ financial and economic expectations. For March, there was a 17.3 percentage point rise in the number of households who expect to be worse off financially next year.
The Economic Impact Payments included in the CARES Act helped many workers. One survey found that 57 percent of respondents plan to use the money to pay off debt, pay rent or mortgage, or buy necessities like food or supplies. A survey conducted in late March by SimplyWise, though, found that 63 percent of households will need another EIP within three months and 15 percent will need one in just two weeks.
Divergent outcomes by industry, firm size
Those with the ability to telework—accountants, analysts, managers, etc.—have been less affected by COVID-19 shutdowns. Among LendEDU respondents, three out of 10 said they plan to put their CARES Act payment into savings accounts or emergency funds.
There is risk of further divergence in wages by industry and business size. Smaller firms have been most affected, while large firms, with professional and flexible staff and work arrangements, have been better able to hold off on layoffs and wage cuts. This could lead to a gap in worker outcomes. Professional jobs at large firms could experience a faster bounce-back, while small businesses require several years to recover to pre-coronavirus levels. Thousands of firms are likely to fail in this downturn, keeping unemployment high for an extended period.
The Small Business Administration’s Paycheck Protection Program is reducing financial stress for many small businesses by providing for SBA-guaranteed funding to retain workers. This will likely reduce layoffs and increase the survival rate of small businesses. Nonetheless, staffing is likely to remain cautious and only enough to meet PPP requirements. The PPP exhausted its first round of funding and it remains to be seen if the second round is enough to help all the small businesses in need .
The unknown shape of the recovery
Economists struggle with the question of what recovery will look like when the economy reopens. Whatever shape recovery takes, household health will be key. Consumption, the engine of economic growth, has collapsed amid social distancing measures. Retail sales plunged 8.7 percent from February to March—the steepest decline on record—and were down 6.2 percent from March 2019.
If the pandemic can be controlled within the next few months and the nation can reopen, trillions of stimulus dollars may support a rebound. When a large number of firms re-open, we can expect an initial surge in activity as consumers may go on spending binges to satisfy pent up demand. After the initial surge, a synchronous recovery will be needed to build momentum for growth.
