On April 30, IEDC hosted a webinar titled “COVID-19 – Future Scenarios, Near-Term and Far”, where three economists discussed economic projections for the COVID-19 trajectory.
Rodrick Miller, CEO of Invest Puerto Rico, moderated the session. He was joined by Betsey Stevenson, Professor at the Ford School of Public Policy, University of Michigan, Susan Helper, Professor at Weatherhead School of Management, Case Western University, and Chris Chmura, CEO and Chief Economist at Chmura Economics & Analytics as speakers.
Miller started off the webinar painting a general picture of economic predictions for the upcoming years. Global projections all point to a dramatic reduction in general economic opportunity as a result of the coronavirus. Already 30+ million Americans are unemployed, and more are anticipated. There is also a high level of low-quality corporate debts, with 40% of traded companies not being profitable. Lastly, even before the COVID-19 crisis 40 US states did not have enough money to pay their obligations, barring significant program cuts or tax hikes.
These numbers hit extra hard when looking at Puerto Rico, where Miller works. With the layering of disasters, and the economic fragility the island has found itself in for more than ten years, Puerto Rico seems extra susceptible to an economic downturn. At the same time the COVID-19 pandemic has made the US think more about its supply chain and national production of essential goods, a hopeful sign for the growth of the pharmaceutical and medical device industry in Puerto Rico. Over the next few years, Miller predicted expanded investment in life sciences, logistics, and advanced manufacturing, an increase in remote work, and resilience as an important factor in decision-making.
Chris Chmura presented the audience with three possible scenarios for how the COVID-19 crisis will play out. Scenario 1 assumed that COVID-19 would last through the end of May. With a quick end to the pandemic, we would see an economic rebound in the 4th quarter of 2020 and unemployment peaking during the 3rd quarter at 20.6%. Scenario 2, based on the projection that COVID-19 will last 6 months, would bring higher unemployment – 23.3% at its peak- with the rebound starting in the first quarter of 2021.
Scenario three presumes that COVID-19 will last through May, but that the shutdown orders will vary by state. For a scenario like this it’s important to look at the vulnerability of the region to project how impacted you will be.
Most importantly, Chmura said, is that the US entered the crisis with a strong economy. Unlike economic crises in our past, nothing is fundamentally wrong with the US economy. As such, this will play out more like a natural disaster scenario, where we should expect to see strong growth once we get out of this. She predicted the economic crisis will be short, sharp, and not sustained.
Susan Helper spoke about the impact COVID-19 is having on supply chains. According to Helper, the Coronavirus crisis has really laid bare the fragility of the modern long supply chain. Two essential issues are the concentration of production in China, and the inflexibility of the supply chain. Not only did the COVID-19 outbreak in China hamper production, but it also led to Chinese officials prioritizing domestic distribution, making it harder for the US and the rest of the world. The inflexibility of the supply chain is visible in the dumping of food due to the inability of food shifting from restaurants to grocery stores, or the shortage of toilet paper due to the inability to shift from commercial use to personal use.
COVID-19 won’t be the last disruption to our supply chain, but Helper argued that we could work towards making our supply chains more adaptable to prevent similar issues in the future. She suggests we can do this by creating “real options” - flexible operations that can provide what turns out to be needed, with e.g. surge capacity. While it is unclear what this would look like, there is a big role for the government to play in creating more flexible supply chains. The government can contribute by:
- Reimbursing companies for the extra expense of building surge capacity
- Holding periodic drills to test surge capacity compliance
- Creating subsidies for innovation and production that help achieve national goals
- Removing hidden subsidies for offshoring(such as infrequent, announced inspections abroad vs. frequent, unannounced inspections stateside)
Though the right balance remains to be found, Helper asserted that supply chains where competition is based on innovation, instead of low wages is not only beneficial to workers, and the environment, but also leads to a faster response to demand fluctuations.
The last speaker was Betsey Stevenson, who spoke on the reasons for economic decline and how these will play out. Stevenson outlined 4 reasons for the decline:
- Demand is lower because people are fearful of engaging in activities that could expose them
- Demand is lower because of state orders of protection
- Demand is lower because of precautionary savings and income declines
- Supply chain problems
During the 1st quarter of 2020 we saw a drop in personal consumption expenditures of 7.6% and an increase in personal savings of 2 percent points. As COVID-19 only hit the US at the end of the first quarter, the numbers for the second and, maybe, third quarter will likely look much worse. Depending on the trajectory of COVID-19, we might start seeing a climb in the third quarter of 2020. Unlike other recessions, coming out of the pit will include a return to work for furloughed people as many jobs are not disappearing permanently. Yet, Stevenson does not predict we will be getting to the top of the hole before 2022.
Unemployment insurance has proven to be the best safety net we could have to protect people’s incomes. However, it will also present issues for re-opening, as in some states people receive more in unemployment insurance than they would if they were working. A possible strategy to soften the impact of going back to work would be by introducing work sharing, a program that is already present in Stevenson’s home state of Michigan. Under a work-sharing scheme, employers could bring back all workers for 70% of their hours at 70% pay with the government making up the rest. This also makes sense for employers, as demand will not be as high as before the shutdown.
However, this brings the issue of state and local governments’ budget, one of the most lagging economic indicators. Many policies dictate that state and local governments can not spend more than they make, which will impact government employment once the recession is over as there will be a $500 billion dollar shortfall in revenue.
Lastly, Stevenson briefly spoke on the measures necessary to re-open the economy, especially the importance of test-and-trace. Before the US is able to fully re-open, she stressed the need for at least 2 million tests a day to test those in high-risk jobs weekly, as well as anyone who has symptoms and everyone they have been in touch with.
When asked about the long-term impacts and trends in the retail and hospitality industry, the speakers weighed in with their predictions. Chmura highlighted the fact that recessions lead to innovations. She believes we will see more cashless, touch-free systems, such as automatic checkouts like at Amazon’s stores. Stevenson is predicting that these two industries are going to be particularly hard hit, as consumer spending will decline 5-6% with no recovery until 2022. What will make it extra hard is that hospitality relies on close physical contact, and customers will feel like it’s not worth the trade-off.
With several states opening up in late April and Early May, Stevenson believed we might see a return to shelter-in-place in the fall. With the 2 to 3 week delay in symptoms, she thinks we might be playing a game of “whac-a-mole” until there is a cure or a vaccine available.
When asked about the future of remote working, Helper explained that the predicted rise in remote working might be shortsighted . Right now dense cities, such as New York are getting a bad rap due to their COVID-19 outbreaks. Yet, the largest concentration of COVID-19 cases in NYC was in Staten Island, the borough with the most drivers. In cities it’s easy to shrink your network and get all your necessities in walking distance, while this shrinking is impossible outside cities. Chmura added that many commercial leases are long-term, which will make it harder for companies to pivot to permanent remote working. Stevenson closed out by saying that while we’re all learning new skills working from home, many of us are also dealing with meeting fatigue and missing the human connection we are so used to in the workplace.
Lastly, all speakers had suggestions for what should be done on the local level to help economies moving forward. Helper recommended economic developers understand and build upon local assets and to Eencourage long term planning with checks for robustness. Chmura advised communities to continue with site preparation for new prospects, beef up business retention and expansion efforts, and build relationships with educators. Stevenson called for ingenuity and innovation as those will assist in recovery.