Read the June Economic Currents Special Edition in PDF
There are two kinds of changes that economists watch:
- Cyclical changes, which play out quickly, over as little
as a few month’s time; and,
- Structural or secular changes, which can take years
(or decades) to form and work their way through the
COVID-19 has laid bare many of the secular changes that
we knew existed and too many ignored: inequalities in
wealth, wages and access to education and health care.
Low-wage households and minorities have been hit harder
by the disease and economic losses triggered by efforts
to mitigate its spread. Women have suffered the majority
of job losses and, with children sent home from school,
they could lose decades of progress toward equal pay.
As little as a three-to-six-month break could deliver a
permanent blow to their earnings relative to men.
Generationally, retirees were more vulnerable from
a health perspective but more protected financially.
Millennials suffered a second blow to incomes and
careers in a little more than a decade, while generation
Z - born in 1997 and after - is graduating into a recession
much like their millennial siblings. The unemployment rate
for 20 to 24 year-olds came close to 26%, nearly double
the rate for 25 to 34 year-olds as states shut down.
This special edition of Economic Currents
list of changes in the economy that were exacerbated
but not necessarily caused by COVID-19. The U.S. is
unique among many of its western counterparts in that it
appears willing to accept a higher rate of infections and
A deep distrust of government and corporate America
will undermine everything from the tracking and tracing
of infections to a willingness to accept a vaccine. This,
combined with de-urbanization, growing inequalities,
heightened stress levels, consolidation of small and
midsize businesses, a blow to investment, a more militant
China and a fractured world order, will undermine our
potential to grow. Disruptions due to climate change will
exacerbate those trends.
A Top 10 List
- Infections will remain elevated. Mitigation efforts
have actually been challenged in the courts as they are
seen as an affront to civil liberties. Masks, testing and
the invasion of privacy tied to the tracking and tracing of
infections are seen in a similar light. There is no way we
would accept the parsing of phone records and credit
card receipts necessary to trace the exposure of one
infected individual. It is a close race among whom we
trust least, the government or the technology companies
scrambling to make tracer apps.
The fallout for the labor force will be acute. Employers
will have to prepare themselves for a spike in sick leaves
and a surge in hospitalizations. COVID-19 is much
more devastating than the flu even when it hits young,
seemingly healthy people. The pickup in the rate of
hospitalizations following Memorial Day celebrations was
particularly worrisome as it suggested contagion rates in
the U.S. could remain well above one per person.
- Vaccine acceptance will be tepid. A recent survey
by the AP-NORC Center for Public Affairs showed
that less than half of respondents over the age of 18
would actually take it. (See Chart 1.) Anti-vaxxers fear
side effects from vaccines, including autism, while
conspiracy theorists on the right fear that Bill Gates
developed COVID to vaccinate them with a mind
controlling bot. (Really?) Democrats are more likely to
accept a vaccine than Republicans. There is even some
resistance in the over-60 crowd.
“Black people are more likely
to live in poverty, have less
access to health care and die
from COVID than other races.”
The uptake on flu shots has been on the rise in recent
years but remains low. Just over 45% of adults got a
flu shot during the 2018-19 season. Infectious diseases
expert Dr. Anthony Fauci has warned that any COVID-19 vaccine will be more like that for the flu than polio or
the measles; It could be effective for less than a year
and need to be repeated like the flu vaccine.
This will undermine the service sector rebound. Retail
has taken it on the chin. Baby boomers, who account
for a third of all spending, are particularly skittish
as they are at higher risk for the disease and closer
to retirement. It would be hard to imagine a packed
stadium without the majority vaccinated or immune.
The move toward discretionary services is an 80-year
long trend. We are a social species and not about to give
up our ability to travel and congregate. Hospitals and
schools are likely to be the first to enforce vaccine rules.
New York has already eliminated religious exemptions
for vaccines in the wake of a measles outbreak in 2019.
It would no doubt be among the first states to require a
COVID vaccine once it becomes available.
Then there is the challenge of who manufactures the first
vaccine. Producers in the West are concerned that a
breakthrough in China would not be freely shared. This
is one of the reasons that Bill Gates resigned from the
board of Microsoft to devote all of his time to combat
the pandemic. He is currently supporting seven different
vaccine candidates and the manufacturing capacity to
get winners to market faster.
International travelers will likely have to prove they are
not carriers and/or immune with antibodies. Greece and
other countries currently require travelers to complete
two weeks of quarantine, despite its reliance on travel
and tourism. Tokyo will not want to risk an outbreak
during the already delayed 2020 Olympics, now
scheduled for 2021.
- De-urbanization will accelerate. COVID has
increased the focus on working from home and
prompted many companies to reevaluate executive
travel. Most professional service firms have opened
the door to work-from-home options through yearend 2020. Others are looking at significantly smaller
office footprints with staggered work schedules and
social distancing reinforced. Silicon Valley has had to
completely rethink open-plan offices.
The goal will be to socialize and onboard their
employees, without risking contagion. Later, the push
will be to get people into more affordable offices outside
of urban centers, where housing is more affordable.
Facebook has already said that it will reduce workers’
compensation if they move to a city with more
affordable housing and a lower cost of living.
Telemedicine is taking off, which will change the nature
of routine medical visits. This could increase access
to much needed medical care in rural areas, where
specialists are scarce. The largest hurdle is limited
access to broadband, which inhibits the speed with
which we can communicate.
A similar problem was seen with the shift to online
education, which accelerated the inequality in education
between affluent and poorer students who have less
access to high speed Wi-Fi. Students in rural areas have
often relied on access to free Wi-Fi in public places
including fast-food restaurants. Some were forced to
quit school once classes moved online as those places
Many workers lack access to broadband needed to work
efficiently. Even the technology sector is feeling the pain
because sales were still done face-to-face via travel.
Salespeople relied on in-person meetings to sell. Many
put a premium on access to airports over broadband
when deciding where to locate.
The downside is Zoom fatigue and the stress of sheltering
in place. The emotional toll for workers to be “on”
all day with video conferencing can be substantial.
Breaks for water cooler talk, which spur innovation and
morale, are also lacking along with informal networking
opportunities. Our youngest workers are already being
hurt by graduating into a recession.
- Stress Levels Escalate. A recent household pulse survey by the Centers for Disease Control and
Prevention (CDC) revealed a sharp increase in the
incidence of anxiety and depression. Almost 50% of
young adults (aged 18-29) reported increases in the
wake of mandated lockdowns. Reports of anxiety among
the young were already elevated.
Women and those with less than a high school diploma,
who were most at risk of layoffs in the service sector,
were harder hit than men and those with higher
education levels. This was at the same time that reports
of anxiety and PTSD among first responders were
already on the rise.
Teleworking and the lack of social interaction we are
experiencing during COVID will only exacerbate those
trends. Recent research reveals that the relationships we
form at work, with our colleagues and our bosses, are the
most important determinants of “meaningful” work.
Those who enjoy purpose in their work are more likely
to engage in training and advancement exercises. They
are also more reliable, less likely to call in sick and more
likely to postpone retirement. It may be easy to see how
your work matters now if you are a first responder or
restocking grocery store shelves. That is not the case for
many who work solely from home or can’t find a job in
an economy that is struggling to reopen.
It is not hard to see how the economy contributed to
a sense of anxiety even as it was improving in recent
years. The Federal Reserve was humbled by the absolute
failure of the economy to lift wages in a world where
the unemployment rate had fallen to a 50-year low.
The economic aggregates were clearly not capturing
inequalities as they compounded.
- COVID-19 has exacerbated existing inequalities. Black people are more likely to live in poverty, have less
access to health care and die from COVID than other
races. Deep-seated bias in everything from access to
education, housing, incarceration rates, police brutality
and social networks has left them lagging whites and
other minorities. The bias is systemic, persistent and
deadly. Slavery in the U.S. persisted longer and was more
tied to one specific race than elsewhere in the world.
Black people were the last ones to find jobs in the
recovery and the first to be cut, once layoffs hit. Their
unemployment rate tends to take years longer to decline
after a recession and continued to rise even as the overall
unemployment rate fell in May.
All of this has combined with a high level of stress and a
large number of people home, unemployed, young and
who are much more diverse than previous generations to
stoke social unrest on a global scale. Those tensions will
not abate anytime soon. Millennials now dominate the
labor market and include 44% minorities. Generation Z
is even more diverse; whites are in the minority among
children under the age of 12.
- Small and midsize companies consolidate. Defaults,
bankruptcies and firm consolidation are all expected to
accelerate, which will cause the second shoe to drop:
white-collar layoffs. That, combined with the dire situation
that state and local budgets are facing, could mute the
recovery in jobs and the drop in the unemployment rate.
The Federal Reserve has flagged defaults and
bankruptcies as risks to bank balance sheets and
financial stability down the road. Those are some of
the reasons Fed officials have discouraged banks from
paying dividends. The Fed is worried about the need for
banks to have a cushion against future losses.
One could argue that at least a portion of the surge in
stock valuations in the U.S. is driven by the bet that more
profits will be concentrated in a few, largely high-tech
firms. The downside of such market consolidation is that
it could undermine dynamism and job generation. That
could exacerbate inequality between winning and losing
firms and undermine potential growth. Less dynamism
could also undermine innovation and productivity.
- Pandemic triggers risk aversion. The fear of
pandemics is expected to siphon funds from investment.
More will initially be spent on creating social distance in
offices, enabling staff to work from home and keeping
down the risk of contagion.
Firms will seek to shorten supply chains to hedge against
future disruptions. This could accelerate the move that
started out of China in response to the trade wars.
Mexico was expected to benefit most from the shift, but
contagion in Mexico is still rising quite rapidly.
The irony, of course, is that it wouldn’t have mattered
where you were producing during a pandemic.
Production came to a virtual standstill in every region of
the world. Even states within the U.S. closed and reopened
at different times.
- China becomes more aggressive. The blame game
over COVID has intensified tensions between the U.S. and
China at a critical juncture. China can’t begin to meet the
obligations in its Phase One trade agreement. At the same
time, the Chinese government is becoming more brazen in
human rights abuses.
So far, the U.S. president’s bark has been worse than
his bite. He has refused to sanction Chinese President Xi
Jinping directly for his takeover of Hong Kong’s national
security apparatus. Congress has been more aggressive
and forced the U.S. president’s hand on sanctions over
China’s imprisonment of an estimated one million Muslim
Uighurs in camps in Xinjiang province.
China is already an election year issue. Blaming China
is a bipartisan sport. Conditions will no doubt get worse
before they get better. Tariffs that were lifted to allow
more personal protective equipment (PPE) into the U.S.
are expected to be reversed. Tariffs on a broader array
of clothing, shoes, toys, electronics and critical parts for
manufacturing are expected to rise at least temporarily in
the run-up to the election. (See Chart 2.)
This will further undermine the struggle to recover from
COVID, while encouraging Chinese aggression on the
world stage. China has already dramatically expanded its
military presence in the South China Sea and is now filling
a void left by the U.S. with many of Asia’s less developed
economies. Vietnam has been a particular target.
- De-globalization accelerates. Last August, the
Peterson Institute for International Economics (PIIE)
assessed the rise of nationalism in the Group of
20 countries. It found that the majority of new and
existing political parties are nationalists. For developed
economies, nationalism included immigration curbs,
tariffs and quotas. For the developing economies,
nationalism focused on subsidies for favored industries.
Efforts to blame China for the outbreak and interruptions
to supply chains will accelerate that trend in the near
term. Travel bans have erected another hurdle to
international trade flows. The irony is that the pandemic
is global in scope. More regionalized supply chains would
have done nothing to stem plant closings in the wake of
outbreaks. Government aid and protection for politically
sensitive industries will only exacerbate the breakdown in
trade flows post-COVID.
- Climate change intensifies. COVID has not
stopped some of the largest polluters from rolling
back environmental regulations, including the U.S.
Deforestation in Brazil has accelerated as President Jair
Bolsonaro has followed the lead of the U.S. and made
further reductions in environmental protections. Economic
losses to COVID have made it easier for him to justify
deforestation for loggers, miners and farmers.
The National Oceanic and Atmospheric Administration
(NOAA) Climate Prediction Center is forecasting an
unusually busy hurricane season. Forecasters expect
to see a flurry of severe storms, up to 10 hurricanes
with winds of 74 miles per hour or higher and three to
six hurricanes with winds of 111 miles per hour or higher.
This, coupled with the increased accuracy of NOAA in
forecasting severe weather, suggests another blow to the
economy this summer.
Much like the terrorist attacks of 9/11, COVID-19 is a
watershed event. The risk of pandemics will have to be
hedged from now onward, which will have a long-term
effect on the potential for the U.S. economy to grow.
COVID has acted as an accelerant to a fragmenting,
hostile world, which is badly in need of reform. It could
also act as a catalyst for reforms that are essential to
creating a better and more productive future.
Copyright © 2020 Diane Swonk – All rights reserved. The information provided herein is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic, financial, investment or any other decisions. This communication does not constitute an offer or solicitation, or solicitation of any offer to buy or sell any security, investment or other product. Likewise, this communication serves to provide certain opinions on current market conditions, economic policy or trends and is not a recommendation to engage in, or refrain from engaging, in a particular course of action.