Unemployment claims skyrocketed to an unprecedented 6.6 million earlier this week, double the previous record hit just last week amid the idling of auto and steel plants, the collapse of the hospitality sector, and massive layoffs in nearly every industry. In another first last month, the U.S. government passed a $2.2 trillion emergency stimulus package—the largest in history—in an attempt to limit the devastating economic effects of the COVID-19 pandemic.
The U.S has entered a recession unlike any other. Without a vaccine or a cure for a never-before-seen virus, the only way to stop the spread is physical distancing, which has forced the economy into a virtual standstill. No one knows when the virus will be under control; Mother Nature is an unpredictable adversary. Perhaps warmer weather in the Northern Hemisphere will slow the virus, as some predict. Or maybe people—despite inherently craving human interaction—can maintain the ability to keep physically apart for weeks, if not months, to suppress the outbreak.
What's frustrating business leaders is that there's little they can do to end the current recession. Companies are purposefully closing to help slow the pandemic, but they're dependent on public health services to develop a virus containment strategy and on the government for more economic aid. Experts say the latest rescue package was just a band-aid. Getting to the root of the economic malaise and reversing it will cost more.
"Businesses can't do much without knowing what the strategy to contain the virus is going to be," says Gregory Daco, chief U.S. economist at Oxford Economics. "There's a lack of coordinated response despite the $2 trillion."
Business leaders' concern is growing as the virus spreads. As of March 25, nearly 90 percent of finance leaders said the virus could have a significant impact on their business operations and is causing their companies great concern, according to a survey by PwC. That was up from 54 percent two weeks earlier. Eighty percent said the virus would cause a decrease in revenue and/or profits, up from 58 percent on March 11.
An Uncertain Future
Predictions of when the recession will end vary widely. There's so much uncertainty that consulting company McKinsey & Co. has laid out nine different scenarios. One point of agreement is that millions more will lose their jobs, experts say. St. Louis Federal Reserve President James Bullard suggests joblessness could hit 30 percent. The U.S. record is 24.9 percent, which was reached in 1933 during the Great Depression. In February, it was 3.5 percent. In March, it rose to 4.4 percent.
"Companies are in panic mode right now, [thinking] 'Let's slash and burn costs,' " says Bart van Ark, executive vice president and chief economist of The Conference Board, a global business research think tank headquartered in New York City. "But you don't want to do things you regret later."
The Conference Board outlined three potential paths for the recession. In the first, the number of new cases stops accelerating by the middle of April and there's a controlled reboot of the economy in May. GDP growth will contract significantly in the second quarter. GDP will fall 1.6 percent this year. (Last year, the GDP grew at a rate of 2.3 percent.) Unemployment would rise to 8 percent before leveling off.
In the second version, the economy doesn't begin growing until June or July. Unemployment will hit 15 percent in the third quarter and fall to 10 percent at the end of the year. GDP growth will contract 5.5 percent.
In the worst-case scenario, the economy doesn't improve until the fourth quarter, causing the GDP to contract 6 percent. That would be the sharpest year-over-year decline since 1946. This forecast, like the other two, assumes the virus doesn't re-emerge in the fall.
Van Ark says companies should think carefully about mass layoffs in case of a quick rebound and suggests that some businesses may want to trim salaries rather than headcount. He adds that companies could have employees tackle projects such as renovations that they're too busy to address during boom times. Another option is developing plans for the post-crisis environment. For example, he suggests that restaurants may be allowed to reopen but with more space between tables, so they may want to start thinking about how to reconfigure their operations for such a change.
The hospitality industry was hit hard and fast by the virus, and some believe that it will be the last to recover. Stories of passengers being trapped on cruise ships as fellow travelers died will likely squelch demand for such vacations. Fear of the virus may also keep people away from crowded places such as amusement parks, and concerns over cleanliness may deter them from staying in hotels. Plus, unemployment and a sagging stock market will likely limit spending by some consumers on discretionary activities such as travel and dining out.
The American Hotel & Lodging Association says 4 million jobs have already been eliminated or will be soon. It projects that 44 percent of hotel employees nationwide will lose their jobs in the coming weeks if they haven't already. That's an especially big blow in California, where 285,122 residents work in the hotel business, as well as in Florida and Nevada, where the industry employs 201,000 and 193,000 people, respectively.
"The impact to our industry is already more severe than anything we've seen before, including September 11th and the Great Recession of 2008 combined," says Chip Rogers, president and chief executive officer of the American Hotel & Lodging Association.
Similarly, the National Restaurant Association predicts that its industry will lose at least $225 billion and will eliminate between 5 and 7 million jobs over the next three months. The Cheesecake Factory will not pay the April rent on its nearly 300 outlets, according to published reports. The Calabasas Hills, Calif.-based restaurant chain also said it drew $90 million on its revolving credit line to increase its cash position and has curtailed its expansion plans.
Tough Times for Real Estate, Oil
Such announcements don't bode well for the commercial real estate industry. Poor economic conditions will make it difficult for many retail and office clients to pay their rent. And office space owners face another headwind: Occupancy levels figure to fall as some companies that are operating remotely because of the virus decide to let some or all of their employees work from home to cut costs. Real estate is typically companies' largest expense after salaries and benefits.
The shelter-in-place edicts in many states have also decreased demand for gas as many Americans work from home and only go out for necessities. That's putting more pressure on oil companies that were already struggling for revenue due to a price war between Russia and Saudi Arabia. International benchmark oil prices have been slashed in half since the beginning of the year to about $25 a barrel, according to Reuters.
However, prices started to rise last week after President Donald Trump said he had spoken with the leaders of both countries and they plan to cut their oil production. That would be good news for the industry.
A prolonged price collapse between 2014 and 2017 forced American oil and gas companies to lay off more than 160,000 workers, according to The New York Times. Last year, 42 oil and gas companies filed for bankruptcy protection in North America. In late March, Natural Resources founder and chief executive Scott Sheffield told CNBC that only 10 of the 74 publicly traded independent oil and gas producers will be left with decent balance sheets by the end of next year if prices don't improve.
The battered oil industry impacts the manufacturers that supply its equipment, says Chad Moutray, chief economist for the National Association of Manufacturers. "People focus on cheap gas," he says. "They underestimate the effect on manufacturing. I think we will have pretty dramatic ramifications if the low price is sustained."
Moutray adds that all kinds of manufacturers are being hit by lower demand due to the virus, though there are some exceptions, such as producers of food and health care equipment. A survey of the membership in early March found that 75 percent of firms predicted that they would be financially impacted by the pandemic.Supply and Demand
A potential bright spot amid the chaos is that companies may move at least some manufacturing to the U.S. because the global pandemic has interrupted existing supply chains. Moutray speculates that this could be an especially interesting option for companies in the areas of defense and health care.
Van Ark says that in their attempts to curtail costs, some manufacturers may have created far-flung supply chains that now don't look attractive amid current travel disruptions. "From a sustainability point of view, it also isn't the best thing to do," he says.
The PwC study found that 42 percent of finance executives were considering changing their supply chains as of March 25, up from 30 percent two weeks earlier.
But Van Ark doesn't expect a rash of new manufacturing jobs in the U.S. anytime soon. "Building a supply chain takes a lot of time," he says.
The retail sector has been a mixed bag of employment news. Macy's, Gap and Kohl's announced they were furloughing the majority of their workers in late March, becoming the latest chains to take such an action. Other retailers, including Amazon, CVS and Domino's Pizza, are adding thousands of jobs as Americans hoard certain household essentials and demand more delivery options to avoid going out and increasing their chances of contracting the virus. However, safety concerns may make some people reluctant to take such positions. Some workers at Amazon warehouses have contracted the virus and some went on strike last month to protest safety conditions. Workers at Instacart, a grocery delivery service, also staged walkouts last month.
Some companies, including Bank of America and Morgan Stanley, have vowed not to lay off any workers through the end of the year. Experts say that's important, as people are paying more attention to firms' ethical behaviors when deciding where to work or spend their money—a trend that will likely gain strength during this crisis.
Last year, the Business Roundtable revised its definition of a corporation's purpose, saying companies should benefit all stakeholders, including customers, employees, suppliers and communities, as opposed to just shareholders. The crisis is an opportunity for companies to live that statement, says Bhushan Sethi, joint leader of PwC's Global People & Organization practice.
"It won't be easy to lead with purpose," Sethi says. "How [companies] show up and act will be remembered."
Theresa Agovino is the workplace editor for SHRM.
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