Businesses Are Sheltering In Place. How Long Can The Economy Survive That?

By Laurence Darmiento Los Angeles Times

WWR Article Summary (tl;dr) "The longer this disruption goes on, the more likely it will have a permanent effect," said Roger Farmer, an economics professor at UCLA and the University of Warwick in the U.K. "Three weeks we can bounce back from, three months is not so clear."

Los Angeles

We've all seen the unsettling images of what happens when the economy goes haywire.

Bread lines, farmers abandoning the Dust Bowl, drivers cued up to fill their gas tanks, houses with foreclosure notices pounded into their front lawns.

Add to that a rush-hour view of an L.A. freeway, typically jammed with commuters, but now more like a Sunday morning due to a virus that has wrecked the once booming U.S economy just two months after the first confirmed domestic case.

Stocks have collapsed, airlines shed routes and businesses have closed.

Millions of workers are being sent home and cautioned to minimize their interactions with their friends, neighbors and even family members, a course of action the White House recommends Americans follow for 15 days.

But just how much sheltering in place can the economy take before the damage is irreversible?

The short answer is that experts are grappling with a situation as novel as the virus that caused it and they really don't know how much our high-tech, interconnected and consumption-oriented economy can endure.

"The longer this disruption goes on, the more likely it will have a permanent effect," said Roger Farmer, an economics professor at UCLA and the University of Warwick in the U.K. "Three weeks we can bounce back from, three months is not so clear."

Yet months, even a year or longer, it may be.

The White House is preparing its response at least partially based on a frightening report from doctors and scientists at Imperial College London that concluded the virus could kill 2.2 million Americans if it were not contained. And the kind of suppression measures needed to control it, such as social distancing and school closings, could have to remain in place as long as 18 months until a vaccine is developed.

That's a very long time, considering that it took the UCLA Anderson Forecast this week only four days to revise a quarterly prediction calling for slower economic growth into one stating that the U.S. had already slipped into a recession expected to last through September.

The forecast was responding to rapidly changing conditions and fresh data. A survey conducted Friday and Saturday had already found some 18% of adults reporting that they had hours cut or had been laid off, with the workers in lower-income households hit hardest.

One analysis by Moody's Analytics found that nearly 80 million U.S. jobs are at varying levels of risk, though it's more likely some 10 million workers could either be laid off, furloughed or see their hours and wages cut. In China, with four times the population of the U.S., roughly 5 million people lost their jobs in the first two months of this year amid the outbreak.

The areas of the economy expected to take the biggest hit are transportation and travel, hospitality and leisure, temporary help, and oil drilling and extraction. Outplacement firm Challenger, Gray & Christmas said 7.4 million jobs in hospitality and leisure alone could be lost or affected.

Retail, manufacturing, construction and education are at moderate risk, Moody's said. Macy's, with 130,000 full- and part-time workers, announced this week it was closing its stores and moving all sales online, where it has struggled to compete with competitors such as Amazon.

Treasury Secretary Steven T. Mnuchin warned Republican senators on Tuesday that without bold government action the pandemic could push up U.S. unemployment to 20%.

The numbers look scary, but economists take some comfort in the fact that the economy entered this crisis on a strong footing, with unemployment at a 50-year low. The U.S. also has social programs such as Social Security, unemployment insurance, food stamps, Medicare and Medicaid put in place during the New Deal and the later Great Society initiative of President Lyndon B. Johnson, even if they are constantly in danger of being cut back or don't measure up to European welfare state standards.

Yet what social insurance the country has wasn't predicated on a near shutdown of the economy, which for all its strength was already displaying well-documented gaps likely to be exacerbated by the outbreak. That includes including millions of low-income workers with little to no paid time off, a lack of affordable housing, a homelessness crisis, and rising levels of corporate debt that could send highly leveraged companies into default, which is why the local, state and national governments are considering such measures as a halt on evictions, cash payments to citizens and more than $100 billion in loan guarantees to businesses.

But trying to get a handle on how this may play out is tricky, partially because the cause is non-financial in origin, unlike, say, last decade's crisis, which was driven by subprime mortgage defaults.

It's also challenging that the economy has rapidly evolved. The U.S. manufacturing sector has been in long decline, replaced as an economic engine by consumer spending on goods and services. Those are huge categories that include food, clothes, appliances, electronics, furniture, cars, movie tickets, transportation, investment advice and healthcare.

It also all comes amid telecommunications and computing advances that have made home deliveries ubiquitous and working from your bedroom desk commonplace. They have also vaulted tech companies such as Amazon, Google, Facebook and Microsoft to the top of the economic food chain.

"Our economy is altogether different now than 1975," said economist Chris Thornberg, founding partner of Beacon Economics, an L.A. consulting firm. "It's now service oriented. Service sectors tend to be more loose and limber."

Indeed, on Monday, Amazon announced that due to "unprecedented" demand, it plans to hire 100,000 people across the U.S. to keep up with orders as workers stay home and shop online. It also plans to temporarily raise wages by $2 an hour through the end of April for hourly employees at its warehouses, delivery centers and Whole Food stores.

Economist Edward Leamer, director emeritus of the Anderson forecast, said that redirected spending can create an "automatic stabilizer" effect. Farmer said that the crisis will hasten economic changes that already were occurring due to technological advances, including telecommuting and online virtual meetings.

"These disruptions will probably speed that up," he said, noting that climate advocates already had been pushing hard to reduce jet travel. "A lot of people will find that it is actually much easier."

But many of those advantages would go to knowledge workers who sit in front of computers, such as programmers, lawyers and others in the white-collar workforce. Cashiers, waiters, construction workers and others in the blue-collar workforce don't have that luxury as they sit at home without pay.

Farmer said that double digit unemployment would make it hard for the economy to recover. "If (workers) lose those jobs it can take years to rebuild those skills. The danger is it becomes not only a temporary drop in employment but permanent," he said.

For now, the government is focusing on ensuring the financial and credit markets don't seize up, preventing businesses from failing and getting cash into the hands of individuals.

In an emergency session, the Federal Reserve dropped its key interest close to zero over the weekend and said it would buy at least $700 billion of Treasury and mortgage-backed securities, similar to what it did during the financial crisis. It also announced plans Tuesday to shore up the commercial paper market that provides short-term liquidity to companies to help fund their short-term operations.

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