Blog
LAM Blog Post: Economic Solutions to COVID-19
NCPERS hosted a webinar with Lazard Asset Management, “Life on the Other Side of COVID-19” with Ronald Temple. Ron divided the COVID-19 crisis into four parts: healthcare, the economy, policy responses, and investment implications. In this blog, we will breakdown the economy part.
Economic activity around the world has sharply declined due to the lockdowns, affecting developed and developing countries alike. Economic activity will be essential to watch in the next two to four weeks. We are particularly eager to see data from the reopening of countries in Europe in the upcoming weeks. Germany – the gold standard in handling this crisis – began to reopen on April 20 starting with small businesses with less than 8,800 square feet of space, and still requiring social distancing. LAM's healthcare team thinks it will take four to six weeks before we see whether the infection rate climbs again due to the economy reopening.
LAM Blog Post: Economic Solutions to COVID-19
NCPERS hosted a webinar with Lazard Asset Management, “Life on the Other Side of COVID-19” with Ronald Temple. Ron divided the COVID-19 crisis into four parts: healthcare, the economy, policy responses, and investment implications. In this blog, we will breakdown the economy part.Economic activity around the world has sharply declined due to the lockdowns, affecting developed and developing countries alike. Economic activity will be essential to watch in the next two to four weeks. We are particularly eager to see data from the reopening of countries in Europe in the upcoming weeks. Germany – the gold standard in handling this crisis – began to reopen on April 20 starting with small businesses with less than 8,800 square feet of space, and still requiring social distancing. LAM's healthcare team thinks it will take four to six weeks before we see whether the infection rate climbs again due to the economy reopening.
U.S. Economy
U.S. retail sales were down a record 16.4 percent in April compared to March, nearly doubling the decline seen the prior month. To put this in perspective, in 2008 the decline was only four percent. A large portion of the decline was in food services such as restaurants, cafes and bars. With 13 million Americans working in the food service industry, this is a significant crisis.So far in this crisis, 36.5 million Americans have applied for unemployment benefits in only eight weeks. There are 160 million people currently counted as being part of the U.S. labor force. (The definition of being in the labor force is someone who has either worked or actively sought work in the last 4 weeks.) Based on these numbers, the true unemployment rate might already exceed 25% versus the 14.7% reported for April. To be fair, some of the 36.5 million people who filed jobless claims have likely found jobs since, but we can be quite certain that the vast majority have not given the economic shutdown.
Unfortunately, the Americans hardest hit in this crisis are those who are paid the least. McKinsey & Company did a study that showed 75 percent of workers who make between $20,000 – $25,000 per year are most vulnerable to job loss given mobility restrictions and social distancing requirements. As income goes up, vulnerability decreases with only 2.5 percent of workers earning over $70,000 per year being deemed vulnerable.
Importance of Small Business
Thirty three percent of Americans work for companies with less than 100 employees, and 47 percent of Americans work for companies with fewer than 500 employees. The Paycheck Protection Program (PPP)– a loan/grant program for small businesses – was included in the CARES rescue packages to assist these businesses. Small businesses typically do not have large amounts of cash on hand and are unlikely to survive an extended period of little or no business. The PPP has been a critical lifeline so far for millions of small businesses and their employees, but this funding is only for a limited period.European Model
One critical lesson in this experience is that the European approach to unemployment insurance could be a better model than the U.S. model. European countries typically have short-term working allowances and prioritize keeping employees on the payroll. For example, in Germany, a company applies for the benefit when they have a 30% reduction in revenue. The company gets the benefits and keeps its employees on the payroll. For employees, instead of losing their jobs and waiting weeks for unemployment benefits to begin, they continue to get paid seamlessly. Importantly, when business recovers employers do not have to scramble to find new workers but can instead simply recall their existing workforce.This is very different from the U.S. model. With 50 different states and 50 different systems, the U.S. unemployment system is inefficient. We've all heard the horror stories of people getting busy signals for days and weeks at a time when they call for their unemployment benefits.
China
The COVID-19 crisis began in China, and authorities there acted aggressively to flatten the curve. Their draconian methods would not be accepted in the U.S. or Europe but were effective. The industrial economy is 40 percent of China's GDP and is back to 90 – 95 percent of pre-COVID activity levels. China's service economy is back to 80 – 90 percent in terms of supply, but only 60 – 70 percent in terms of demand. People are back at work, but after work they are still social distancing and heading straight home. It is interesting that since people are not using public transportation, China has seen an increase in intra-city traffic levels. Inter-city traffic is still down 40 percent because people are not traveling outside of where they live and work.To summarize, we've seen a sharp decrease in economic activity globally. We still don't know about the risk of a resurgence of infections because we still do not have treatments or a vaccine. With the healthcare and economic implications in mind, the next blog post will be about policy responses.
Comments
There have been no comments made on this article. Why not be the first and add your own comment using the form below.
Leave a comment
Please complete the form below to submit a comment on this article. A valid email address is required to submit a comment though it will not be displayed on the site.
HTML has been disabled but if you wish to add any hyperlinks or text formatting you can use any of the following codes: [B]bold text[/B], [I]italic text[/I], [U]underlined text[/U], [S]
strike through text[/S], [URL]http://www.yourlink.com[/URL], [URL=http//www.yourlink.com]your text[/URL]