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A review, and forecast, of the COVID-19 economic damage

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The economic plunge that is wreaking havoc on so many in the United States isn’t going to go away soon. But where is it hitting hardest? And how will those impacts ripple out?

Ned Hill, a professor of economic development in The Ohio State University’s John Glenn College of Public Affairs, weighs in on those questions.

Are there specific industries within the United States that have proven to be particularly vulnerable during this crisis?

I looked at the U.S. Bureau of Economic Analysis estimates of Gross Domestic Product released on April 29 and examined the changes in gross domestic product (GDP) from the end of the last quarter of 2019 (October through December) to the end of the first quarter of 2020 (January through March).

The most significant contributor to the decline in the GDP came from the tourism, entertainment, recreation and travel industries. Together, they contributed 3.3 percentage points to the 4.8 percent negative annual growth rate. It threw NBA players, ski bums, movie stars and restaurant servers out of work along with cruise ship entertainers.

Food services and accommodations (bars, restaurants and hotels) made the second-largest contribution to the economy’s decline while recreational services accounted for another percentage point of decline. This sector includes the performing arts, movies, professional sports, gambling and the ski industries — all of which shut down in March.

Transportation services include both air travel and the cruise industry and contributed 0.7 percentage points to the overall decline in the economy’s growth rate.

Meanwhile, personal consumption — spending on personal services and physical goods — declined at a faster rate than the rest of the economy, which is troubling because consumer spending has been the source of economic buoyancy for the past several years. Personal spending declined at an annual rate of 5.3%.

Declines in auto sales and repairs accounted for about 20% of the decrease in GDP rate. Another apparent impact of COVID-19 was the drop in clothing and footwear sales — a stalking horse for catering traditional store-based retail sales in late-March.

People did shift their personal consumption from restaurants to grocery stores and take-out food purchases. Restaurants accounted for 1.6 percentage points of the decline, and direct purchasing of food and take-out meals offset the decrease by 1 percentage point.

Even spending on health care took a hit. The cutback in health care spending accounts for nearly half of the decrease in the GDP growth rate. How can health care spending decline and the industry be thrown into chaos during a pandemic?

As hospitals spent to prepare for COVID patients and expand their ICUs, they gave up revenue to free up resources throughout March. Medical offices were closed, along with dental clinics and other medical services.

Hospitals canceled elective surgeries, and routine checkups and procedures declined. Patients stayed away from health care facilities in their attempts to avoid the coronavirus.

Reports of financial distress and potential bankruptcies of rural hospitals are increasing. The nation’s physician staffing agency, Envision, is reporting to be exploring bankruptcy as well. And the academic medical industry has raked up losses that will hurt the balance sheets of higher educational institutions and public higher education systems.

Is it true that this virus has wiped out a decade’s worth of job growth in weeks?

The economy gained 214,000 jobs in January and 275,000 in February after making seasonal adjustments to the employment data. Then came the last three weeks of March, when the economy was shut down by a bug — COVID-19.

Over those four-weeks — from March 6 until March 31 — the economy fell so fast and so far that the quarterly GDP growth rate dropped from a potential gain of 2.1% to a loss of 4.8%. That is a decline of nearly 7.0% in three weeks or a drop of 2.3% per week!

Over the two months before COVID-19 whacked the economy, there was an average of 7,400 new claims for unemployment insurance in Ohio, and there was an average of 71,300 people receiving unemployment compensation.

The governor shut down large swaths of the economy on March 14. Over the next week, 196,000 people filed claims — half were in food services and food preparation. The total number of people receiving unemployment insurance benefits a month later, on April 18, was more than 827,000. On March 14, there were 68,000.

It is too early to say how many jobs the coronavirus has killed.  The most recent job numbers are for March and were released on April 3. These data will be revised over the next few months as more data are collected, and the losses in late March and early April will be better reflected in the numbers.

Nationally, seasonally adjusted, non-farm employment in March was 151,786,000, a drop of 701,000 jobs from the month before. March’s reported employment decline brought the nation down to November’s job numbers. March employment numbers for Ohio show a drop of 40,000 jobs to 5,559,000.

These do not reflect the reality of the labor market in late March.

What concerns do economists have in the near-term?

Self-employed workers

Initially, the most significant concern was the invisibility of self-employed workers and making sure they were covered as they lost their sources of income. The unemployment compensation system does not cover the self-employed. Technically they are people who file a 1099 or an SE IRS income tax form and do not have most of their income reported on W-2 forms. They include contract computer programmers, cleaning teams, gig-workers and artists, and many who provide personal services and work in the building trades.

Public sector employment

The shrinkage of state and local government revenue from March through the end of the summer is a looming concern. It’s difficult to estimate what impact layoffs will have other than to write that it will be large without relief from Washington. Fiscal years start on July 1, and employment cuts will come with the new fiscal year. Cuts have begun and will accelerate.

July property tax payments will be down, and along with them will be a marked decline in state and local wage and income tax payments and a cratering in sales tax revenue. Revenue declines will trigger a wave of large-scale downsizing of local and county governments unless the federal government steps in with support as part of another stimulus package. And, right now, that is not a sure thing.

If states start downsizing drastically, or if they have difficulty providing vital services, they also will contribute to a second shock. That’s one of the reasons that in mid-March, the policy focus in Ohio was not only over the fate of self-employed workers but on defending the rainy-day fund.

This recession will last long enough and be deep enough to use every one of the nearly $3 billion sitting in the state of Ohio’s rainy-day fund.

Layoffs by state and local governments will have a substantial negative feedback effect on the private sector and provide a second shock to the COVID-19 recession, and this will take place just as recovery is beginning. The hoped-for “V-shaped” recession can turn into an elongated “U.”

How long will this recession last?

I fully expect that the economy will not be on a firm road to recovery until early winter 2023. At that point, the nation will have to confront a long list of economic policy issues, including addressing the nation’s chronic structural deficits and broken budgeting system, changing the unemployment system so that it meets the realities of the 2020s, develop a national health insurance system that works and is affordable for all across the income distribution and make public investments in infrastructure.

And, yes, increase taxes to pay the piper.