Dealing With the Pandemic’s Fire Before the Phoenix Rises
"And some phoenix may rise from these ashes, but the fire comes first." -Ben Abraham, singer and songwriter
This may have been one of the most challenging columns to write in the short history of CoStar Economy. And we’re not sure they’re going to get much easier over the next few months.
One can always find reasons to be optimistic or pessimistic in any economic outlook at almost any stage of expansion or recession. But we find ourselves in a very rare spot indeed, and last week highlighted it perfectly. On Monday, it was announced that Pfizer’s vaccine appears to be 90% effective in preventing COVID-19. It’s hard to imagine any better news than that! At that level of effectiveness, the disease will be wiped out and life can return to normal. Full stop.
However, last week also showed a record number of new COVID cases, a record number of hospitalizations and a daily death count rising to levels not seen since the spring. And all of those numbers are climbing quickly. At this rate, the third wave of COVID infections is setting up to be worse than the one we saw over the summer, and could result in another rollback of economic activity and new lockdowns.
We have more reason to be optimistic about the future today than we’ve had in nine months, as we can now actually see the other side of the chasm. But the chasm appears to be getting very deep in the meantime, and not every business will make it across without help.
As we survey some of our favorite high-frequency data points, it appears that the pace of recovery has slowed since the summer. Using daily data on physical office usage, from security and keycard provider Kastle Systems, and the number of small businesses that are open, from commerce platform Womply via Harvard's economic research group Opportunity Insights, we see the “return to normalcy” trend stalled as we make our way into the winter months.
According to Kastle data, only 13% of New York City office space is being used, down from 17% in late October. Of the 10 major metropolitan areas tracked, Dallas office space is being used the most, though still at less than half capacity.
And in spite of continued employment gains on a national basis since April, the share of small businesses closed has been relatively unchanged. In fact, it has been declining since summer. Given the quickly rising third COVID wave, this is not likely to get better in the meantime.
The lack of virus containment to date has meant the more pandemic-afflicted sectors have struggled to join the recovery. September’s "Job Opening and Labor Turnover Survey" from the Bureau of Labor Statistics, released last week, shows this most starkly. As you can see in the graph below, the industries more inclined to work from home have stabilized, with job openings back to year-ago levels in professional and business services. But the same cannot be said for hospitality, restaurant, bar and entertainment sectors. Openings in the leisure and hospitality sector are once again falling at an accelerating pace.
What’s worse, the data above is from September. For a higher frequency, look at this point, check out career search Indeed’s job postings data, which indicates this trend is likely to get worse.
This is all sounding very dire, you’re likely to be thinking. Where’s all the optimism? Stocks are up. A vaccine is coming!
You’re not wrong! In all honesty, the economic boom that will come on the back of overcoming the virus for good will likely rival post-war booms of the past. The key is now to bridge the gap between here and there, and get as many businesses and households across it as possible. Some predict, on the back of Pfizer’s results, that this will happen by mid-2021. But possible timelines remain highly uncertain in both directions (we won’t even get into our worries about actual adoption and use of the vaccine when it is available). The timeline that is much more certain is that of the Coronavirus Aid, Relief and Economic Security Act, or CARES, which has helped keep the economy afloat so far. Those programs sunset in a month and a half.
Weekly jobless claims data shows that there are nearly twice as many claims in special CARES Act programs, than in traditional unemployment insurance. Whether gig workers (Pandemic Unemployment Assistance claims) or special jobless benefit extensions (Pandemic Emergency Unemployment Compensation claims), roughly 14 million people will see those claims expire at year-end. Six months of job gains has not helped these workers.
To keep these figures in scale, recall that even at the peak of the Great Recession in 2009 that a maximum of 7.4 million applied for regular benefits. Regular, non-CARES Act claims remain 1 million above that. Businesses and households alike have been highly dependent on this continued cash flow during the lack of a normal, settled economy. Letting these programs roll off will have dire consequences, even if a vaccine is six months away.
The economic situation is not the same everywhere. The data below shows jobless claims, both traditional and CARES Act, broken out by state as a percentage of the pre-COVID labor force. As you can see, many states have three to four times as many people on CARES Act claims programs than traditional unemployment.
Looking at the states that are still suffering the most, we see a few familiar themes. The most densely populated states such as New York, California, Massachusetts and Washington, D.C., are all among the most at risk. Those are joined by states most dependent on the hardest-hit industries, such as Hawaii and Nevada. These states and industries and businesses and households are now coming under increasing pressure once again. Restaurant restrictions are being increased again throughout the country, plans to return to offices are being pushed back once again and New York City shut down schools again due to a rising positive COVID test rate. Early indicators of consumer spending are rolling over , especially in areas hardest hit by the third wave of COVID cases. The last time we saw these things happening, the CARES Act rode to the rescue.
New fiscal stimulus in the next few months is highly unlikely. We look forward to writing about the economy and commercial real estate in the post-COVID world. It’s close enough that you can almost see it. But the pathway there will not be easy.
The Week Ahead ...
Retail sales data for October highlights next week’s releases. Results have been overperforming recently while highlighting growing divergences in the economy. Sales are expected to have increased by 0.5% in the month after a sharp 2% rise in September. As mentioned above, early tracking data for November appears to show a slowing from this hearty pace.
Industrial production data for October is set to be released as well on Tuesday, projected to rise 1%. Production has been on a slower path than retail, remaining down a few percentage points since the pandemic began. But manufacturers have become much more optimistic, with October’s Institute of Supply Management's manufacturing print of 59.3 just below 2018’s peak. We will receive some early November survey data as well, with New York’s Empire Manufacturing survey releasing Monday morning and the Philadelphia Federal Reserve region on Thursday.