Weekly Economic Update May 11, 2020

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Hopefully you were able to celebrate Mothers Day over the weekend.  In this rather odd time celebrating what our mothers have done for us on a virtual or distant basis just does not seem right.  Once the world returns to normal we can all set a time to get back together and recognize what our mothers have done and sacrificed for us in a proper way.

The non-manufacturing report came out this past week.  Retail, service and other non-manufacturing sectors had carried the economy for the past year.  The overall economic growth of 2 to 3% was due to non-manufacturing components.  The April non-manufacturing index fell from 52.5 to 41.8%. The index fell to its lowest level since March of 2009, the height of the great recession.  Not surprisingly the two industries in the report that showed growth were Public Administration (read government) and the second, Banking/Finance.  With the PPP loan activity banking was sure to show growth.  All other industries noted significant declines with Arts, Entertainment and Recreation leading the way.  The rate of contraction is reminiscent of the Great Depression.  The concerns the report lays open is when can business re-open?  What is the new business model that will allow re-opening?  Under the new business model can the business reach break-even?  The last concern that is on everyone’s mind, Is it worth re-opening or not? 

There are a number of concerns that are arising as the nation struggles to find the right way to re-open and get back to work.  As above, what will the new business model look like?  If social distancing is now required, either by the government or by changing social norms, how can a business adapt and still make a profit?  With social distancing we are already seeing productivity and efficiency collapse.  Where is the bottom and how does a business make up both a depressed sales level along with a lower productivity level. When a business reopens what happens if workers refuse to return due to their own safety concerns?  Who will fill those jobs and how long will the government provide payments for those who refuse to work? 

The retail industry was already on the ropes.  This crisis may have pounded a stake through the heart of the traditional retail business model.  Neiman Marcus and J Crew are just the tip of the iceberg.  There will be thousands of small retailers that will not reopen.  The US will be facing a commercial real estate crisis not seen since the 1930’s.  The dominos are starting to tip as building owners now approach banks to provide some sort of accommodations for the real estate loans they have outstanding.  Without rental income the loan payments will not be paid.  For now banks may take a wait and see approach, allowing for payments to be pushed to the end of the loan term.  However, bankers need to know now which tenants will re-open and survive.  Planning now, getting ahead of the curve will be better than waiting and having to liquidate an asset when the world is awash with empty buildings.

As noted above there are just too many unanswered questions right now to even guess at what the recovery will look like.  While our economy was stable in January and February with the evidence of continued growth, until we know what the new business model will look like no one can say when or how we will recover.  I can only wish my outlook was better, we will just have to ride this one out together.

Take Care, have a good week.



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