What To Expect from the Economy During Reopening
It’s a huge question weighing on the minds of many of us. What will happen to the economy as states start to reopen? Will we quickly return to the economic normal we enjoyed just before coronavirus? How long will that take? How will the various outcomes impact my life?
Those are tough questions to answer because there’s a lot we simply don’t know yet. Will there be another wave of coronavirus? What if there’s a small coronavirus mutation that brings on another round of the disease? How will businesses respond? How will governments respond?
We just don’t know all the answers yet. Given what we do know, however, we can make some educated guesses and then do some basic planning according to those guesses.
It is worth noting that everything that follows is based on what we know as of mid-May, along with what models we have to draw upon. Things will likely not turn out exactly like this, and may not turn out even similar to this, but this is what we’re looking at going forward.
Most states will return to normal business operations in the next few months, which will cause a modest economic rebound over the next year.
We’re already seeing many states loosening restrictions on business operations, and many more states are making plans to do so. Within the next few months, most states will reopen their businesses to some extent, and some states will be fully reopened. They will do this almost regardless of the coronavirus data, with perhaps only some very local lockdowns and quarantines happening in the short term.
This will cause the economies in many of those areas to modestly rebound, but it will mostly be for the business owners and property owners that the benefits occur. Many of the employees recalled to work will have to lose their unemployment benefits and return to work or else become unemployed, so their income situation won’t improve much and, in some cases, will actually get worse. This isn’t to say that it’s bad for workers to return to work, but that it won’t be a boon to the economy as many of them will simply be moving from unemployment benefits to a normal paycheck that’s higher but comes with the cost of going to work.
However, property owners will start earning rental income and small business owners will start earning business revenue, which will get money flowing through the economy more than before.
The rebound will be uneven and unpredictable.
The best modeling we have, based on how different nations have recovered from pandemics and crises in the past, indicates that the economic rebound will not be evenly spread everywhere. Some cities and areas may rebound quickly, while others do not.
For example, this study suggests that areas that have utilized strong social distancing practices may see a stronger economic recovery. I’ve heard other commentary that cities with a strong tech base will recover quickly because so many of the employees can fully work from home.
Some areas may see a stronger and quicker recovery, while others may struggle significantly for much longer. Even before coronavirus, there were differences in the economic situations in different areas, and this difference will be even more noticeable (though possibly different) as the economy pulls back together.
There will be a second wave of coronavirus of some intensity, which may trigger additional rounds closures depending on the availability of testing.
Most experts indicate that a second wave of coronavirus will come as social distancing guidelines are relaxed. The big question is how big that second wave will be, and no one knows for sure.
With additional testing, we’ll have a much better picture of a second wave as it emerges, which will allow public health officials to make quicker decisions about lockdowns in areas where local services may be overwhelmed, closing things like schools and businesses for shorter periods until the local peak has passed.
This will likely mean a period of stops and starts in local areas, with some states, counties and parishes open for business like normal and other states, counties and parishes with schools, businesses and other services closed down, depending on local spread.
Although there is much desire among some to reopen businesses and other services right now, this is mostly happening in areas where the risk of overwhelming health care services in the next month or two is low. If that risk rises, then there will be local lockdowns in those areas.
Some people will continue to choose to stay mostly at home for a long while and will be very slow to return to old routines.
There are going to be a lot of people who choose to stay at home as much as possible even as lockdowns wrap up. This doesn’t mean that they think it is “dangerous” to go out or that they’re “afraid,” but that the risk of going out while there is still significant coronavirus activity outweighs the personal benefit to them of doing things like going to restaurants or traveling.
For some, the desire to return to familiar services outweighs the risk. For others, it doesn’t. Both viewpoints are reasonable and understandable and we’re all free to choose as we like, but in terms of the overall economic picture, many restaurants, bars, shops and travel services will not see a return to their original customer volume simply because many people won’t perceive the benefit of using those services (over just making food at home and finding entertainment at home) outweighs the added risk of spreading or getting sick themselves with COVID-19.
For example, families with immunocompromised people will probably not choose to re-engage with these services for a while. Many elderly couples and individuals may choose not to re-engage for a while, as will some of their caregivers. People who are naturally introverted, enjoyed home entertainment options and didn’t deeply value restaurants, bars and travel anyway will see this as an additional reason to stay at home. There will also be people suffering from mental health concerns who no longer feel safe leaving the house.
Those groups will add up to a significant impact on the economy. Many services will feel an impact from this and will either struggle to stick with their current business plan or will have to adapt it to operate well within this new normal.
Many companies will allow information workers to continue to work at home indefinitely, reducing the number of commuters.
I have friends throughout the software development and data mining world and many of them have told me that working from home has been largely very successful for their organizations. Many companies have seen a jump in productivity, even with the chaos of workers working from home and having to quickly adapt to a new normal.
Many businesses will stick with having many workers work from home for a very long time, if not permanently. This allows businesses to operate with a smaller office space and with less equipment on site, saving them money, and it allows the workers themselves to avoid the expense and time of commuting, saving them money and time. There will be less need for meetings and a shift toward management structures that operate well in a virtual setting.
Again, what does that mean for the economy? I suspect in the coming year that a fair number of people will no longer commute for work, which means fewer cars on the road, which means less money spent on gas, auto maintenance, repairs and car replacements. It won’t be an enormous effect, but it will be enough to be noticeable, as will the reduction in things like coffee shop visits and food drive-thru stops (if people who used to stop for those things every day are no longer commuting, they’re not going to stop any more).
Of course, this will mean that many of these work-from-home folks will have extra disposable income to spend, which means that those dollars will go into other sectors.
A lot of service businesses with marginal profits won’t be able to continue to exist unless they change their service, and that will ripple through the economy for years.
These changes will mean that even when everything returns to “normal,” there will be a lot of businesses that were on the edge of being viable businesses will no longer be able to make it. If all of these changes add up to a 10%-20% loss in their customer base, then there are many businesses that were already riding the fine line of being viable businesses won’t be able to continue to keep their doors open.
Some businesses will figure out how to pivot in this new normal, figuring out things they can do to cater to these changes. Some landlords might also lean into this, cutting rents in some areas to allow businesses that would otherwise close to continue to stay open. Other businesses were strong enough to begin with that they’ll be able to stay in business without any trouble.
However, I believe there will be many marginal businesses that close in the coming year or two because their business model doesn’t quite work in the “new normal.”
Remember, the 1918 flu epidemic was followed by the “roaring ’20s.”
There is often a sense that the things we are living through right now define how things are going to be for the foreseeable future. If times are tough, it can feel like times will always be tough.
The thing to always remember is that tough times pass. Things get better.
In 1918-1920, the world faced a vicious pandemic, with a particularly nasty form of influenza killing somewhere between 17 and 50 million people over the course of three waves. There were entire communities wiped out by the illness and there were waves of quarantines and lockdowns all across America and across the world.
At times, things seemed like they might never recover, but they did. Medical researchers figured out how to treat the disease’s symptoms, many people became immune due to exposure and surviving the disease, and things recovered.
What followed was a solid decade of unparalleled cultural, economic, and technological growth, a period that often feels like the birthplace of the modern world.
We’re at a low point now, but there have been high points before and there will definitely be high points to come. It may take us a while to get there, but perhaps the decade to come will be a whole new roaring ’20s.
What will all of these things mean for you?
What does this mean for the finances of many Americans? Here are some impacts that these things will have on your life and how you can prepare.
The upcoming years will be bumpy, so have an emergency fund. This is my number one suggestion for everyone for the next few years. Start socking as much money as you can away in a savings account so that you’re prepared for whatever unexpected twists and turns might come. It’s a principle I have kept repeating during these last few months, because I view it as being extremely important when you’re facing a clear economic downturn. It’s our best weapon against uncertainty.
How do you build an emergency fund? Here’s a brief guide, but it boils down to opening a savings account at a local bank or credit union, depositing as much as you can initially, and setting up a repeated automatic transfer to gradually pull in more and more money from your checking account, a few dollars a week. Leave that fund alone until a genuine emergency strikes, like a job loss or a car failure or something like that.
Continue to be smart with your money, and don’t forget the personal finance lessons of the lockdown. During the shutdown, many people naturally migrated toward spending less money on nonessential purchases. After all, they couldn’t go out to stores, restaurants, bars, and other such places.
As the economy recovers, we all will want to return to some things, but be mindful of what you’re returning to. Remember what things you easily lived without during the shutdown, and what things you truly missed. The things that you lived without weren’t really valuable products or services, while the things you missed were things you should support.
Don’t feel obligated to go out to “save the economy.” This type of pressure will be applied heavily in the coming months, much as it was applied after 9/11. There will be countless advertising campaigns urging you to buy, buy, buy as a patriotic or civic duty. You are under no obligation to go out and spend money to “save the economy.” None. If you feel the desire to buy a product or service because you value that product or service, do so, but don’t do so otherwise. Businesses exist to provide services and products that you value, and your decision to buy should be on the merit of those services and products alone.
The reality is that as long as you have money that’s doing anything besides sitting in cash in your sock drawer, it’s helping the economy (and even having money in a sock drawer is better than nothing). Bank deposits enable banks to lend more. Stock investments support brokerages and the businesses you’re invested in. If you spend your money on things that don’t require you to go out, like home entertainment, solar panels for your home or a geothermal heating and cooling system, you’re helping those businesses.
At the same time, make a conscious decision to spend your dollars at businesses you really value. For example, if you’re glad that a mom-and-pop restaurant is open in your town and you’ve decided to go out to eat, go there instead of to the chain restaurant down the street.
If you decide to spend, think more carefully about where your dollars are going. Right now, where you choose to spend your dollars if you choose to spend them will have even more impact in determining which businesses remain viable going forward, so make sure that if you do spend, you’re supporting businesses that provide services you really value. Don’t be thoughtless with your spending.
As I stated earlier, spend your money on services and products that you value, but when you have a choice of services, consider supporting the business that provides those services and products in a way that’s in line with what you value. For example, if you value a thriving local community, buy those things locally.
Unless you have a strong and secure pension, don’t retire for a few years. Retirement investments are going to be a bumpy ride for a while, so if you’re relying on a 401(k) to retire, I would wait for a few years to retire so that these current economic issues can work themselves out, which will give you a much clearer picture as to the sustainability of your retirement plans.
Be patient with your investments. During an economic downturn, it’s natural to feel frustrated with your investments, particularly when they’re worth substantially less than they were a few months ago. The truth is that it takes time for the economy to recover, and that time will be reflected in your investments. Things will get better, both for the local economy and for your investments, but they won’t get better today or tomorrow.
Be patient. Remember that you’re invested for the long term, not for the next week or the next month or even the next year. Don’t make radical changes to your investments because of their current balance.
Don’t lose hope. Troubling times in the past, including similar periods like the flu outbreak of 1918-1920, were often followed by strong recoveries. While things might not feel hopeful today, don’t give up hope. Things will get better. Sunshine always follows the rain.