CALChamber - Coronavirus continues to dominate the news, raising concerns among individuals and for our economy. In the episode of The Workplace podcast presented by the California Chamber of Commerce, CalChamber Executive Vice President and General Counsel Erika Frank is joined by economist Christopher Thornberg, Ph.D, founding partner of Beacon Economics, to discuss the COVID-19 coronavirus and its possible impact on the economy and businesses.
Two Economic Impacts
There are two places in our economy where the impact of the virus will be apparent and each one needs to be handled differently, Thornberg tells Frank.
First, there is a substantial decline in the demand for travel services and basic tourism. “…Airlines, large hotels, and conference centers will find their Q1 [first quarter] and Q2 [second quarter] will end up being quite bad from a profit-loss perspective,” Thornberg says. Because these types of industries rely on their available capacity to make money, if capacity levels dip, the industries lose money.
The second area that will be visibly affected by COVID-19 is supply chain influences. It can be as big as having trouble getting parts from China and realizing what this means for your particular businesses, or having employees refuse to come work out of concern or because they have become ill, he explains.
If people aren’t spending money on tourism and travel, Thornberg says, consumers either are going to save that money and spend it during the second half of the year, which will help the travel sector, or consumers will spend their money on something else.
In the long term, the economy will be better off because people have money saved away to go ahead and spend it elsewhere and help bolster the economy where there are deficits, Frank clarifies.
If one looks at the economy immediately after 9/11, there was a substantial decline in travel and tourism, but the economy did OK because people simply spent their money somewhere else in the economy, Thornberg explains.
He points out that what causes a recession is when consumers pull back on overall spending (aggregate demand shock)—which is not what is happening now.
“This is not an aggregate demand shock; this is a shift in demand away from things like tourism and travel toward other parts of the economy,” he tells Frank.
Not If, But How Long?
The real question, Thornberg says, is not if companies are going to be hit, but for how long?
It isn’t necessarily the case that one or two bad quarters will cause larger companies, like a hotel or an airline, to go bankrupt despite having negative numbers. Larger companies should have enough cash reserves or can borrow to weather a short storm between three to six months, he says. Small companies, however, simply don’t have that kind of wherewithal, so there is going to be a larger amount of stress, he tells Frank.
As a reminder, Thornberg points out that every year there’s a substantial decline in economic activity in the first quarter of the year from the last quarter of the previous year due to the holiday shopping season. This seasonal drop doesn’t have an impact because everyone is used to it, but a decline that drags into the latter months of the year may be a cause for concern.
“…if this bleeds a little bit into the second quarter, I’m still going to be OK, I’m still not too worried about it. But if we don’t get in front of it, if we don’t handle it appropriately and it gets into Q3…that’s the point in time when this really will start to have an impact on overall economic growth and…could actually lead to a recession-type scenario,” Thornberg explains.
“Everyone should appreciate that short-run pain is going to lead to long-run gain,” Thornberg says. Despite the legitimate concerns about coronavirus, there are some positive things to take away from what’s happening to the economy and nation, Frank says.
While the potential for these kinds of contagions increases every year, the quicker we figure it out, the better systems we will have in place to control the next one, Thornberg reminds listeners.
He points out that overall, the stock market is not doing that badly. A year ago today, markets were down 20% and 2019 was still a perfectly reasonable year for economic activity.
Thornberg emphasizes that the COVID-19 outbreak should be taken seriously: Make sure people understand to stay home if they don’t feel well. Don’t shut your company down and don’t think about canceling investments. People should understand that with the right aggressive action this is going to go away relatively quickly.
“Stay calm and carry on,” he says.