We have never witnessed a voluntary world-wide shut-down of modern civilization, as has taken place with the Covid-19 pandemic. While the economic damage will be devastatingly clear, other consequences will be less obvious at first. When unprecedented global events occur, the ramifications take years to play out and can spiral in unpredictable directions.
The injury from our self-induced economic coma will be the most obvious consequence. In a matter of weeks, the U.S. went from full employment, with 10 consecutive years of GDP growth, to 30 million people thrown out of work, 15% unemployment and economic growth in a free-fall, with GDP expected to decline 4-6% for full-year 2020.
Roughly 30% of small businesses have shut down during the pandemic, many closing permanently. The break-neck speed of the downturn is having a flywheel effect. When companies lay off workers, those people spend less in their local economies, making other businesses weaker, necessitating further layoffs, and so on. Consumer spending powers about 65% of the economy, and consumers will choose austerity and saving instead of spending for the balance of the year if not beyond.
As small-businesses die-off, the landscape of American commerce will change. The Amazons, Home Depots and Wal-Marts of the world will be the beneficiaries, accelerating the trend of large publicly-traded retailers taking sales and market-share from mom-and-pop stores. The future of densely packed malls, like SouthPark in Charlotte, are also in serious jeopardy as many of their large anchor tenants, department stores, are teetering on the edge of bankruptcy.
Many of the products sold by those large retailers are sourced from China — but that is changing too. The most alarming weakness exposed by this crisis has been U.S. reliance on China for vital exports, particularly medical supplies. Recent reports show American companies are leaving China at an accelerating rate, spurred first by Trump’s trade war and hastened by China’s unleashing of Covid. The resulting re-shoring of international supply chains may turn out to be the beginning of the end for globalization. Over time China will be seen as an economic and military threat, not just a cheap trading partner.
Companies that used excessive debt and leverage to juice returns may not survive. Reliable cash flow and strong balance sheets will become more important than ever to investors.
Many of the new ways of doing business will stay as well. More online retail and restaurant curb-side-to-go will replace personal dining and shopping experiences. Social distancing will be the new norm — those markings on the floor telling customers where to stand in line are here for good. The immediate future of large sporting events, concerts, churches and political rallies are in serious doubt, and those experiences may never be the same.
We will see more Zoom and working-from-home for those who can do so productively, about 35% of the workforce. Telemedicine is a growing trend. For those back at the office, open floor plans will replace tightly packed cubes and co-working spaces. These trends have repercussions for everything from construction of office and work space to commuting and investment in mass transit and infrastructure.
The decades-long trend toward urbanization and high-density growth will stall. We will see accelerating movement back to suburbs and rural America — again, with positive consequences for single-family homes (with tax-deductible home office space) and negative results for urban multi-family apartment or condo living. It will be fascinating to watch what happens with on-line learning in education; if it takes off, what will we do with all of the school campuses around the country?
State and municipal budgets will be blown up by a combination of lower tax revenues and massive spending to counter the effects of the virus shutdowns. With too many long-term obligations on the books, state and local governments won’t be able to raise taxes enough to cover shortfalls and will have to cut services instead. The looming federal “debt bomb” will approach $30 trillion, certainly a dangerous level once interest rates begin to rise.
What of our cherished civil liberties? The vast majority of us have willingly abandoned our freedom and accepted government-imposed lockdowns for the common good of “defeating the virus.” As Americans have gotten more comfortable with “Big Brother” tactics, such as using cell phones and drones to track sick people and their contacts, some governors have shown an authoritarian streak.
The governor of Michigan deemed the purchase of flowers or a garden hose “illegal,” along with other so-called non-essential supplies. Police in New York City roam the parks, harassing scofflaws who only want a breath of fresh air and a little vitamin D. How long will Americans tolerate this creeping expansion of government control?
In short, the world is transforming rapidly in ways we still cannot fathom. How we come out on the other side remains to be seen. One thing is for sure, though; we must prepare our country to face the next pandemic without sacrificing our way of life and shutting down our economy.
Frank Dowd IV, chairman of Charlotte Pipe and Foundry Company, is a registered independent. Charlotte Pipe and Foundry is a 118-year old U.S. manufacturer of cast iron and plastic pipe and fittings, with seven plants around the country.