Downtown Los Angeles streets on Sunday. The economic damage from the coronavirus crisis would depend not just on how high unemployment goes in the next month or two, but how long it stays there.
Photo: Allison Zaucha for The Wall Street Journal
The U.S. economy has suffered a body blow with no modern precedent. Unemployment, just 3.5% in February, could top 10% in coming months, higher than its peak in the 2008-09 recession. Some see it surpassing 20% soon, levels unseen since the Great Depression.
But it isn’t a foregone conclusion that this must wreak as much damage as the great recession, much less the depression. That would depend not just on how high unemployment goes in the next month or two, but how long it stays there. That, in turn, depends on two things: how long it takes health officials to stop the novel coronavirus pandemic, and whether businesses and workers, with the aid of government, can stay afloat in the meantime.
This isn’t like other recessions, in which businesses and consumers are unwilling to spend. This time they are unable to spend. It resembles a natural disaster such as a hurricane that closes an entire affected region. Businesses and employees typically treat a natural disaster as transitory and pick up afterward where they left off. The difference is that this one is shutting down most of the country, potentially for months. The longer it drags on the more businesses will fail and the more temporary layoffs become permanent, with knock-on effects on spending and employment that become difficult to reverse.
While we don’t know much about the economic effects of pandemics, we know a lot about the effects of natural disasters.
The week after Hurricane Harvey’s landfall in 2017, the typical Houston business’s incoming cash plummeted 63% relative to a year earlier, and 31% had no cash coming in at all. That is according to a study the JPMorgan Chase Institute, the bank’s in-house think tank, conducted of thousands of anonymized accounts. The week after Hurricane Irma hit Florida two weeks later, the typical Miami business’s income sunk 82%, and 41% had no inflows.
Importantly, businesses’ cash outflows also significantly shrank, preserving somewhat their cash balances. And within a week, cash inflows returned to normal in both cities. A surge in temporary layoffs, particularly in Houston, didn’t translate into a significant or sustained drop in employment.
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While the bank didn’t study Hurricane Katrina, that storm’s severity in 2005 and the slow pace of rebuilding left lasting economic scars. Employment in the New Orleans area immediately plunged 30%. Two years later only half that drop had been recovered and, according to one study, a third of businesses had failed to reopen.
The priority now is to avoid New Orleans’ post-Katrina fate. That requires enabling businesses, as best as possible, to hang on until the pandemic emergency is over.
Lauren Knox, who owns a hair salon in Huntsville, Ala., right, hopes government assistance will help her salon survive while it is closed because of the coronavirus pandemic.
Photo: Lauren KnoxLauren Knox has owned a hair salon in Huntsville, Ala., since 1989. In 2011, she was forced to close for 10 days when tornadoes tore across the southern U.S. She still remembers dividing up the cash the salon had on hand to help tide over her employees through the disaster. It helped prepare her for the pandemic, to an extent. On March 3, she had her employees sign a plan of action for the pandemic, in which she said: “Like any other disruption in our lives, like a tornado, etc., we ride it out together.” A week ago to protect their and their customers’ health, she closed her salon and told her seven support staff, seven commissioned stylists, and 11 stylists who rent a salon chair from her, to stay home.
None, so far, have been laid off. Her hope is that when the pandemic passes, she can reopen and bring all those staff back. But she has just $7,000 in cash on hand and, assuming she cuts all operating expenses, still has fixed monthly expenses of rent, utilities and insurance of around $7,200.
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“I did make the decision to pay my support staff two weeks out of pocket and hope this stimulus and relief will bridge that gap soon,“ Ms. Knox said in an interview, referring to the $2 trillion-plus relief package passed last week. “I’m up to date on all my bills for April. But I can’t continue through May without some assistance.”
Most workers have skills and experience that are specific to their current jobs. The longer they spend looking for a new one, the more that human capital depreciates, delivering a lasting hit to income and thus spending. Separate research by the JPMorgan Chase Institute found that those unemployed six months or more had cut spending by 13% a year after losing their jobs, compared with 1% for those unemployed under six months. That loss of purchasing power compounds the recession, driving unemployment even higher.
Research by the Organization for Economic Cooperation and Development found that in the past recession unemployment rose less in countries where employers thought the downturn was seen as transitory. That was especially notable in Germany, which encourages employers to reduce each worker’s hours rather than cut workers altogether.
The U.S. has traditionally resisted subsidizing employers to keep workers, preferring instead to subsidize the unemployed as they search for a new job. The $2-trillion-plus economic rescue package enacted last week breaks that tradition. It includes money for unemployment benefits, but earmarks more to discourage business from sacking workers. It includes $350 billion in Small Business Administration loans and $500 billion in direct loans and seed money for even more credit from the Federal Reserve, all of it conditional on minimizing layoffs.
For the plan to succeed, federal officials have to quickly implement an efficient processing and approval process. Then there is the unknown question of the duration of the pandemic. While social distancing appears to have slowed the rise in cases and deaths in early hot spots like Italy and Washington state, many other regions are still early in their outbreaks. The virus could return months later, forcing another round of social distancing. If so, last week’s package may not be enough.
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Write to Greg Ip at greg.ip@wsj.com
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