24 Aug. 2020 | Comments (0)
The Covid-19 pandemic is leading to what may end up being the deepest economic recession since the Great Depression. Consumption categories affected by social distancing are driving this recession. And they will be slow to recover to pre-pandemic levels, as many consumers remain reluctant to spend on them.
But eventually, a vaccine will be found, and the fear of the virus will dissipate. How different will the US economy look, say five years from now?
First let’s identify the main Covid-19 related economic trends that will impact the US economy:
What’s new will be old
To start, some of the industries most impacted by social distancing – entertainment, travel, lodging, food services and personal services – should make close to full recovery, but only after a wrenching down-period. 2020 and perhaps 2021 as well, will be devastating for these industries, resulting in many bankruptcies and mergers. The stronger companies will survive, making these industries more efficient. And in the years prior to the pandemic, these industries were growing much faster than the overall economy. That consumer demand figures to rebound, to the benefit of the companies still standing.
The shift to online
Industries which are positioned to transition to online commerce, and may have anyway over the long run, have sped up their evolutions. The retail apocalypse, in which brick-and-mortar retail increasingly gives way to e-commerce, is here. In addition, restaurants will still have increased curbside pickups and home-delivery, telemedicine is unlikely to entirely diminish, and higher education and banking both figure to retain strong online components. Beyond the accelerated shift online, the higher education industry looks especially fragile and may significantly shrink during this crisis.
The main long-lasting impact of Covid-19 will be the acceleration of the shift to remote work. Pre-pandemic, roughly 5 percent of full-time employees with office jobs worked from home, a figure likely to settle at 20-30 percent in the new normal. Location will become less important in hiring, with a larger number of white-collar workers living further away from city centers, in different parts of the US and also outside the country. This will have massive ripple effects, including reducing demand for business travel, impacting the hotel and transportation industries, especially air and train transportation.
Declining commercial real estate and cities
The collective shift to online will also lead to a drop in demand for office and retail space, including for higher education. This change will be both large and relatively sudden, and will have an outsized, perhaps unprecedented, impact on non-residential real estate construction and prices. Industries that rely on providing services to office buildings and brick and mortar retail stores will shrink as well.
The impact on city centers will be especially large. Fewer people will go there to work, shop, and consume other services. Real estate prices are likely to grow more slowly, or drop more sharply, than in other places. Areas outside city centers will benefit from this trend, experiencing an increase in consumption and demand for real estate. In a more extreme scenario, the shift in business and real estate tax revenue from the principal cities in metro areas to other locations will start a vicious cycle of fiscal crisis in principal cities reducing government services and the quality of life there, spurring more people to leave.
However extreme it proves, the current decline in business activity and incomes as well as the long-term crisis expected in real estate activity and prices, will lead to a state and local fiscal crisis that could easily impact spending even five years from now.
What are the labor market implications of these trends?
The acceleration of the shift to online activities and the destruction of less efficient companies, as well as the pressure to cut costs in a recession, will lead to a major boost in automation and efficiency-improvement and a lower demand for workers.
That drop in demand, and the corresponding wage stagnation, will hit especially hard in several ways: Demand for workers in the social-distancing related industries will decline as they become more efficient; routine office jobs will be automated faster; there will be fewer sales jobs, especially in brick-and-mortar retail; likewise there will be less demand for in-person customer service jobs in restaurants, for construction workers, and for higher education workers. Lastly, more white-collar jobs will be offshored.
But certain jobs will be in greater demand: The rise in online shopping and home deliveries will significantly increase the demand for drivers and warehouse workers. Driverless cars becoming a significant factor will reverse this trend, but that is not likely for at least the next decade. In addition, the shift to online activity, acceleration in companies’ digital transformation, and general technology sector growth will increase the demand for technology-related workers and services.
These trends will have a more negative impact on the demand for less-educated workers than on professionals. But at the same time, the long-run trend of much lower growth in the supply of less educated workers will continue. It is therefore not clear whether there will be over-supply of less educated workers.
The bad news overall is that the economic scars of the pandemic are not only likely to linger for years but also exacerbate the decades-long trend of rising income inequality. Many high-earning workers will benefit from growing technology demand while the jobs of many less-educated workers will vanish.
The good news is that the U.S. economy is likely to retain its dominant global position. Technology is going to become even more important, and the US has a strong comparative advantage in that sector, especially in growth areas like cloud computing, internet, business-related software, online payments, social media and smartphone software. US technology hubs will benefit the most. Secondly, the depth of the crisis will leave many distressed companies and assets ripe for plucking across the globe. The US private equity industry is much larger and more developed than elsewhere, and in a great position to benefit from these opportunities.