A Gordon Brothers Perspective on the Economic Impacts of the Coronavirus

Article

Date May 4, 2020

 

by Alex Sutton, Managing Director, Head of Research
 

As we make it to week seven of the coronavirus pandemic, it is hard not to reflect on this incredible period in history.  The pandemic and the associated COVID-19 virus are an enigma that is bringing the world economy seemingly to its knees.  First the virus was dismissed by the Western world as a mere flu-like illness originating in Asia, then an epidemic that might disrupt the Chinese economy, then an Italian problem, a cruise ship issue, a Washington state complication, and a New York dilemma.  Now, it has finally been recognized for the major world concern that it is.  The coronavirus has erupted into a global pandemic with over three million cases that will likely have a global and possibly U.S. pandemic-related death toll second only to the Spanish flu of 1918.  We already know that this pandemic will have the greatest impact on the global economy since perhaps the bubonic plague of 1342, also known as the Black Death.
 

The disease has already made an unmistakable impact on our global culture, altering our vocabulary and adding obscure technical terms into the vernacular.  “Coronavirus” although not a new word, should be the Merriam-Webster word of the year. The term refers to a common virus type that includes a variety of benign viruses including the common cold.  However, it also refers to some of the most deadly respiratory viruses, including the severe acute respiratory syndrome (SARS) (a pandemic in 2002-2003), the Middle Eastern Respiratory Syndrome (MERS) (an outbreak of 2015), and of course the culprit of the current pandemic, SARS-CoV-2 virus or COVID-19.  Also, consider “quarantine.”  The term first used in Italy when certain merchants inadvertently brought in a deadly disease from another land.  Sailors were put into “quarantina” and were forced to remain on-board their ships for “quaranta-dia,” a 40-day period of isolation and death.  A quarantina is not only what we have been living with in the U.S., but also in Canada, Europe, India, Ecuador, and in 185 countries around the world.  As we move into the eighth week since a global pandemic was declared by the World Health Organization (WHO) on March 11, 2020, it is worth reflecting that in many ways we have not moved far from the disease control methods used in the fourteenth century: isolation. 
 

Extensive isolation will continue to create the most significant and long lasting effects of the COVID-19 pandemic.  Stay-at-home orders were issued in 45 states in the U.S. from mid-March to late April.  Motor vehicle travel has ground to halt.  Car usage dropped by over 50 percent on April 12 and again on April 14, and truck traffic was similarly down by 35 to 45 percent in the same week.  Overall, vehicle traffic remained suppressed by 20 to 40 percent through the end of April.  Motor vehicle assembly plants for Ford, GM, Fiat Chrysler, Honda, Toyota, Subaru, Nissan, Mercedes-Benz, Hyundai, Kia, Volvo, BMW, and Tesla, were shut down through the month of April, and only a single Mercedes-Benz plant in Alabama restarted on April 27, with the rest scheduled to restart either in early to mid-May or having no firm scheduled restart date set as of May 1.  Air passenger miles dropped by 95 percent as of April 9, with 2,200 planes (approximately one-third of the total U.S. fleet) idled by carriers as of that same week.  Retail foot traffic as of April 19 was down 21.1 percent for essential retailers and of an astounding 86.8 percent for non-essential retailers.
 

The pandemic has taken hold of the world economy and slowed its overall pace in a few short weeks by perhaps as much as one-third.  If we look at the oil and gas industry, worldwide consumption as estimated by the International Energy Agency (IEA) is expected to have dropped by 30 percent in April.  Crude oil prices as reported in Cushing, Oklahoma had already fallen by approximately 50 percent in March 2020 after oil production negotiations broke down between Russia and Saudi Arabia.  The price war was settled on April 12, 2020 with both parties agreeing to cut oil production by 9.7 million barrels/day from July 1 to December 31, 2020, with additional reductions planned through 2022.  However, the agreement came too late to stop the precipitous drop that culminated in prices going negative briefly on April 20, 2020 with storage capacity in Cushing, Oklahoma and around the world reaching maximum levels.
 

Core industries were deemed essential early on as government shelter-in-place orders expanded across the world, and some businesses, including grocery, drug, and hardware stores, along with other essential retail segments have remained open.  In the retail grocery space, food and beverage purchases at grocery stores increased by 25.6 percent in March of 2020 compared to February. However, food and beverage sales to food service customers fell by 26.5 percent in that same period offsetting most of those gains. Despite the anecdotal reports of large increases in online sales and shortages of household and medical essentials, these pockets of increased demand have not benefitted the economy as a whole. Amazon, perhaps the one company perfectly situated to benefit from this crisis, reported strong gains in sales of 26 percent for the quarter ending March 30, 2020 compared to the prior-year.  Despite these gains, profits fell, as the Company reconfigured its product mix towards essential products only, hired an additional 175,000 staff, and equipped warehouses and delivery channels with protective equipment and social distancing protocols to safeguard against COVID-19.
 

Similar trends have been seen in the beef, pork, and poultry industries.  Protein producers have seen strong demand from the grocery store sector, but are facing a decimated food service sector with collapsing demand due to restaurant closures.  Additionally, it has been difficult for slaughterhouses and processing operators to keep their workers healthy because of the spread of the virus throughout their plants.  As of May 1, 2020, 34 food-processing plants throughout the U.S. and Canada either had temporarily or indefinitely closed or had significantly reduced production because of infected workers.  As plants have been shut down, thousands of animals have gone unsold and/or have been euthanized.  Tyson published a full-page advertisement in The New York Times on April 26, 2020, warning “the food supply chain is breaking.”  To address the issue and to allow companies in the space to operate without threat of lawsuits from COVID-19 health impacts, on April 28, President Trump signed an executive order to alleviate the supply situation by ordering food processing companies to continue to produce in accordance with the Defense Production Act. This order has sparked outcries from workers and others concerned about the health and safety of workers over producer profits.
 

As we stand today, the near-term retail and economic effects of the pandemic are beginning to solidify a bit more than was understood a month ago. U.S. consumer sentiment fell 11.9 index points in March 2020, followed by a further 9.6 index points in April as the pandemic escalated. The decline in the index indicates an ongoing recession; however, the portion of the index that gauges future expectations is more positive than the current conditions.  The gap reflects the anticipated cyclical nature of the coronavirus, mirroring consumers’ fears of another wave in the fall. The Conference Board outlook from March 25, 2020 projects a full-year decline in U.S. GDP of 5.9 percent for 2020.  The International Monetary Fund adjusted its 2020 outlook for world GDP growth to negative 3.0 percent on April 14, 2020, with Chief Economist Gita Gopinath noting, “It is very likely that this year the global economy will experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago.”
 

In certain countries in Europe non-essential businesses that had been closed, opened in late April or the first week of May.  In Germany, initial retail store openings for the first week after opening indicated that sales were 33 percent below the prior year.  Of the stores reopened, 16 percent saw sales levels that were up 20 percent or more over pre-pandemic levels and 66 percent of retailers reported sales declines of 20 percent or more.  In Austria, which was in its second week following the reopening, sales levels were 10 percent lower compared to prior years.  During the week of April 20, 2020, the U.S. economy began to re-open.  Georgia opened some stores on April 24 as it was among the first states to begin a phased reopening of its economy. Based on Placer data showing mobile phone foot traffic in shopping areas, average retail foot traffic in Georgia improved 14.9 percent for the five days ending April 28 compared to the average retail foot traffic in Georgia for the balance of April prior to April 24.  This was an anemic improvement when you consider that those foot traffic levels remain 88.6 percent below the average generated during the first 11 days of March prior to the declaration of a worldwide pandemic.  
 

There is certainly reason to be hopeful in many sectors that there will be a quick resumption in commercial activity, but it is hard to imagine that retail sales capacity will not be diminished longer term because of  social distancing and limitations on store density.  And what is long term?  Is it 2021?  2022? Or until an effective vaccine or anti-viral medication is deemed effective and widely distributed?  Or is it just simply when all normal activities in retail, social, and industrial spaces can resume? 
 

Even in the 21st century children still sing “ring-around the rosie, a pocket full of posies, ashes, ashes, we all fall down.”  Most do not know that the song this refers to the Black Plague’s grip on medieval Europe.  Today we live in a society that is unaware that the “Hong Kong flu pandemic of 1968” killed an estimated one million people throughout the world, or that Donald Trump’s grandfather died of influenza in 1918, a pandemic that saw 500 million cases.  As we reach almost four million cases of COVID-19, there is hope that we will develop the fastest vaccine ever created in history to prevent the disease.  We know from previous pandemics that one day this will end no matter how painful the end will be. Moreover, we know from previous recessions and depressions that the economy will recover, even if it takes longer than 40 days.