Small Business

Dark Clouds Forming on the Horizon

Scott Anderson
Chief Economist

Like a mid-summer thunderstorm approaching from the West, dark clouds are beginning to build on our economic and financial horizon yet again.

It’s still too early to know whether we will be hit by an imminent downpour or not. A last minute economic rescue package in the $1 to $2 trillion dollar range from Congress before the end of July could help keep the storm clouds at bay until the end of the year, but the increasing virus case count is already doing some material damage to the pace of the economic recovery in my opinion.

Here are some of the dark clouds that are starting to come into view.

First the labor market recovery appears to be stalling as initial jobless claims remain stubbornly high, despite nearly all states reopening to some extent over the past two months. Twenty-two states have already taken actions to partially rollback their reopenings or close down again, including the state of California.

Many restaurants and bars and other small businesses had just reopened only to find they will have to close again and lay off staff. A Yelp survey of 24,000 restaurants completed in the middle of June finds that 53% have permanently closed. Small businesses with the highest rates of closure, according to Yelp, are shopping and retail (35% report permanent closure), restaurants (53% permanent closures) , beauty (24% permanent closure), and fitness businesses (26% permanent closure). Across all categories, Yelp is reporting 41% of its small businesses are reporting permanent closures.

We have already started pushing up our forecast for the U.S. unemployment rate due to the July virus case resurgence. We now see the U.S. unemployment rate averaging 9.8% in the fourth quarter of 2020, not much lower than June’s 11.1% unemployment rate.

The real shift in the economic outlook is coming from the deterioration in the virus case outlook. Rather than a short and sharp two or three month shock, consumers and businesses must now prepare for a more prolonged pandemic with no clear endpoint in sight. Risk adverse households and businesses will need to more closely guard their future spending and pull-back on non-essential categories, prolonging the economic malaise into next year.

Consumers are already becoming more cautious. Open Table’s dinner reservation recovery peaked way back on June 21 at -41.37 percent from a year ago, but for much of July has been more than 60% below last year’s pace.

The big 4.9 point pull-back in the University of Michigan’s preliminary consumer sentiment index for July to 73.2, just above May levels, reveals the potential problem for sustainable consumer spending improvement in the face of this prolonged pandemic. The future expectations component of this consumer sentiment survey fell by an even larger 6.1 points on surging virus cases. Consumers’ appraisal of the U.S. labor market continues to deteriorate. In July 21.8% of consumers thought their spouse would lose their job over the next 5 years – up from 20.7% in June and 18.9% who thought so in April.

Lastly, generous government payments and deferments to households and businesses over the past several months are masking some serious longer-term financial stability concerns.

A monthly survey from Apartment List, clearly illustrates the potential problems ahead. According to the survey, in July 32% of Americans were unable to make full on-time housing payments. Even more troubling then the high percentage unable to make full on-time payments is the fact that that percentage has been going up steadily since April.

To avoid an economic and financial downpour from these dark clouds that are forming, it will be critical for Congress to act boldly to keep vulnerable sectors of economy afloat until there is light at the end of the tunnel on this pandemic.

Otherwise, more households and businesses will permanently sink under the economic and financial weight of this pandemic.

To find out more, check out this week’s U.S. Outlook Report.

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