Speaking purely in economic terms, the US services sector is quite obviously the biggest casualty of COVID-19.
The US economy is, after all, the largest on the planet, and it lives and dies by the consumer.
Until the pandemic hit, Americans were still willing to open their wallets, helping to keep the Titanic afloat despite myriad evidence to support the contention that between the trade war and election uncertainty, business spending was likely to remain subdued for the foreseeable future.
A similar dichotomy was observable in gauges of manufacturing sentiment (some of which began to turn materially lower last summer as Sino-US tensions escalated) and services activity (which remained generally buoyant, come hell or high tariffs).
Now, the services sector is the locus of the pain. The largest demand shock since the Great Depression is concentrated in services, where millions upon millions of Americans lost their jobs as restaurants closed, entertainment venues were shuttered and travel ground to a standstill.
Those millions of newly jobless are now staring down the terrifying prospect of insolvency.
“In the absence of a major disruption, the system is capable of moving along by collecting small installments of rent (‘clipping the coupons’) from a large segment of the population”, Deutsche Bank’s Aleksandar Kocic wrote earlier this month. “However, if an exogenous shock disrupts the fragile order of these cashflows, there is a chain reaction of collective insolvency ready to sink the entire system”, he went on to say. “As precarity becomes everyone’s prospect, consumers from a wider sector of the population withdraw and the rest of the economy gradually has to contract or shut down”.
The advance read on Q1 GDP confirmed that on Wednesday, just in case the deluge of dour data out over the past several weeks wasn’t enough to convince you. Personal consumption shrank 7.6% in the first quarter.
“We must remember the lockdowns only really came into effect in mid-March, so total consumer spending through April will be well down on March”, ING cautioned, in a quick GDP postmortem. “Even if we assume the bulk of the lockdowns start to ease from mid-May, ongoing social distancing, consumer caution and the legacy of 30 million unemployed Americans will ensure spending through June remains well down on the levels of January and February”.
A look under the hood at the change in the various components of US services GDP lays bare the true scope of the malaise.
The granular breakdown reveals a series of historically large declines, all of which make for eye-popping visuals, and one of which is perhaps a bit surprising.
Zooming in on transportation shows a 29.2% drop, unprecedented in data back to 1970. The previous record low was 15%, set in 1980.
“Travel restrictions will remain in place, limiting the scope for a recovery in the airline, hotel and hospitality industries while social distancing measures may make many restaurants and bars unprofitable and force their closure”, ING went on to write, in the same note mentioned above, warning that “with many businesses in different industries [saying] they will need to restructure, millions of people who have lost their jobs will struggle to find work quickly”.
In food and accommodation, the Q1 decline was 29.7%. That, folks, doesn’t have any manner of historical precedent whatsoever. It’s not just a record drop, it is a country mile removed from the next worst print, which was -8.2% in 1992.
Recreation was a similar story. The 31.9% drop witnessed in the first quarter is entirely anomalous. The next worse print in the history of the series is -7.1% in early 1991. So, the first quarter of 2020 was more than four times as bad as the worst quarter ever.
Finally, the granular breakdown shows health care down 18%, a result that it is either wholly unintuitive or else entirely predictable, depending on which finance Twitter account you care to consult.
“If you had told me we would have a massive pandemic I would have predicted an increase in health spending”, Harvard’s Jason Furman remarked.
“[It] shows why you shouldn’t listen to me”, Furman continued, adding that the decline in “health was responsible for nearly 1/2 of the overall GDP decline”.
“[It will] likely be down much more in Q2”, he said.
Read more: Deutsche’s Kocic – The Last Two Months Show The Intrinsic Instability Of Our Entire Economic System
If one listened to Gov Cuomo when he described the Pandemic Health Care Protocols and then read them in their entirety you had to know profit was out the window.
A large part of the consumer spending is based on young peoples lifestyles. There is a whole velocity of money that they create. How are the younger citizens going to lifestyle now?
I don’t mean to be a jerk, but if you shut down hotels, restaurants, recreation, entertainment and travel, that leads to massive unemployment numbers and revenue cuts. Lavishing gallons of virtual ink on the consequences may be necessary reporting, but it shouldn’t be any surprise.
See where you used the word “necessary” there, Paul? That’s kinda the key here. What do you imagine readers would think if they came to the site on Wednesday and there was no mention of GDP or the granular breakdown? This is a site dedicated to economics, politics, and markets. Hence, you can expect to see all of those topics discussed, all day, every day.
I would have absolutely loved to have seen your analysis of many of the Coronavirus Task Force briefings, which I always watched for the comedic value. It’s a shame you were too busy parsing the abundance of unbelievable financial news to allocate much time to those…it would have made them at least twice as much fun!
I do not know the size of this portion of the economy, but services purchased for cash – which were probably, at least partially, unreported income ( house cleaning, yard work, dog walking, nail salons, child care, a portion of “tips”, home repairs/maintenance, etc. ) have been decimated.
Interesting question –how big is the informal economy and how much impact will it have upon actual consumption –not just house cleaning, home improvement paid in cash etc. . .but drug dealing, illicit gambling, the sex trade –does anyone have any idea what the impact upon the opioid market will be? Also wonder what impact new virus rules will have upon social service productivity –raising productivity in a service based economy is challenging and now would seem to have become more so. Even if every service provider were to return to work tomorrow would each and every be able to perform as much service as before? Seems unlikely
Who cares??? Google is cutting back on capex and boosting their share buy-back program! New highs by June 1st, at the latest!!!
Right outta the “strongest economy ever” playbook.
On the one hand, non-critical healthcare will eventually resume. On the other hand, there’s going to be a lot more people without any kind of health insurance.