By Tom Barkin, President, Federal Reserve Bank of Richmond
The downturn will be deep, but recovery will follow.
This pandemic is new for all of us, creating unprecedented uncertainty. First and foremost, families are asking how best to protect their health and safety. But Americans are also asking about the health of the economy. How deep will this downturn be? How long will it last? How fast will we recover?
The answer to the first question is now clear: it will be deep. The service sector is 70 percent of the US economy and broad swaths of it are shut down, including travel, non-food in-store retail, restaurants, sports and entertainment. Last week’s initial unemployment claims exceeded 6 million, nearly doubling the previous week’s 3.3 million. The previous high had been 695,000 in 1982.
The duration is of course not fully knowable, but — absent a remission or treatment of the virus — it is hard to imagine social distancing moderating until there is a significant slowdown in new cases. While testing is expanding, it is far from universal. Most experts project widespread availability is at least a month away. As testing rolls out, the number of confirmed cases will inevitably expand. It’s hard to imagine calling the country back to work until the numbers have started to drop, which could be May or even later. This of course will be painful for tens of millions, and the recent fiscal package is intended to mute the impact of this elongated outage on businesses and employees, as are the Fed’s recent moves to stabilize markets and lower interest rates.
Which gets us to the third and most important question for our economy: the pace of recovery.
The good news is that one can have confidence people will be able to go back to work. Chinese companies have brought manufacturing back. Essential US businesses such as grocery stores, logistics companies, hospitals and public safety have operated successfully throughout this crisis. Each has used a now proven set of protocols, including appropriate distancing, sneeze guards, gloves and masks, testing upon entrance, funding sick employees to go home and deep cleaning where required. Companies that follow those protocols should now know they can operate, not with zero illness but with the ability to assure employees they are safe. That of course assumes we address the current shortages in necessary personal protective equipment.
The challenge will be bringing consumers back. Consumer spending is two-thirds of GDP. Our confidence in our ability to interact with others while staying healthy has been badly shaken. Hopefully doctors will quickly develop a treatment or vaccine. Absent that, businesses will have to find a way to convince consumers to shop, or eat out, to travel, or go to a concert or a game.
Unmanaged, this will happen very slowly. In China, retail traffic six weeks after stores reopened is reported to be only about half of where it was previously.
After 9/11, the rollout of the TSA was critical to restoring confidence in the air traffic system. It was messy, to be sure, but the existence of tougher screening, more agents, heightened vigilance and the like made a real difference in convincing people like me that it was safe to fly again.
Is there a way to, similarly, provide customers more reassurance? There are some obvious steps businesses can take, such as enhancing online access, self-checkout, drive through or delivery options. Perhaps governments can publicize “safe protocols.” But more will likely be needed.
Grocery stores are innovating here. In many, someone meets you in a mask and swipes down your shopping cart, sending a signal that safety is their priority. The aisles aren’t crowded. The cashiers have sneeze guards. The floors are taped to demonstrate appropriate social distancing in line. Seniors have a special time window to shop.
Other service businesses will need to redesign their models to signal that their experience is safe as well. Could restaurants offer explicit deep cleaning protocols for their tables, less server contact or less dense seating to allay health concerns when eating out? Should airlines fly with middle seats empty and boarding/deplaning protocols that preserve social distance? Should personal services pivot to an at-home delivery model? Is there a screening protocol for anyone who enters a hotel or a restaurant or a bar? Many of these changes could increase costs and prices, but they could also reassure the public enough to bring business back to life.
With rates at zero and fiscal support at historic scale, there is significant financial stimulus to help bring the economy back. But that will only meet its full potential when customers are ready to spend. Businesses and governments will need to innovate to make them comfortable doing so.
As part of the nation’s central bank, the Richmond Fed is one of 12 regional Reserve Banks working with the Board of Governors to support a healthy economy and to foster economic stability and strength. It connects with community and business leaders across the Fifth Federal Reserve District — including the Carolinas, District of Columbia, Maryland, Virginia, and most of West Virginia — to monitor economic conditions, address issues facing communities, and share this information with monetary and financial policymakers. It also works with banks to ensure they are operating safely and soundly, supply financial institutions with currency that’s fit for distribution, and provide a safe and efficient way to transfer funds through the nation’s payments system.