Recovery from pandemic will be multifaceted

Economists for decades have measured a full economic cycle from a peak to a trough to the next peak. Economic cycles have had different driving forces. While there is still some debate on the origins of the Great Depression, most economists agree it was a combination of forces: a significant decline in the supply of money; a bone-headed international trade policy pursued by the United States and other Western countries; wild speculation in the stock market driven by ungodly amounts of debt; and the economic aftermath of the First World War. The 1974-75 recession was the result of the oil price crisis combined with the elimination of wage and price controls. The Great Recession from 2008-10 was caused by speculation in mortgage-backed securities also fueled by debt and greed. This economic crisis is the result of the economic shock caused by the COVID-19 pandemic. But common to all crises and cycles is that there was — and will be — a recovery. The question is what this recovery will look like for businesses. The answer to this question is embedded in how this economic recession/depression started and the characteristics of the crisis.

To understand the likely path of the recovery, it is important to understand how the key sectors of the economy were affected by the crisis. In Connecticut, those key sectors are defense, insurance, education, health care and small business.

Defense

There are more than 3,400 defense contractors in the State of Connecticut. The three largest — Pratt and Whitney, General Dynamics/Electric Boat and Lockheed Martin — are likely to not be as directly affected by the COVID-19 crisis as companies focused exclusively on non-defense spending because the more than $15 billion in federal contracts that were won by Connecticut’s defense industry do not depend on individual consumers who cannot get to the market; these businesses rely on their primary customer — the U.S. Department of Defense. The defense department’s budget is likely to be unaffected in the short-run by this crisis.

Of the big three defense businesses, United Technologies Corp. has the most exposure to the crisis because some of its companies do have exposure to the precipitous decline in consumer spending. Pratt and Whitney is a large supplier of jet engines to DOD and they also supply domestic clients such as Boeing. Boeing has been hard hit by this crisis and previous missteps. It was reported recently that Boeing faced a cancellation of 300 large passenger jets. This decline will and has had an effect on Pratt and Whitney. This part of Pratt’s business will come back slowly. The demand for engines will probably take years to return to pre-pandemic levels if domestic and international air travel remains lethargic.

Insurance

The insurance industry in Connecticut has been one of the anchors of the Connecticut economy for more than a century. In a 2018 study by consulting company PWC, 2.7 percent of the Connecticut workforce was involved in the insurance industry, the largest proportion of a state’s workforce in the country. The insurance industry will be hit hard by this crisis for several reasons. Insurance is tied to the fortunes of other businesses — directly. When large companies furlough workers, some if not most of those workers may lose their insurance coverage. When small businesses close, insurance premiums may go unpaid. When people get sick and die in large and unexpected numbers, payouts by insurance carriers will increase. These factors will be reversed in rhythm with the recovery of small businesses and large employers in the state and the country. In other words, the insurance industry will return to normalcy only after the millions of American workers return to work.

Higher Education

Connecticut is also known for having a strong public and private higher education sector. There are 42 public and private institutions of higher learning in Connecticut. In a 2017 report issued by the Connecticut Conference of Independent Colleges it was estimated that the 17 private colleges and universities had a combined $33 billion economic impact on the state. Private and public colleges are likely to be hit hard by the pandemic because of the cancellation of some classes, the return of money to students/ families for room and board, and lost tuition. If there is no vaccine or no treatment by fall, this crisis is likely to continue to result in a continuation of the current state of affairs. Higher education will come back when students, faculty and staff feel it is safe to return to campus.

Health care

Hospitals are often the largest employers in the towns where they are located. This is also true in Connecticut. This is an economic crisis caused by a health care crisis. COVID-19 is stressing the health care sector in the state and across the country. In preparation for the pandemic, many hospitals stopped elective surgeries. Hospitals that normally are running at 95 percent of total bed capacity are now running at less than 70 percent. No other sector in the U.S. economy is being as directly affected by the pandemic as is health care. The industry is being asked to sprint a marathon. There is exhaustion and stress at all levels of industry. It will take years for this sector to fully recover. And is unclear what the industry will look like after all of this is over.

Nursing homes in the state are facing an existential crisis. More than 50 percent of the deaths from the virus are taking place in nursing homes. Long after this crisis is over, families will factor in this increased risk of death before placing their aging parents in nursing homes.

Small Businesses

There are more than 360,000 small businesses employing almost one million residents in the state. Most small businesses are currently shut down by order of the state. In the first round of the Paycheck Protection Program (PPP) only 15,000 small businesses received loans/grants. The overwhelming majority of small businesses are not getting the help they need. For all small businesses, those that received loans and those that did not, a return to normalcy will be depend on consumers and workers feeling comfortable shopping and congregating in large groups. The progression of the virus and the development of a vaccine and/or treatment will dictate how quickly this important sector bounces back. But at this moment, it looks like small businesses will not lead the recovery.

Public Sector

Towns, cities and state governments are being hard hit by the crisis. Costs are rising while revenues are falling — a clear recipe for budgetary stress. Most towns are being forced to furlough workers either because of social distancing policies or budgetary concerns. The recovery in the public sector is going to be slow because of a new dependency on the federal government to make up for the precipitous decline in expected tax revenues.

There about 300,000 public school teachers and public sector employees in the state. Perhaps now more than ever there is an opportunity for the state and municipalities to consider county government instead of town-based government. We would not need fewer police officers, firemen and teachers, but we might find out we need fewer bosses. Fairfield, New Haven and Hartford Counties each have larger populations than the 18th-largest city in the country, Seattle, and each of these Connecticut counties have higher population densities than Houston, the fourth most populous city in the country. This is a good time to innovate the public sector in Connecticut.

Summary

The recovery from this pandemic will be slow. Fortunately, that recovery is not going to be slowed further by consumers and households not having sufficient resources. The expanded unemployment compensation and the one-time checks were helpful in supporting the purchasing power of the prime driver of the economy — the consumer. The consumer ultimately will determine the shape of this recovery. Because this is both an economic and a health care crisis, I suspect the recovery will be long and slow, particularly for consumer-facing industries and businesses.