San Diego Union-Tribune (Sunday)
COULD THIS WAVE OF COVID REVERSE THE RECOVERY?
Some businesses are still hurting, but economists see signs of strength
The spread of the Delta variant has delayed office reopenings, disrupted the start of school and generally dashed hopes for a return to normal after Labor Day. But it has not pushed the U.S. economic recovery into reverse.
Now that recovery faces a new test: the removal of much of the aid that has helped keep households and businesses afloat for the past year and a half.
The Paycheck Protection Program, which distributed hundreds of billions of dollars in grants and loans to thousands of small businesses, concluded last spring. A federal eviction moratorium ended last month after the Supreme Court blocked the Biden administration’s last-minute effort to extend it. Most recently, an estimated 7.5 million people lost unemployment benefits when programs that expanded the
system during the pandemic were allowed to lapse.
Next up: the Federal Reserve, which on Wednesday indicated it could start pulling back its stimulus efforts as early as November.
The one-two punch of a resurgent pandemic and waning aid has led Wall Street forecasters, who were once rosy about the economy’s prospects this fall and winter, to turn increasingly glum. Goldman Sachs said this month that it expected third-quarter data to show a decline in consumer spending, the linchpin of the recovery for the past year. Many economists expect jobs numbers for September to show a second straight month of anemic growth.
Yet economists also see important sources of strength that could help the recovery overcome the latest coronavirus wave and possibly fuel a strong rebound on the other side of it. Few believe the overall economy is headed for another recession, let alone a repeat of last year’s collapse.
“There’s been a clear deceleration, but I would stress deceleration rather than retrenchment,” said Jay Bryson, chief economist for Wells Fargo. “We certainly think that the expansion will continue.”
Rather than posing an immediate threat, what the withdrawal of aid does is leave the recovery with less of a safety net if economists are wrong or if the public health situation worsens — both scenarios that have recurred throughout the pandemic.
“I think one should be concerned that we could see the recovery weaken further and that appetite for putting in place more fiscal stimulus has diminished,” said Karen Dynan, a Harvard professor and Treasury official under President Barack Obama.
And even if the recovery stays on course, it will almost certainly leave out some individuals and businesses, who face an increasingly uncertain fall with little government help. Even under the most optimistic scenarios, it will take months for all the workers who lost benefits this month to find jobs.
The Delta variant has caused a clear slowdown in certain sectors, particularly dining and air travel. But so far the decline in activity is nothing like the economywide pullback that the United States experienced in previous COVID waves.
State and local government officials have not reimposed the lockdowns and business restrictions put in place in earlier waves and they appear disinclined to do so. Consumers appear to have become more careful, but they have not abandoned in-person activities, and many businesses have found ways to adapt.
One wild card is how the Delta variant could affect the supply of workers. If virus rates remain high, people may hesitate to take jobs requiring face-to-face interaction. And if schools and day care centers cannot stay open consistently, parents may have difficulty returning to work.
The government is still providing a boost.
Government aid has not dried up entirely. The Federal Reserve said Wednesday that it could soon begin to pare its $120 billion in monthly bond purchases — which have kept borrowing cheap and money flowing through the economy — but it will almost certainly keep interest rates near zero into next year. Millions of parents will continue to receive monthly checks through the end of the year because of the expanded child tax credit passed in March as part of President Joe Biden’s $1.9 trillion aid package.
That bill, known as the American Rescue Plan, also provided $350 billion to state and local governments, $21.6 billion in rental aid and $10 billion in mortgage assistance, among other programs. But much has not been spent, said Wendy Edelberg, director of the Hamilton Project, an economic policy arm of the Brookings Institution.
“Those delays are frustrating,” she said. “At the same time, what that also means is that support is going to continue having an effect over the next several quarters.”
Businesses are entering a critical period.
Eighty percent of small businesses are worried about the impact of the Delta variant, according to a recent survey by Alignable, a social network for small business owners. Not all have had sales turn lower, said Eric Groves, the company’s chief executive. But the uncertainty is hitting at a crucial moment, heading into the holiday season.
“This is a time of year when business owners in the consumer sector in particular are trying to pull out their crystal ball,” he said. “Now is when they have to be purchasing inventory and doing all that planning.”
Rothmans, a century-old men’s clothing retailer in New York, is in one of the hardest-hit sectors in one of the nation’s hardest-hit cities. Yet a co-owner, Ken Giddon, is betting on the future: Last week, the company announced it would open a new location as part of a development project on the West Side of Manhattan.
“We pride ourselves on taking hits and getting back up,” he said.
The pandemic has been hard, Giddon said, but it has also created opportunities by driving down commercial rents and leaving fewer competitors. The Delta variant has delayed the return-to-office boom that retailers had been hoping for, but Giddon expects workers to return eventually — and to need new clothes when they do.
“We don’t really care if people go back to work in suits or jeans,” he said. “We just want men to think about buying new clothes again.”
In Minneapolis, however, Nicole Pomije is still struggling to make payroll.
Pomije opened her baking business, the Cookie Cups, in 2018 after several years of selling at farmers markets and other events in the area. Much of her revenue came from cooking classes and birthday parties — activities that were virtually impossible for much of the past year and a half.
Pomije closed one of her two locations for good in June. The other is hanging on, but barely; the store restarted cooking classes this year, which brought in some money, but parents are nervous about signing up their unvaccinated children for indoor activities.
“I can’t tell you how many payrolls I’ve pulled out of my savings account the past two years,” Pomije said.
Pomije is trying to adapt. Last year, she created a set of baking kits aimed at children, which she is selling online. The product has been a success — she has sold nearly 3,500 kits and is expanding her offerings — but she has been plagued by supply chain issues. A crucial shipment from Asia, containing the boxes she uses to package her kits, was held up at the Los Angeles port complex for 60 days.
Pomije said she would be out of business already if she had not received help from the federal government. Now, with more help unlikely, she is hoping holiday sales will help save her business.
“This fourth quarter is going to be really critical to our success,” she said. “If we do sell enough product online even to just pay our payroll, rent and critical bills to stay afloat, with enough inventory still to sell, I think we’ll be fine.”
Supply issues are putting policymakers in a bind.
Early in the pandemic, economists had a simple message for policymakers: Go big. If some aid ended up going to people or businesses that did not really need help, that was a reasonable tradeoff for the benefit of getting money to the millions who did.
Today, the calculus is different. The impact of the pandemic is more tightly focused on a few industries and groups. At the same time, many businesses are having trouble getting workers and materials to meet existing demand. Traditional forms of stimulus that seek to stoke demand will not help them. If automakers cannot get needed parts, for example, giving money to households will not lead to more car sales — but it might lead to higher prices.