Note: This is Part 2 of a two-part article including sections 4 – and 5 – please read Part 1 for sections 1) COVID-19 Unique Event, 2) Virus Drives the Economy, and 3) Outlook for the U.S. Economy
“The economy was a very nice photo, than the pandemic turned it into a jigsaws puzzle that’s all messed up, now we’re trying to put it together and figure out if all the pieces are still here or not.”
Mohammed A. El-Arian, Chief Economist, Allianz
The novel COVID-19 virus has driven the world economy into the deepest recession since the Great Depression while shattering the linkages that previously held it together. Two months into the crisis and economists are still trying to figure out what has happened to supply chains and demand channels. As El-Arian, notes key components of the economy may be missing.
Some components will need to be created. Then all these components will need to realign into a “New Economy.” The challenge of rebuilding the economy will be influencing consumer behavior. Consumer spending is 70% of GDP. Thus, growing employment is crucial toward increasing consumer confidence and recovery. The central question is: how will the economy shift a growth track? We’ll look at crucial signposts along the way in building a new growth track by presenting the following topics: (The first three are from Part 1)
- COVID-19 – Unique Event – Examines the unique characteristics of the pandemic and how they set up certain economic trends. Part 1
- Virus Drives the Economy – Looks at how the virus is driving the economy, how it is out of control and what strategies are working toward containment – Part 1
- Outlook For U.S. Economy – Takes a new perspective by overlaying the virus cycle with a deep U shaped economic cycle and how economic activity changes during each stage. – Part 1
- New Economy – Describes the transformation of our society and how these changes will create losing and winning new businesses and how consumers will likely have conservative spending and saving habits – Part 2
- What We Need To Do To Create a New Economy – Recommends a federal team of scientific experts to be authorized to lead virus containment, investment in self-renewing innovation centers in hard hit pandemic areas and focus employment development on climate change solutions – Part 2
The New Economy will feel different, much more virtually driven by software, the Internet, and be home centric. All major aspects of consumer behavior will be affected by the panipression (combination of panic, recession, and depression) experience opening new opportunities for products and services. In contrast, others will see reduced demand and be forced to close. Investors will want to watch these social trends as they cluster into a set of needs where businesses can flourish and become profitable.
Similar to the deep psychological scars of the 1930s, it will take time to repair the emotional, social, and mental damage of the pandemic. Today, a social trend called the Ameri-Can spirit is helping to heal people in a wave of unifying, uplifting virtual programs. Celebrities, social groups, and crowdsourced teams are using Internet hashtags links to raise funding for charities to provide financial assistance to restaurant workers, hotel workers, farmworkers, meat processing staff, entertainment crews, and thousands of others that have been furloughed or laid off. This Ameri-Can spirit plus our culture of entrepreneurship will create a new economy that will be robust.
Businesses will provide new services or products targeted at a cluster of behaviors related to values, social styles, and desires. Social distancing will change our behaviors so groups of behaviors will disappear, be sustained, or begin to emerge. Socially people will have to be encouraged to take a trip, get on a plane, or have an experience outside of their home when they have so many alternatives.
Let’s look at key consumer and business segments and how they may be transformed:
Consumers will be seeking experiences they cannot get at home. We expect to see more experience-based travel packages that include hotel, meals, and an experience like a Costa Rica eco tour as a destination. For sought after destinations like Hawaii, Europe or Disneyland, the attractiveness will still be there. However, for small resorts, villages, or towns with a singular appeal, they will have to differentiate and create traffic in innovative ways to hold out during the contraction and trough stages of the recession. Airlines are already making ‘pandemic cleanliness promises’ and will continue to build on making passengers feel safe. Hotels will need to make guests feel safe as well and focus on the destination appeal, amenities, and service to a far greater degree than they needed to in the past. Local restaurants that shifted to take out during the pandemic and survived will be able to go back to their usual food fare if it has new appeal. The foodservice industry is likely to be even more competitive than before, with the major chains surviving and the local community restaurants failing during the lockdowns. The rental car industry has many choices with some firms with high debt levels, so we may see industry consolidation.
Work At Home
Home will become a central focus for new services. More services will come to the home than ever before with added twists and features for: meal delivery and pickup, car servicing, pet grooming, mobile dentistry, and laundry delivery. As workers are likely to have little savings and limited credit, so car sales will likely drop, replaced by even more ride-sharing. The auto industry will be faced with declining auto sales yet, there will be increased demand for cars by ride-sharing drivers and new autonomous car services. Personal fitness or yoga training will be offered online, along with many personal development classes held virtually. The number of car trips to work will decline causing gasoline demand to drop lower than pre-pandemic levels. Car rentals for out-of-region trips will be in even higher demand as fewer consumers will own a car. E-Commerce will continue to grow as people have become accustomed to most things being delivered to their homes. Retailers will need to differentiate their offerings by expertise that consumers can’t get online. For example, going to a nursery to buy a plant means seeing the plant’s condition. To close the sale, the consumer will want to ask an expert gardener how to plant it and care for it. Shopping malls will need to develop attractions or experiences to motivate consumers to leave their homes and shop.
Work at Office or Plant
Companies will soon discover that having employees work at home as many days as possible will reduce their costs. The need for office space will likely be reduced, and the need for a variety of support services like cafeterias, lounges, team rooms, etc. will decline. The need for shared office tenant spaces will fall. After all, except for key meetings, it is cheaper to have their employees work from home and eliminate or reduce office space, computer systems, utilities, and all the overhead of an employee office. Manufacturers will figure out how to achieve the same level of production using fewer employees. Production management systems will continue to be installed with sophisticated automation systems using artificial intelligence features. As more robots are installed we expect they will stay in place so manufacturing employment will not return to pre-COVID-19 levels. Features like non-touch time clocks, automated employee temperature monitoring, and other pandemic related services will probably be kept in place post-COVID-19.
Consumers already using the internet 24 hours a day will be looking for more ways to use laptops and internet services. Demand for high-speed internet services will be even greater. Many consumers use personal assistants like Alexa. We expect using personal assistants to gain new users after their shelter-in-home experience. We can expect to see more artificial intelligence features added to ‘dumb’ devices like refrigerators to provide monitoring of food usage, make recommendations, and suggest food purchases based on usage. Home security systems do surveillance today like turning on lights while a person walks from room to room. These systems may add employee temperature surveillance, so companies will know how healthy their employees are at home. There is likely to be increased stress from the blurring of family versus home life, and issues related to child care. This stress may impact work from home so firms will be interested in monitoring work at home activity. Firms will be able to use retina scans to determine how focused a worker is on his screen. The scans will be reported back to companies to know when their employee was at their computer, and for hourly workers, how many hours they have worked.
After their pandemic experience, consumers will be obsessed with their fitness. Some consumers may look for their doctor to become a ‘health consultant’ helping them to stay healthy with a focus on preventive medicine, diet, and lifestyle management. Artificial intelligence will be applied to diagnostics as medicine becomes ever more complex and expensive to reduce doctor’s hours and costs. Telemedicine will become the norm for visits as patients will want to stay home if they can. In some cases, doctor’s offices and clinics will shrink in size as being ‘on-premise’ for doctor visits will be a premium service. Clinics will shift some services to urgent care. Consumers will take even more control of their health, use more online advice services, and drug delivery apps. The use of stress reduction virtual apps will soar to help people transition into normal life as they use mindfulness to go out ‘into the real world’ again.
The merging of the internet with television and streaming channels will be accelerated. Internet applications like polling, audience interaction, and 3D experiences will merge with consumers doing things at home they would otherwise go out to do. During quarantine, entertainers have opened their homes to produce programs they used to do from studios. We expect more mixing of these personal entertainer ‘home visits’ to create an artificial intimacy with audiences that are not with them in person. The boundaries between movies, television shows, and gaming will continue to blur. For example, group ‘Minecraft games’ with a host and multi-player options become the norm. The focus on delivering entertainment to the home means less need for studio space and expensive studio crews. Audiences will still demand live concerts, though we expect to see more tie-ins with virtual pre-concert events and games along with post-concert follow up with entertainers.
Higher education will transition into lower-cost online learning. College online learning will become the standard. In person education will be ‘extra’ at the college level. The emphasis online learning to the home in elementary grades will place new stress on teachers and require far more sophisticated software for learning than is available today. Small colleges that focus on ‘in person’ learning experiences will be hard pressed to attract students during the lockdown or reopening phases of the pandemic control. We expect that many small colleges may be forced to close or merge their curriculum and teaching staff with other larger schools that have the ability to attract a large enough student base to be financially viable.
Home sales will take a long time to recover from the market contraction of the pandemic. Millennials have often been the first to be laid off, have little savings, and spend more on experiences than saving for large purchases. Major incentives will have to be offered by builders and existing homeowners as the market will be slow to return to pre-pandemic sales levels. Homes will be remodeled, and new homes built to accommodate the home centric needs for office space, closed off family rooms, and sound dampening for video conferencing privacy. Apartments that offer ‘work-at-home’ floor plans and capabilities will be in demand while smaller apartments will see reduced demand. The pandemic may force home buyers to think about leaving the city and its density to suburbs or even further out since they can use the internet to do their job. An essential homebuyer requirement that their home is near their office will no longer be as crucial in locating a home for purchase.
Many banks have closed their retail offices due to social distancing. We expect banks to close many retail offices as being too expensive. Thus, customers to see a banker will need to make an appointment to see their banker at a specific branch. Virtual banking relationships will be the norm. Direct digital transfer of funds will grow leaving banks out of money transfers, particularly between customers and small businesses. Tap and go credit cards will be a standard way of handing a transaction at stores without touching cards or receipts. Digital wallets with financial account information will be readily adopted as tech savvy millennials become the dominant consumer group.
Consumers will think about money differently as a result of a panipression experience. Not having money for food, rent, or utilities will leave emotional scars and teach new habits. Similar to the Great Depression generation, consumers are likely to use less credit, increase their savings and be careful about getting over-leveraged with significant purchases. They will make conservative investments similar to baby boomers after the 2008 recession, who did not reinvest in stocks. Building consumer spending will likely take three or more years to reach previous levels.
The New Economy will feel different, much more virtually driven by software, the internet and home centric. All major aspects of consumer behavior will be affected by the panipression experience opening new opportunities for products and services. In contrast, others will see reduced demand and be forced to close. Investors will want to watch emerging social trends as they cluster into a set of needs where businesses can flourish and become profitable.
What We Need To Do To Create A New Economy
Challenge: The most crucial next step is to contain the virus and provide people with the confidence to go about their social life without the fear of becoming infected.
Proposal: Provide unifying intelligent leadership at the federal level to overcome the virus. The people need support, compassion, and hope, not divisive politics, bickering, and conspiracy theories as a basis of policy. A federal team of scientists using facts, research, and the latest techniques for pandemic containment needs to be authorized to bring the virus under control quickly. Other countries like Germany have focused their efforts on containment without politics leading to moderate success in virus containment.
Self-Renewing Economy Investment
Challenge: Rural areas of the country were already in recession from being hollowed out by manufacturing moving overseas. The pandemic has ravaged inner-city areas where many hourly workers lived in tight quarters. Small businesses across all regions are reeling from the lockdowns temporally shutting their businesses down, forcing them onto a financial cliff.
Proposal: Build New Economy innovation development centers using the Silicon Valley model. We see promise in using a Silicon Valley model of integrated partnerships between venture capitalists, company incubators, universities, and local government to build new businesses. The model has been used in places like Portland, Oregon with their Silicon Forest and in Salt Lake City with their Silicon Slope to build successful self-renewing economies. We recommend that this model be used to target inner-city regions, rural areas, or any area where the pandemic has taken a toll on the local economy. Since the federal government has limited funding we recommend the government act as a ‘seed’ investor to jump-start these development centers with partner investments by venture capitalists and cash rich firms like Apple, Google, and Microsoft. To ensure a well-trained labor force, the centers could be located near university campuses and integrated into degree or certification programs. The Department of Education could assist with scholarships for workers that need tuition and fees financial aid to study at the universities.
Climate Change Solutions
Challenge: While the focus over the next three to five years will rightly be on containing the virus and rebuilding the economy, the existential climate change problem continues to go unsolved. The impact of climate change is already felt in rising seas flooding coast side cities and mega wildfires destroying millions of acres.
Proposal: Focus employment development in renewable industries. The pandemic economic slowdown has reduced carbon emissions by 8% during the past two months, according to experts. The latest U.N. climate change analysis recommends that an 8% a year reduction in emissions be continued until 2030 to achieve the global emissions reduction target of 2 degrees Celsius. A U.N. sponsored Science Based Targets Initiative organization of 890 companies has endorsed shifting investments and employment toward reaching the 2030 emissions reduction target. A diverse set of 165 U.S. companies are SBTI members including: Walmart, Target, Coca-Cola, Adobe, Microsoft, Hewlett-Packard, Owens-Corning, Whirlpool, Proctor & Gamble, and Verizon. We should start now solving the next major global challenge by focusing on federal, non-government organizations, private research, and business development on innovative solutions to climate change problems. Focusing on climate change for job creation ensures that we tackle two major issues: employment and climate change. With so many workers unemployed we should shift their skills to a new industry that has been growing fast and is urgently needed while offering long term careers
We expect corporate leaders to take the lead in employment development for a long term economic transformation as political divisions will continue. We noted in our post: A Pandemic Iceberg Hits the ‘Unsinkable’ US Economy’ that the fabric of a robust labor safety net needs to be built to mitigate the impact of an economic crisis like COVID-19 on labor in the future. It is in the interest of executives to build businesses where workers are thriving, not just surviving. The focus must be on building an innovative economy that is creating new jobs through entrepreneurship. Otherwise, we are faced with a stagnating economy dependent on government transfer payments. We conclude with the following declaration from that post:
“Americans built the most innovative, self-renewing, wealth building economy in the world. It is the American spirit of entrepreneurship combined with invention, self-sacrifice, equal opportunity, and creativity that will build the businesses of the future. These new businesses will adjust to new social realities and pave the way for workers to gain job security and become confident enough to spend at robust levels.”
Patrick Hill is the Editor of The Progressive Ensign, writes from the heart of Silicon Valley, leveraging 20 years of experience as an executive at firms like HP, Genentech, Verigy, Informatica, and Okta to provide investment and economic insights. Twitter: @PatrickHill167