The economic impact of COVID-19 started to come into focus this week, as furloughed workers filed the first wave of unemployment claims. Meanwhile, economic forecasts are being revised to reflect unprecedented drops in consumer spending and GDP.
Thursday’s jobless claims report marked the first tangible data point showing the impact of COVID-19 on the U.S. economy. Roughly 280,000 jobless claims were filed during the week ending March 14, and economists are expecting that number to jump again next week. Oxford Economics Chief Economist Gregory Daco said on Wednesday that total U.S. unemployment claims could rise 400 percent to 500 percent this week.
The layoffs are coming amid emergency declarations and enforced social distancing as states attempt to slow the spread of the virus to reduce the number of infections and protect health-care systems from collapse. The closings encompass a wide range of public spaces, office buildings, entertainment venues, shopping malls and more.
Oxford forecasts U.S. GDP to drop 12 percent over the first half of the year, falling 0.5 percent in the first quarter and 11.5 percent in the second quarter as the reduction in economic activity takes its full toll. If that happens, the second-quarter drop in GDP would be the largest on record in the post-World War II era.
The decrease in GDP will be driven by a 13.5 percent drop in real personal consumption in the second quarter—which also would be the biggest drop in the modern era—as individuals stay home and services such as entertainment, food and beverage, recreation, transportation and other services are impacted, according to Oxford. “The hit to GDP will be enormous,” Daco said.
Jobless claims spike
The week-over-week increase of more than 70,000 new jobless claims marks the largest weekly jump since 2012. While the jobless claims are not broken out by sector or geographical location, drilling into the employment concentration by metro provides insight on the locations likely to be hit hardest in the coming weeks and months. Leisure and hospitality, mining and logging (which includes oil extraction) and retail and trade will bear the largest brunt of cratering airline and hotel demand.
Markets with risks of high unemployment include Las Vegas and the Southwest Florida coast, which encompasses vacation destinations such as Naples, Bradenton, and Cape Coral. Almost 30 percent of Las Vegas’ workforce is in leisure and hospitality, and casinos have been ordered to shut down for a month. On the Southwest Florida coast, leisure and hospitality makes up roughly 15 percent of the workforce, but retail and trade encompass nearly 18 percent of employment, making the cross-sector impacts even more significant along the Gulf Coast.
Not surprisingly, metros with heavy concentrations of office-using employment and creative industries are more likely to be insulated from the economic hardships caused by COVID-19. The San Francisco Bay Area, Washington, D.C., New York City and Boston all fall within the bottom 10 markets for exposure to at-risk employment sectors. However, these markets are not entirely immune. Given their size, there will certainly be employment losses in the gateway markets. In New York City, more than 1.9 million jobs are in the three sectors most at risk. Chicago has roughly 1.3 million, while Boston and Washington D.C. employ just under 1 million people.
Manufacturing at risk
Early signs of supply chain disruptions come from sharp drops in the Empire State Manufacturing Survey and Philadelphia Federal Reserve Business Outlook Survey. While supply chains remain intact, the slowdown in Chinese production followed by a demand shortage in Europe and the Americas will likely weigh heavily on retail and trade.
Other sectors of the economy that face major disruptions include travel and energy. Oxford forecasts that travel sector revenue will drop 75 percent in March and April. Although revenue will likely improve over the course of the year as the quarantining ends, it will remain at least 15 percent below 2019 revenues through the end of the year.
Although the price of crude oil price rallied on Thursday to $28.34 per barrel, energy prices remain at multi-decade low levels that make exploration uneconomical. Normally, low oil prices have a negative effect on energy-dependent regions, but it is a positive for consumers because it reduces the price of goods. However, because consumer activity is currently so weak, the drop in oil prices serves to produce negative effects without benefiting consumers, Daco said.
The silver lining in the forecast is that economic activity should largely rebound in the fourth quarter, provided the aggressive measures to stop the spread of COVID-19 are successful. Oxford’s projections call for a 3.2 percent increase in GDP in the third quarter of 2020 and 14.5 percent growth in the fourth quarter, which would bring GDP growth for the year to -0.2 percent.
The promised massive fiscal and monetary efforts of the federal government— including direct payments to individuals, bolstering unemployment insurance and worker sick leave—will help stimulate a rebound in 2021, “if the right measures are put into place,” Daco said.