The Economics of COVID-19

By Ray Pinard | April 23, 2020

Dear clients and friends:

As we continue to experience the effects of COVID-19, business owners are asking when things will return to normal. The short answer is when we have a vaccine. Everyone has their own risk tolerance level. Some people would go out to crowded bars, restaurants, and sporting events tomorrow if this were possible. Others will stay away from crowds and normal activity until the possibility of contracting COVID-19 is near zero.

So what does this mean regarding the length of a recession? Will it be a V-shaped recession with a steep downward trend, short duration, and steep upward trend? Or will it be a U-shaped recession, with a steep downward trend, moderate duration, and a moderate upward trend?

Let’s review some issues we must consider:

  • With the current stay-in-place orders issued by most state governors, nearly all public and private events and activities are on hold.
  • Some scheduled activities will not occur. This is a permanent economic loss to GDP for at least this year. Will professional hockey and basketball leagues be able to finish their seasons and have playoffs or will they call off their seasons? What is the liability to team owners if they restart their seasons? Liability applies to many other activities, not only sports.
  • Some scheduled activities will occur, but in a delayed or abbreviated fashion. Will Major League Baseball have a 100 to 125-game season? The longer the lockdown continues, they can get in a limited number of games before the World Series. How many people will be comfortable going to a game?
  • Many nonprofits have annual events. While some of these events may be rescheduled, for some this will not be feasible. Dance recitals may be cancelled; weddings will be delayed or scaled back. Will some youth sports organizations cancel their seasons for health and safety reasons?
  • Once restaurants and bars are allowed to reopen, will people have to sit six feet apart at the bar? Will family seating be allowed and how many will be allowed at a table? How far apart will the tables be spaced? Most facilities cannot operate, even at their breakeven point, when their seating is regulated below a certain level. Will these businesses be forced to close permanently?
  • For performing arts centers, how long can their endowments carry their fixed costs? When they reopen, will seating be limited to every three seats and every other row? We all know they have to sell a certain number of tickets to hold a profitable event.

There are numerous other issues and types of businesses we could consider, but you get the point. Without a base level of economic activity, most businesses of all types will struggle. The domino effect throughout specific industries is much greater than most people may realize. Just think of the supply chain involved to serve you a meal at a restaurant, or to manufacture a refrigerator. This points to a U-shaped recovery and the need for a vaccine before a vast majority of people will be comfortable resuming life as they knew it just six months ago.

What should business owners do?

  • Conserve cash. Scale back on capital spending unless it is absolutely necessary. Scale back on discretionary expenses if you don’t foresee a return on investment over the next six months, then reevaluate these expenditures.
  • Collect your accounts receivable. Be very aggressive. Many companies will be conserving cash, just like you. You have to be the squeaky wheel.
  • Negotiate payment terms with vendors. Some vendors may be in a financial position to do this in order to retain your business.
  • Negotiate loan forbearance with your bank if you are in a tight cash position and conserving cash is critical for you to remain in business.
  • Furlough employees. While this is often very distasteful for most business owners, if you don’t have work for everyone, you have to cut your losses.
  • Apply for a Payment Protection Loan (PPP) as soon as possible through your bank. If you don’t have a lending relationship with a bank, many community banks are participating in the program and are easier to deal with than large national banks. I have been receiving feedback from colleagues and businesses that their loans have been approved.

I hope you found this helpful. Please feel free to call or write if you wish to discuss any of these topics.
Best wishes, Ray

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