The fallout from the coronavirus pandemic sweeping across the globe has been swift and severe with Corporate America taking extraordinary steps to protect its workers. Detroit’s Big Three automakers — Ford, General Motors and Fiat Chrysler — are suspending production this week in North America as a precaution against the coronavirus. Meanwhile, major airlines have cut capacity by 50 percent or more systemwide due to sharply reduced consumer demand.
Millions of public school students will be off for at least the next few weeks in an effort to keep the virus from spreading. State governments are increasingly calling for the temporary closure of all non-essential businesses, including bars and restaurants. The Dow Jones Industrial Average closed Wednesday below 20,000, nearly wiping out all the gains made during Donald Trump’s presidency.
The Centers for Disease Control and Prevention (CDC) reported 10,442 cases of coronavirus in the United States and 150 deaths as of noon Thursday on its website. Globally, more than 230,000 people have been stricken by the coronavirus, with 9,358 total deaths and 84,557 people who have recovered, according to a Johns Hopkins University website established as a coronavirus resource center.
The Wall Street Journal reports that the Trump Administration is proposing two rounds of direct payments to Americans totaling $500 billion to respond to the economic impact of the coronavirus outbreak, as the Senate prepares to vote on a second coronavirus response bill.
Seniors Housing Business spoke with Beth Burnham Mace, chief economist for the National Investment Center for Seniors Housing & Care, on Tuesday regarding the unprecedented public health and economic crisis. An edited version of that interview follows.
Seniors Housing Business: Given what we know today about the coronavirus pandemic, what impact will this public health crisis have on U.S. GDP and the overall employment picture in the short run?
Beth Burnham Mace: It’s too soon to say what the total impact will be on the economy, but at this point we know that the supply chain has been broken, discretionary spending at nearly all retail establishments has been dramatically reduced, tourism has been effectively curtailed, and the manufacturing, transportation and accommodations sectors have all been affected. Taken in its entirety, it’s very likely that we are currently in a recession that will last several months at least. The jobless rate in my view will quickly start to rise from its 50-year low point of 3.5 percent as businesses are forced to lay off workers, and as job growth slows.
Some of the distress may be mitigated by federal fiscal and monetary policy that tries to provide support to the broad economy. We saw an unscheduled meeting of the Fed over the weekend at which policy makers slashed their benchmark fed funds rate by 100 basis points to a target range of 0 to 0.25 percent. The Fed said it was going to boost its bond holdings by at least $700 billion. So, the central bank is in fact doing a lot new — as much as it can right now.
There was some coordination with other central banks over the weekend as well. It was probably one of the biggest coordinated monetary policy interventions in history, quite honestly. So, with regard to what I said about the economy, it’s possible that (contraction) could be somewhat mitigated. The hope is that a significant recession could be avoided by doing this coordinated effort.
What really has to happen is we need to figure out a coordinated response to the illness itself — the pandemic. Once it appears that we’re addressing the pandemic in trying to reduce the curve (progression of the outbreak) that everyone keeps talking about, then I think the financial markets will feel a little bit better. That will start to calm the markets, which will start to affect confidence levels.
I don’t have an economic model, but based on my intuition and what I’m seeing, we’re into a recession right now that will last at least into the second quarter and will be determined by the extent of the illness and how quickly it gets reduced or mitigated.
SHB: What will be the shape of the recovery?
Burnham Mace: Sometimes people will refer to it as a letter, like a “V,” a “W” or an “L.” That shape depends on whether it’s a quick down and up — that would be a “V.” A “W” recovery would be like what we had in the 1980s. A “U” would be a gradual recovery. An “L” would be if the economy were to contract and be followed by lower potential growth. Quite honestly, in my view, I’m worried about the longer-term implications for the globalization of the economy. We’re already starting to see that through trade wars. And this is really pointing out the supply change challenges of globalization. It’s possible that when we get to the recovery point, it may be more of an “L.”
SHB: The definition of a recession is two consecutive quarters of economic contraction, according to the National Bureau of Economic Research. But we won’t officially know we’re in a recession until we have those two negative quarters back to back, correct?
Burnham Mace: The virus started in China (in 2019). Then it started having an impact on our economy pretty quickly through supply chains. It started to affect our economy through tourism because there were fewer Chinese tourists coming to the U.S. That drop-off in tourism began to affect the transportation and the accommodation industries in this country. That alone started to have an impact on GDP in the first quarter.
I’ve known Mark Zandi (chief economist of Moody’s Analytics) for quite a long time. His latest projection is for a decline in U.S. GDP of 1.6 percent in the first quarter at an annualized rate, and about a 2.5 percent decline in the second quarter. He has the economy picking up in the second half of the year to more like a “V.”
J.P. Morgan now project the U.S. economy will contract at a 2 percent annualized rate in the first quarter, 3 percent in the second quarter, and then come back in the last half of the year. Goldman Sachs projects no growth in the first quarter and a 5 percent decline in the second quarter, and then strong growth in the second half of the year.
So, that’s three groups predicting a very weak first half. By definition, that would be a recession. A bounceback is a bold statement right now. The data I’ve seen shows that the incidence of the coronavirus illness may not peak until summer.
SHB: At certain points in the past, investors on Wall Street have exhibited irrational exuberance. Are we now in a period of irrational pessimism over the effects of the coronavirus?
Burnham Mace: Well, I don’t know. We’re in unprecedented times, right? From the economist’s point of view, is this a supply shock to the economy, or is it a demand shock? Quite honestly, it’s both. It’s a supply shock from the sense of the supply chain link that we were just talking about. But it’s also a demand shock. Just think about restaurants. They are going to have no business. That’s a demand shock. We’ve never had a period like this. Large parts of the economy are shutting down. You have the quarantine. In San Francisco and the Bay area you are quarantined to your house. There are certain businesses that are doing OK from all of this crisis. That includes Zoom, a videoconferencing company, as well as webinar-type businesses where companies are connected through video chats. Amazon is hiring, and it just brought its wages up to $17 per hour. Groceries, food, pharmacy are the stores that will be open.
In my life, I don’t think we’ve ever experienced anything like this. If you go back and you look at the recessions over time, we’ve had the supply shocks of oil, or we had a housing crisis. We’ve had different (shocks), but never as profound and as deep as this that I can think of. We can go back to the 1918 influenza pandemic, but I don’t know enough about the economic data back then.
Compounding matters is the psychology of the market. That’s weighing on people’s anxieties.
SHB: Can you assess for us the impact the coronavirus has already had on the seniors housing industry and what the impact is likely to be going forward?
Burnham Mace: That I can say is even more uncertain. Anecdotally, at this point it would appear that we’re seeing a slowdown in property tours. A lot of properties host open houses, so those currently aren’t happening. So, probably move-in rates are down, which would have an impact on occupancy. The Centers for Medicare and Medicaid (CMS) came out earlier this week and said it was changing its three-day rule of a patient being in a hospital before moving to skilled nursing. It seems like there is more discussion of using skilled nursing beds as overflow from hospitals because the federal government in conjunction with health officials is coming up with contingency plans. So, there might be some increase in occupancy in the skilled nursing arena.
The transaction market is going to slow as well because of the uncertainty. Think for a minute about the logistics of transacting. If property tours are being postponed or employees are working from home, it’s going to be harder to actually sell. RCA (Real Capital Analytics) collects data on transactions and weekly deal volume. The data indicates for the first eight weeks of 2020, European activity was off 18 percent compared with the same period in 2019, deal volume in the Americas was actually 10 percent higher, and Asia-Pacific was off 50 percent.
What that data for the first eight weeks of the year suggests to me is that the Americas is following what’s happening in Asia but with a lag. The data suggests to me that transaction volumes will start to slow here as well. That would affect seniors housing deal volume as well. The flip side is that in a lower interest rate environment, which we have, now is a good time to recapitalize or refinance. (The 10-year Treasury yield, a benchmark for permanent-rate financing, currently stands at 1.1 percent.)
SHB: Is there a point you’d like to drive home to our audience as the coronavirus public health and economic crisis spreads?
Burnham Mace: It’s more important now than ever to support the workers who are protecting and caring for the most vulnerable among us — our seniors. You have the compounded effect of staff members who are working and have their children at home because the public schools have temporarily closed in large parts of the country. Employers are increasingly wanting to help mitigate that problem by trying to offer a stipend to be used for daycare or some type of babysitting services. A lot of people who are caregivers are mothers with children. Some of the trade associations are trying to bring some of these points to bear Capitol Hill. We really need to create some policies or measures that can help.
— Matt Valley