As if Great Depression-size job losses and a cartoonish contraction in the nation’s economic output weren’t enough, analysts are starting to fret over a new risk from the coronavirus pandemic: deflation.
Deflation, or a sustained period of falling prices, may sound like a good thing: Goods and services cost less, saving consumers money. But deflation prompts shoppers to put off purchases on the expectation that prices will fall further if they wait. That can lead to a toxic cycle in which lower spending prompts businesses to cut wages, further pushing down consumer purchases and prices.
Deflation also can make it harder to repay mortgages and other debt, which become costlier in inflation-adjusted terms.
The economy can get stuck in a rut, similar to the “lost decade” that battered Japan in the 1990s.
Economists similarly worried about deflation during the Great Recession of 2007-09. But while average annual price increases dipped below 1% in 2010, they never declined. The current recession, however, has featured a more abrupt and dramatic blow to the economy.
“I think the risk of the U.S. falling into a deflationary trap is higher now than at any time during the Great Recession,” says economist Ryan Sweet of Moody’s Analytics.
The U.S. is not now experiencing deflation. Sure, oil prices have cratered to historically low levels and gasoline prices are slowly following them down. But when assessing deflation, economists generally put aside food and energy costs, which are highly volatile and likely to recover from near-term ups and downs.
A measure of prices excluding food and energy costs that the Federal Reserve watches closely – known as the core personal consumption expenditures (PCE) price index — rose 1.7% annually in March, below the Fed’s 2% target but nothing close to a yearly decline. Yet the shutdown of much of the nation’s economy to contain the coronavirus – along with more than 20 million related layoffs – has hammered consumer demand.
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In response, airlines already have slashed ticket prices. Hotels are expected to follow suit, Morgan Stanley wrote in a research note. In March, apparel prices were down 1.6% annually and new vehicle prices fell 0.4%.
Perhaps a bigger concern is that the sudden drop in consumer spending, amplified by the layoffs, has hammered business revenues, forcing many companies to lower wages at least temporarily, says Barclays economist Blerina Uruci.
A myriad of companies have announced executive pay cuts, including Delta, Marriott, Macy’s, Bed Bath and Beyond, Nordstrom and Macy’s.
Many small businesses are also reducing wages for low- and midlevel workers as sales have plummeted. Creative Noggin, a marketing company in Boerne, Texas, has trimmed salaries across the board by 20% to 30% rather than lay off any of its 14 employees, says CEO Tracy Marlowe.
Lower wages can further dampen consumer spending, forcing additional price cuts, Uruci says. Reduced pay, she says, also gives business more room to lower prices and maintain at least modest profits.
During the Great Recession, by contrast, most businesses didn’t cut wages despite unemployment that hit 10% because they didn’t want to lose their most skilled employees, Uruci says.
Barclays expects the rise in the core PCE index to average 0.6% from the third quarter of 2020 through the first quarter of next year. That’s a meager price rise but it’s not deflation. And Sweet says he would need to see price drops persist for more than six months to label the episode deflation.
Morgan Stanley says certain bonds that hedge against inflation are implying a 55% risk of deflation over the next two years, but the research firm says the market is far overstating the chances.
The Fed is doing its part to head off deflation by making clear it will do what it must to spur stronger demand and higher prices by lowering borrowing costs.
“As long as inflation expectations remain anchored, then we shouldn’t see deflation,” Fed Chair Jerome Powell said at a news conference last week. “Needless to say, we’ll be keeping very close track of that.”
But with inflation expected to fall to such low levels in coming months, it wouldn’t take much to push the economy into a deflationary spiral, Sweet says. After all, long-term forces such as discounted online shopping and the more globally-connected economy have been keeping inflation below the Fed’s target for years.
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Now, many states have started to allow shuttered business to reopen and a solid recovery is expected by summer, assuming the outbreak eases substantially by then. But if that doesn’t happen, or if the virus returns to a significant extent in the fall or winter, that could halt the rebound and increase the chances of deflation, Sweet says.
“We can’t afford anything else going wrong,” he says.
New cruise ship restrictions will mean big hit to B.C. economy, industry says – CBC.ca
There will be no cruise season in Canada this year, an industry representative says, after the federal transport minister announced new restrictions on vessels’ ability to sail in Canadian waters.
On Friday, federal Transportation Minister Marc Garneau announced further limits on vessels and extended restrictions until October as a measure to limit the spread of COVID-19.
“It’s obviously disappointing news,” said Barry Penner, legal advisor to Cruise Lines International Association — Northwest and Canada. “There won’t be a cruise season in Canada, at all.”
“This announcement will be acutely felt in coastal communities, small towns, bigger centres, everywhere from Newfoundland, Nova Scotia, New Brunswick, Prince Edward Island, Quebec, and especially British Columbia.”
Penner said the cruise ship industry contributed over $4.1 billion to the Canadian economy in 2018 and led to 29,000 jobs. Over $2.3 billion of that economic activity and over 15,000 of those jobs are in B.C.
The employment figures include spin-off jobs in businesses like hotels, restaurants and taxis serving cruise ship customers on shore, as well as suppliers producing goods for vessels, Penner said.
310 Vancouver port calls cancelled
B.C. health officials have already said cruise ships will be allowed to stop for refuelling in the province’s ports but passengers will not be permitted to disembark.
Dayna Miller, director of global partnerships with Tourism Vancouver, said her organization understands the decision by the federal government.
“I think we were not entirely surprised,” Miller said, especially with large gatherings on hold in B.C.
However, she said, 310 cruise ship calls were expected in Vancouver this season, which would have brought about 1.2 million visitors to the city. Each call, she said, generates about $3 million in economic activity.
“It’s a vital industry as a whole,” she said.
The coronavirus pandemic has been devastating to the cruise industry globally.
Experts have said cruise ships, with hundreds or thousands of people in close proximity, present virus transmission risks.
There have been reports that even once cruises are given the OK to begin operations again, fewer customers will want to set sail over health fears. Some have speculated the pandemic will mean the end for at least some cruise lines.
In February, a high-profile outbreak on the cruise ship Diamond Princess led to hundreds of passengers testing positive for the disease.
“I think everybody’s been learning, as fast as they can, around the world,” Penner said.
Penner said the pandemic has been a “vexing” problem for governments and health authorities and the cruise industry is working with both to find best practices to contain viral risks.
But cruise lines aren’t alone, he said. Airlines and movie theatres face similar issues, for instance.
His industry is making some changes to increase consumer confidence, such as making cancellations more flexible for travellers booking in 2021.
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Restarting The American Economy: The Most Essential Factors – Forbes
When governors and the federal government made the decision to close “non-essential” businesses and issue shelter-at-home orders to slow the spread of COVID-19, they did so without the benefit of a historical precedent. We are only now beginning to understand some of the ramifications of this drastic action. As the U.S. moves to unshackle its economy, millions of workers sit nervously waiting for a call from their employer. Though some workers have returned or hired on with companies that have thrived during this pandemic, others may never get ‘the call’ as companies restructure. You see, a crisis provides an opportunity (and motivation) for companies to reevaluate their business model in search of ways to cut expenses and increase profits. This is because success depends on how well a company can meet the needs of its consumers (revenue) and how well it manages its expenses. The difference between revenue and expenses is profit, which is the driving force behind the private sector. Profit is the lifeblood of every business and it is this lifeblood that is under attack.
How quickly will the U.S. economy return to normal? The answer is ‘it depends.’ It depends on how fast the unemployment rate falls. It depends on how quickly the consumer returns to their pre-COVID level of spending. It depends on the path of the virus. In essence, it depends on a myriad of variables. Let’s begin with unemployment as this will determine the level of economic growth over the next 12 to 18 months.
The official number of unemployed workers is now slightly over 41 million. This is substantially higher than the 5.75 million unemployed at the end of 2019. The current number of unemployed workers represents approximately 26% of the ‘pre-COVID-19’ work force. The unemployment rate hit 14.7% in April, the highest figure since the 24.9% rate during the Great Depression. According to some sources, unemployment is expected to reach 25.2% by the end of this year. Unlike the depression, however, the cause of this downturn is known, and the policy response has been more on point. Even so, can the U.S. economy return to normal with so many workers on the sidelines?
Slower Return to Normal?
Roughly 70% of the U.S. economic engine comes from consumer spending. Thus, when the consumer is actively engaged, the economy tends to prosper. Remove an additional 35 million consumers from the work force and, well, the economy suffers. More importantly, debt plays a vital role in economic growth. When consumers borrow, they spend more, which leads to growth. When you look at the level of total credit issued from all commercial banks since 1973, the average increase from one month to the next was 0.6%. In March and April of this year, the increase was 2.8% and 3.3% respectively. However, this was due to a 25% rise in commercial and industrial lending, much of which is attributable to the Paycheck Protection Program.
What about the largest driver of economic growth? Loans to consumers, which averaged a 0.5% increase from month to month since 1973, fell 3.5% in April. This is the largest monthly decline on record. This reduction in consumer lending has led to weaker consumer spending and slower economic growth. In fact, from March 1 to the end of April, consumer spending – as measured by personal consumption expenditures, fell nearly 20%. If you reduce the volume of loans to consumers – again, the largest contributor to GDP consumer spending falls and the economy slows. Therefore, we must find a way to help the consumer regain what they lost from the shutdown.
What else will affect the return to normal? It starts with demand, which, due to the shutdown, has plummeted. This is why the federal government, the Treasury, and the Fed embarked on a massive stimulus program to put money into the hands of Americans. However, since a one-time payment of $1,200 per individual and $500 per dependent won’t go very far, the federal government added a $600 per month bump in unemployment benefits.
The segment that benefits most from this are workers at the lower end of the income scale. Assuming these unemployed workers are receiving a total benefit of $800 per week ($200 state; $600 fed), this equates to over $41,000 per year. Working for $15 per hour, 40 hours a week, 52 weeks per year, yields $31,200 in gross income. Therefore, where is the incentive to return to a lower paying job? Unless extended, the $600 federal stipend will end July 30. This could lead to a flood of workers seeking reemployment. But how many of these jobs will be filled by then?
Safety concerns are key to consumer demand, which is key to the reemployment of the unemployed. How fast will the consumer reengage? Will there be a second wave of the virus? Will the virus mutate, hindering efforts to develop a vaccine? Regardless, some businesses will permanently close, others will reopen more slowly than expected, and many will look vastly different. Technology will assist those who continue working from home and replace jobs in some industries.
The ‘return to normal’ boils down to how well businesses adapt to this rapidly changing environment and become profitable again. A prosperous business community is necessary for a plentiful job market, which is critical for a thriving economy. If businesses fail to thrive, workers will have fewer employment options and unemployment could remain elevated for longer than necessary. Thus, saving our businesses may be the most important task of all, outside of the virus that is.
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