by Sean Kelly
We’re several weeks into the federal social distancing mandate and things have gotten very quiet. Faced with new U.S. projection models for coronavirus infections in the millions and possible deaths in the hundreds of thousands, most Americans are staying home. Stores are closed, restaurants are shut, businesses are dark – and our cities and towns have slowed to a crawl.
The start of a new month presents a slew of payment due dates, however. For consumers there are mortgages, rents, credit card statements, car payments, phone and utility bills, etc. For businesses there’s operating expenses like equipment leases, fixtures, inventory, storage, licenses, tax deposits and payroll. So, what happens when the hourly worker that was recently laid off and the shuttered business that employs hundreds of workers can’t pay the bills?
Some 3.3 million Americans are now unemployed and millions more have lost pay or had their salaries cut, particularly in vulnerable industries. But months before COVID-19’s infiltration into the U.S. via ‘patient zero’ back in mid-January – Americans were struggling with debt and affordability. According to CNBC, last year U.S. households saw the largest annual increase in debt since the financial crisis, rising over $600 billion and topping $14 trillion for the first time ever. Mortgage debt also made the largest gains since 2007 while car loans and credit card debt increased by $57 billion. To make matters worse, according to a 2019 GoBankingRates’ savings survey, 70% of Americans have just $1000 or less tucked away for a crisis. The key findings of the survey concluded that: 45% of respondents had no monies in savings whatsoever and another 24% had $1000 or less. The top reason cited for not being able to put money away was ‘living paycheck to paycheck’ – while 20% named the ‘high cost of living.’
A lot of businesses are in no better shape. According to the Wall Street Journal, the restaurant industry has lost an estimated $25 billion since March 1st and nearly 50,000 stores of major American retail chains have closed. For the travel, leisure and hospitality industries, the coronavirus threatens their very existence. Airlines are flying near empty planes. TSA screening records showed just 180,000 screenings on March 29, 2020 compared to over 2.5 million on the same date last year. The International Air Transport Association is estimating that over a million flights worldwide will be canceled by June 30th with a loss of over $250 billion in revenue. The loss for the U.S. and Canadian airlines will top $50 billion. Demand for hotel rooms has also plummeted. InterContinental Hotels Group (IHG) whose properties include Holiday Inn, Staybridge, Kimpton, Crowne Plaza and Candlewood Suites announced $150 million in cost cutting measures and said it expected revenues to plunge by about 60% in March. And in light of the various on-board infections, in-dock quarantines, and a complete halt in global operations – some analysts are predicting that the $45 billion cruise industry may never recover.
The domino effect of all this will be swift and severe for all consumer groups and across all categories of business. The job losses triggered by the restaurant and retail industry is a snapshot of what the economic halt can do the rest of the economy. Already mortgage companies are expecting scores of missed payments. Car dealers are fielding calls from consumers that cannot make their next lease or loan installment and commercial landlords are being inundated by companies of all sizes that cannot make their April rent. Suspending foreclosures, banning evictions and a $1200 check from the government won’t curb the damage. Morgan Stanley is projecting that job losses could hit 17 million by May and the unemployment rate could soar over 12% by June. Their analysts also expect GDP to slump by an astonishing 30.1% in the 3rd quarter of this year. But, the worst part of the forecast is the uncertainty. Dire predictions are being made about conditions that could easily worsen if the pandemic is not stopped or if governments around the world enact the wrong measures to try to prop up their economies. And we simply do not know how many jobs will be lost or how fast – or how many payments will be skipped or for how long.
What we do know is that regaining a sense of normalcy could take months, even years. The coronavirus has delivered an acute economic disruption at a rate of speed never seen in modern history. Consumers are feeling panicked and disconnected. Businesses are feeling stressed and overleveraged. And both are worried that bailouts won’t arrive in time, and the money won’t be sufficient to keep them afloat.
We are in the midst of a culture-changing journey to a place we’ve never been – and for those of us trying to ride out the unknown, we need both a short-term and a long-term financial strategy. Perhaps this is why gold, often popular with survivalists and those looking for a hedge against economic volatility is being acquired at record levels. We are, after all, in a ‘survival of the fittest’ scenario in arguably the most volatile economic moment in history.
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