Posted by on March 20, 2020

Many people have been asking my opinion of what’s ahead for the US economy, so I’ve detailed my (mostly) macro view here.

This recession is built in three layers.
1. Global Demand Shock created by a month of furlough and layoffs
2. Unprecedented Credit Defaults created by demand shock
3. Massive Structural Unemployment


LAYER 1. Global Demand Shock created by a month of furlough and layoffs.

Unemployment claims over the last few weeks have skyrocketed. In my estimation it seems we may have already lost 1.5-2M jobs since the last report, conservatively bringing total unemployment to ~4.5%- 4.8% from 3.6% last month. This seems like a base case at this point, if the Trump administration even let’s the Dept of Labor publish figures.
I posted a warning March 6th that the March jobs report would be brutal based on the early indication industries my firm services (events, production, venues). That pain was not lockdown related, and did not include the effect of sweeping furloughs across the nation. It seems hard to imagine a situation where we don’t hit double-digit unemployment this year, unless Fed backstops small businesses in a meaningful way. At the moment, McConnell’s package only provides $300B of “forgiveable bridge loans” for the nation’s 30M+ small businesses. That’s $10k a business. Not enough.
The commensurate reduction of US employee purchasing power driven by unemployment and uncertainty is expected to push GDP growth negative, with Goldman Sachs revising next quarter’s contraction estimates from 5% contraction to a massive 24%. The knock-on effect of this contraction (more layoffs, divestment) will create an unemployment momentum that will not be easily reversed. Government must get ahead of this or it will be a runaway train of pain.

LAYER 2. Unprecedented Credit Defaults created by demand shock

Businesses unable to make sales during a lockdown will dump their two largest liabilities first: labor and real estate. The labor equation has already been captured in the credit shock, but the commercial lease and mortgage defaults will trigger a new wave of layoffs and economic destruction. When businesses stop paying their leases and mortgages (which is already happening in a meaningful way) there will not be a replacement tenant or buyer for properties. Lease rates, cap rates and property values will become difficult to determine, and banks/funds will struggle to mark-to-market or determine LTV for much needed refinancing. They will default to extremely low LTV to err on the side of caution, causing massive liquidity issues for owners. Worse, landlords and lenders will have non-performing assets, and those assets are often pooled as Commercial Mortgage Backed Securities. CMBS defaults will abound, and banks will need to be bailed out again. Expect circa 2008 Citigroup-esque stock prices among some of our strongest US banks. CRE is going to be a very challenging landscape very soon. Those of us who navigated The Great Recession have a sense for what is ahead, and we’re not excited.

LAYER 3. Massive Structural Unemployment

The last component of the CoronaVirus economic upheaval is the seachange it has created in everyday life. Our kids are learning from home. Well over 50M Americans (or more?) worked from home (now abbreviated as “WFH”). Live concerts, trade shows and group gatherings of any size were instantly replaced by video conference; even Alcoholics Anonymous moved to a Zoom meeting. We learned that we can survive digitally, at distance. We’ve been told that perhaps social distancing is here to stay, and will be instituted in waves. What then is the value of commercial office space, if the NYSE is operating out of people’s homes? If a Wall Street trader can move $500M of a bank’s money from his Verizon DSL wireless router in New Jersey in his $1500 home office, will we ever go back to needing 600 million square feet of commercial office space at an average lease rate of $75 psf in Manhattan alone? What about all the ancillary jobs that historically strong office demand creates?
Ditto with education. My kids have been watching videos of their teachers. It’s the teachers first rodeo, and some seem to be born for video instruction. The rest won’t be teachers in 10 years as we move towards a digital-first educational model that plans for interruptions to in-person schooling. The standardization begun by common core will be married to the flexibility of distance learning. The absolute best instructors will have videos and become “education stars”, like YouTube stars. They’ll be rich. The rest will work at the public library offering tutoring. Moreover the question will become- “if my kids learn online, why do I have to live in a given school district?”. The answer? You don’t. And so residential home values will flatten across the country as families who work and learn at distance, distance themselves from overbought major metro markets (where pandemics happen to cause greater complications and anxiety).
These types of structural changes will abound, particularly in retail and live events industries, and coupled with automation will create historic destruction of US jobs. While many believe the destruction of these jobs will simply create 3 jobs more for every 1 lost, that’s a pipe dream.
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