A lot of experts are saying that the current Covid-19 pandemic is the most serious challenge we’ve ever faced. It already had its impact on many sectors and the outlook is not so good. In this article on Niorise we want to concentrate on the impact of Covid-19 pandemic on the US Economy from now through 2025 and predict what can happen. Stay tuned!
The US economy through 2020 – 2025
Where we stand today, in the midst of 2020 and (let’s hope) in the middle of the COVID crisis, the economic outlook is bad. Due to closures and reduced market demand, over 16 million people are at least momentarily out of work. The economy has declined in the first quarter and is in a formal downturn. The big debate now is about recovery forms- V (everyone wishes for), U (somewhat worse however we can tolerate) or an L (not very good).
The wellbeing and stability of the economy would be determined by a variety of factors:
- Consumer spending. Since consumer spending accounts for about 70 percent of GDP, the money which households spend on discretionary or required spending are crucial. Any of our discretionary spending (transport, entertainment, dining out, and so on) will not happen in a shutdown economy. This suggests that lower investment will occur and lower demand will occur with lower spending. There is a need for less services and products, contributing to less market demand.
- Services vs. production – a large portion of the economy is now focused on services instead of on production. Approximately 80 per cent of employment in the US is focused on services instead of manufacturing, so poor demand for physical goods affects a smaller part of the economy, but poor or no demand for movies, hotels, tourism, travel and so on affects a large amount of workers.
- Compensation and safety nets in services. Many of these programs are carried out by individuals with no savings or a safety net. They continue to work to cover bills, because without these service jobs or a gig economy, they cannot afford to pay for simple things like accommodation, food, clothing and taxes. The effect on the economy is significant as low-and middle-income households in the service industry fail to find jobs.
- Easy money doesn’t last long. While the Fed is providing easy money today, it cannot do so indefinitely without the threat of inflation. The dollar is now high compared to other currencies, meaning our exports are more costly (leading to reduced demand for our goods abroad) and imports are cheaper. Again, upward pressure on local employment and local growth
- Debt service. The government now has more than $25 trillion in debt, and the balance is rising steadily. We are reaching a point where our debt is higher than our GDP, which is normally a red flag for most economies. At this point, the government would have to continue raising a large sum of its debt-service tax revenue, crowding out key investments on essential items such as defense and education.
- Difficulties in the real estate market. T As noted in the previous report, the real estate market is expected to be hit hard after COVID for at least 2 factors. First, due to the extreme and prolonged consequences of the pandemic, a bunch of small supermarket and restaurants will shut down, and few companies will choose to take these spaces until the conditions change and there are a shock of commercial property. Second, if businesses are adamant about sending employees to work remotely, there will be a large amount of business real estate available throughout 2021 and 2022, with less interest from companies.
- Job creation and destruction. Jobs will return after COVID, but the form and quality of employment will shift, so we might face a capacity gap. More and more workers are being replaced by robots and automation, but we do not have enough technicians and skilled engineers to do the work to introduce and manage these technologies. Also, more data should be available for study, but we do not have enough professionals with data science expertise. In the future, most of those people who hold positions in retail and services will see these positions vanish, and they will lack the qualifications to take on new tasks. Many university graduates just do not have the expertise to take on modern digitally enhanced jobs, and employers would not be eager to hire new staff at the rate they have had in the past while the margins are slimmer.
- Household savings. The Americans are slowly turning in to savers. Historically, we have saved almost nothing, but in the face of economic downturn and COVID-19 pandemic, our individual saving habits have shifted. Now, we’re saving even more than ever, but this saving acts against consumer consumption.
Three forces of spending
There are three main forces of spending, companies, customers and the government. As stated above, most customers are gradually becoming savers, and many may not have much disposable income to waste. This implies that 70% of the economy will remain static for some time to come. As the dollar becomes stronger, firms will suffer from sluggish domestic demand, and goods will be deemed costly on the export market, which implies that more companies will fail to increase profits in the US or overseas.
The government will work as a last resort spender, but it cannot afford to pump trillions of dollars in to economy. Spending will take effect under the current government, but even in that case, new regulations on projects or big project spending and time may be taken to execute the projects. This suggests that it is unlikely that the government will be able to increase investment on highways, bridges as well as other facilities by at least the summer of 2021.
Winners and Losers
The winners in this changing economy are asset-light and asset-less businesses that have a fair size , low costs and few staff, and provide useful services , particularly those funded by ad sales. Instagram, Facebook, Google and others are now digital, they’re all fairly profitable and they’re going to survive the storm. Amazon will steal more and more of the shopping sector for the same reasons. Businesses in the telecom and IT field, especially those in the sectors of networking and transmission or digital communications, will do well.
Many buyers are going to become much more value-aware and price-aware, meaning low-cost retailers (Walmart as an instance) are probably more likely to survive the storm than higher end specialty stores.
Essentially, the further every company is with its digital transformation, the best positioned it would be for success in the immediate future.
Businesses that encounter headwinds in this new era are those that rely on exports, since the dollar is likely to be strong as well as other countries will see much slower growth than US does. Some firms that would fail are those that depend on discretionary spending-travel and entertainment-because we can expect that less dollars will be accessible.
Health and education as an issue
Until we have substantial new laws, I think that the health of the ordinary person will decline because health care expenses have risen significantly and people are more likely to delay health treatment or refuse surgery or medicine if money is tight. For certain unemployed people and who had lost their health care plans, or who have been in the health insurance sector and find costs unaffordable, they and others may be at risk of consuming fewer health care services and may see their health adversely affected.
If the economy slows, individuals in their late teens and early twenties are expected to have a clear effect on their educational and work opportunities. When resources are tight, a college degree can appear out of reach. College graduates will find it hard to locate a job and have to opt for a job that is much less than their degree or expectations.
Universities and colleges are in a total shock, I guess. Years of unparalleled cost growth have left several colleges out of reach without a large loan debt. For certain schools, the price of tuition is not covered. So we have services with increasingly rising prices that do not cover expenses sufficiently, at a time when less and less people can afford college, and the university degree does not reflect value like it used to. In addition, state governments are likely to take a close look at the funds they expend on universities and colleges. The next five years will be a real reckoning for small and medium-sized schools, and both universities and colleges will face major financial difficulties.