Even though quite a few American are confessing to having Covid-19 fatigue, there’s no escaping the ongoing damage to the economy, like bleeding out of a major artery. Commercial tenants, particularly of retail space and office space, are either not paying or are pushing their landlords to give a major rent reduction. Upscale business hotels remain closed in major cities. I am told there are lots of moving vans in New York City, and they aren’t for move ins. Restaurants are trying to figure out how to get by. Operators that depended on corporate activity, be it shops and food vendors catering to office cube dwellers commuting or retailers in airports, are thinning out their locations and their staffing.
And mind you, that was the state of play as states were partly or significantly though reopening, when there was hope the economy would haltingly get back to something approaching the old normal. But now, thirty-two states reported an increase of 10% or more Covid-19 cases in the last week. Even though the death rates so far aren’t correspondingly high, experts warn that with the lag between infection and mortality, that it’s too early to rule out a follow-on death spike.
What has kept the bottom from dropping out of the economy is the emergency response. Yes, way too much was in the way of zombie futures, as in allowing already heavily leveraged companies to have more access to debt. And the subsidies to households, both directly, through the $600 a week unemployment insurance supplement, which resulted in five out of six making more than when they were employed, the payroll protection plan, which kept others from being furloughed, and the $1200 per person payouts all helped preserve incomes. As a result, even though residential mortgage delinquencies are elevated, they aren’t at the post financial crisis level, when 9 million mortgages went into foreclosure.1From HousingWire:
The U.S. mortgage delinquency rate rose to 7.76% in May as Americans struggled to pay their bills during the worst public health crisis in more than a century.
The rate rose from 6.45% in April and was 3.39% in March, the month when states began issuing stay-at-home orders to try to stem the spread of COVID-19, according to the report on Monday. Black Knight counts loan in forbearances – meaning they have an agreement with the servicer to suspend payments – as being delinquent, as does Mortgage Bankers Association.
Measured as a number, rather than a percentage, there were 4.12 million mortgages in the U.S. that had payments more than 30 days overdue in May, Black Knight said.
Last week there were 4.6 million homeowners with mortgages in forbearance, down 57,000 from the prior week, according to Black Knight. Some owners get an agreement with their servicers to suspend payments and then keep paying their home-loan bill, the firm has said in the past.
Mississippi had the worst delinquency rate, at 12.73%, according to the report. Louisiana was next, at 11.79%, followed by New York at 11.28%, New Jersey at 11.03% and Florida at 10.52%….
Serious delinquencies, which means people who are 90 days past due but not yet in foreclosure, have increased by more than 50% over the past two months to 631,000, Black Knight said.
There’s a moratorium on foreclosures for loans that are backed by Fannie Mae, Freddie Mac, and the Federal Housing Administration through the end of August because of the COVID-19 pandemic.
Some other omissions are on the restaurant front.3 The piece does capture Fig & Olive, which had been in trouble and Covid-19 pushed it over the edge; a story on its bankruptcy filing listed other Covid-19 casualties, some of which escaped Bloomberg’s notice. From Restaurant Business last week:
The pandemic has forced a number of restaurant operators to declare bankruptcy in recent weeks, including NPC International, the largest Wendy’s and Pizza Hut franchisee, as well as Chuck E. Cheese, Twisted Root Burger Co., Souplantation and Sweet Tomatoes, and others.4
But some companies, like Chesapeake Energy, can’t be propped up because they are just too far gone in the new normal.
Bloomberg has a new story on enterprises that declared bankruptcy as a result of the crisis. The authors admit the list is incomplete and even yours truly, who doesn’t follow particularly companies much, has noticed some bankruptcies not on the list attributed to Covid-19. One is 24 Hour Fitness, which if anything is larger than Gold’s Gyms, another health club operator that at best is radically shrinking.2
Nevertheless, the Bloomberg survey does give a sense of the sort of companies that are falling over. The article also has an excellent interactive graphic which enables you to see even more names than listed in the text. I was sad to see other businesses I had patronized there, like Sur la Table, where I’d bought holiday presents and got all my good knives sharpened before I left NYC, as well as J Crew (which even though I hadn’t bought from them in a decade due to crapification was still a warhorse you expected to stay around), Tuesday Morning (a Southern chain selling remaindered goods at cheap prices; a good place to grab cheap linens or a knockabout piece of luggage), and GNC (one of those stores I never partronized but seemed to have a loyal customer base). But what is remarkable is the range of businesses that are having to reorganize, including a DC parking garage operator, American Addiction Centers, and The Roman Catholic Church for the Archdiocese of New Orleans. The authors also picked up some very small businesses, with only $50,000 in assets like:
…Sugarloaf Craft Festivals, which organized artist fairs across the country. It simply saw no way to keep going in the era of social distancing. Ditto for Bounce For Fun, which rented bounce houses and water slides for school parties and spring festivals in the Dallas area. The owner says cancellations had hit 100% this year, with little hope for a rebound next season.
In addition to the infographic, the article also has case studies of some of the bankruptcies, like of Northern Bear, a diner in California, Klausner Lumber, a sawmill in Florida, professional sports league Alpha Entertainment in Connecticut, and Alaska regional airline Ravn Air. A table sorts the bankruptcies catalogued by size. From the biggest:
Bankruptcies are only one measure of economic damage. The companies that do survive it will emerge smaller, but some will liquidate and never return. But other companies are shrinking without declaring bankruptcy. Airlines are expected to cut more staff soon. Even Starbucks has been closing stores.
Moreover, particularly for small businesses, bankruptcy isn’t a great way to shutter your business. Small business owners almost always have to issue personal guarantees of their company’s obligations. So a business bankruptcy will often trigger a personal bankruptcy. Oh, and bankruptcies often lead to divorce. So an owner who sees the handwriting on the wall is better off closing his business and walking away if he can.
And as we’ve stressed, companies that received PPP loans, on the whole, expect to cut employment levels once they’ve met the eight week requirement to turn the loan into a grant. That bleeding is just starting.
So far, the economy is tracking our non-letter “recovery”: a bounce off the bottom followed by a rapid loss of trajectory, followed by wobbly sideways to possibly downward activity.
Where things go next is highly uncertain. One big variable is what the Feds do next. While there’s talk of a second stimulus package, the noise-making is for it to be stingier to households than the first. The $600 per week unemployment supplement has engendered a lot of conservative whining. And it has made hiring low wage workers harder; I know the home health care agencies in Alabama attribute their recent increased difficulty in getting staffing directly to the unemployment supplement.
For one-stop complaining, some sightings in the New York Post, the first from July 5, NYC grocers struggle to hire while workers bank on unemployment claims:
New York City supermarkets are getting inundated with unemployment claims — while most of them are looking to hire workers during the coronavirus lockdown, not fire them.
Morton Williams, which operates 16 stores in the New York metro area, was slammed with 400 claims at the height of the pandemic in March and April — up tenfold from a year earlier, co-owner Steven Sloan told The Post. Through June, claims have risen to about 600 — or about half the workers on the payroll, he said.
What’s more, during that time Sloan said Morton Williams has laid off only three people as grocery demand went through the roof. Yet by the end of May, more than 160 ex-staffers were drawing weekly benefits OK’d by the state, he said.
In the past, it was rare that the New York Department of Labor would pay a claim the supermarket disputed, and if they did, they would explain themselves, Sloan said.
That practice changed with the outbreak of the coronavirus, he said.
“In three months I have not received a single explanation about why former employees are being paid when I have disputed their claims,” Sloan told The Post. “So, I don’t know what their reasoning is. I can’t argue any of these cases if we don’t know what the rules are.”
Shorter: So not only are the unemployed being paid too much, they are not being portrayed as the new welfare cheats. This contrasts with the situation in Florida (and no doubt other states), where reader alex has written me at length about how large numbers of workers are encountering big obstacles to getting unemployment. I have been remiss in not writing it up, but it’s a real hairball to explain.
And from the Post over the weekend, Why Congress must say no to the $600 unemployment bonus extension:
Five out of every six recipients are receiving unemployment benefits that exceeded their previous earnings, according to the Congressional Budget Office. This significantly depresses employment and makes it more difficult for businesses to reopen.
The add-on payment expires on July 31. It should not be extended. Doing so would encourage workers to remain unemployed longer than they otherwise would and depress the economic recovery. We estimate that if the add-on is continued, more than 60 percent of those unemployed after July 31 would be out of work specifically because of the add-on.
Congress should create additional incentives for people to return to work, in part because longer-term spells of unemployment can harm a worker’s lifetime earnings, as skills atrophy.
Needless to say, that charitably assumes jobs will be there, a fact not generally in evidence.
Another Scrooge front is proposals for another round of checks to individuals, but at a much lower income level cutoff.
Keynes observed that there isn’t the political will to run big enough deficits long enough to lift an economy out of a depression absent a war. Recall how the US dialed back support in 1937 when activity was improving and the economy promptly fell over.
On top of the general tendency to curtail stimulus spending too soon, we now have the additional wee problem of Covid-19 whacking the economy again. California, Texas and Florida alone are all significant in terms of economic activity. Yet they don’t appear to (yet) have had enough Covid-19 deaths to frighten enough locals into taking mask discipline seriously (unlike New York, when I visited last month, compliance was extremely high and almost everyone was wearing them correctly, as in over their noses). Even so, communities are seeing anything from debates to pitched battles over whether public schools will reopen, with teachers and some parents favoring closure or at most very limited opening. But the first time around, school closures were often accompanied by non-essential business closures, so most parents could tend their kids. What happens if schools are shuttered but more parents are expected to work out of the house?
And the same debate is taking place with colleges, with similarly complex pressures, since in many communities, those institutions are major drivers of local employment.
And these debates will inevitably be framed as jobs versus safety, when we’ve seen from Sweden that high infection rates lead consumers, particularly older affluent ones, to curtail their activities and spending, as well as become national pariahs. For instance, Americans can’t even go to Canada without being required to quarantine, and that’s assuming the trip is deemed essential.
In other words, while a lot of important decisions are in play, the odds considerably favor results that will take more air out of this already weak economy. Yet the NASDAQ hit an all-time high last Friday, and the commentator patter is Mr. Market thinks Covid-19 means only one or at most two lost quarters. I’d like some of what they are smoking.
One of the things that is propping up the sense of normalcy is the apparent limited amount of superficial change. I have not seen that many more “For Sale” signs than usual. I don’t get out much but I have seen only a few vacant stores and they were in marginal locations (I suspect this is true of many moderately-well-off to affluent suburbs; I’m curious to get a grip on why Americans seem to be underreacting to what is happening).
Thing will only get more turbulent. Hope you are well bunkered.
1 Note that some homes had first and second mortgages on them. In general, the data on mortgages and rental is poor due to the fragmentation of that market and the lack of central reporting.
2 I have only been to one 24 Hour Fitness, but it was vastly larger than a Gold’s Gym typically is and had a pool, saunas, and steamrooms. So even though it had slightly fewer locations, I strongly suspect the 24 Hour Fitness operations typically had more members. Golds also became a franchise, and I haven’t come across a breakdown on how many locations were owned v. franchised.
3 A Yelp survey says 53% of the restaurants listed at Yelp say they are permanently closed, but there’s something amiss with their metrics, since it also ways 47% are temporarily closed, whic obviously adds to up 100% when there are some restaurants still open.
4 NPC, Chuck E. Cheese and Twisted Root do get mentions in the Bloomberg piece; there are clearly so many restaurant deaths that it would be difficult just to catalogue them.