ELFA/ELFF Predict the Course of the U.S. Economy in the Epoch of COVID-19

by Erin Rafter May/June 2020
The U.S. economy is already in recession, and although it could be back in growth mode by the end of 2020, this will be a hard year for the industry.

The Equipment Leasing and Finance Association and the Equipment Leasing & Finance Foundation co-hosted an hour-long webinar, “Coronavirus and the U.S. Economy: Implications for the Equipment Finance Industry.”

The April 15 event generated more than 875 attendees and featured the 2020 Equipment Leasing & Finance U.S. Economic Outlook Q2 Update produced by the foundation and its partner, KeyBridge. KeyBridge’s President and Founder Dr. Robert Wescott and Vice President Jeff Jensen presented the data, as well as their own advice and predictions for the current situation.

“We have basically put the U.S. economy into an induced coma to try and save the patient,” Wescott said. “It’s like on March 15 we turned off the lights and we are now beginning to see what that means in terms of economic data.”

The data Wescott and Jenson presented, along with their own anticipations, offered expert insight into the big picture in five summarizing points.

1. A global recession is already underway.

Economies across the world have taken a turn for the worst. China was the first to see the negative repercussions of the coronavirus on its economy and it is now working toward recovery. The rest of the world is on a similar path, rebuilding around a virus with an unidentified timeline.

Oil is a continually declining sector of the global economy. From a Chinese oil imports chart, Wescott highlighted the production drop from 13 million down to 8 million barrels per day. Following suit, in the U.S., Wescott predicted a drop in demand as low as 30% to 50% in mid-May. In an attempt to stabilize the U.S. fracking industry, the federal government has purchased high-yield bonds; unfortunately, Wescott does not think it will be enough to prevent an “industry shakeout.”

2. The U.S. economy is already in recession.

Jensen noted that what makes this current crisis different than previous recessions is its abruptness. The implications of social distancing for the health of the nation has had the opposite effect on the health of the economy, with the second quarter likely to suffer tremendously.

The outbreak of the coronavirus forced severe domestic and international travel restrictions in countries around the world. Wescott pointed out tourism and hospitality as prominent sources of GDP. “Americans are 4% of the world population, 22% of world GDP, but we are 54% of all people that got on cruise ships,” Wescott said. The shutdown of restaurants, professional sports and theater performances has resulted in the absence of disposable income spending in our economy’s circulation.

Industries that necessitate human contact have taken the largest hit from COVID-19. Shelter-in-place orders have halted business operations and consumer spending, resulting in one-third of Americans being furloughed in some way. Around 17 million Americans filed initial unemployment claims in the three weeks preceding the webinar. Wescott anticipated near future data to show unemployment in the double digits, very possibly reaching 20%.

Wescott further analyzed the repercussions by explaining the “negative wealth effect.” In simple terms, this concept suggests that as the stock market declines, households become poorer, and when people start to feel poorer, they buy less. With an $8 trillion loss in the market, and a 3% to 4% wealth effect, Wescott predicted the economy could experience a $300 billion to $400 billion loss in consumer spending.

3. The economy could be back in growth mode by the end of the year. 

What happens in the second half of the year? Jensen and Wescott stressed that the future is contingent on the virus. COVID-19 is a public health crisis at first priority, and the discovery of a vaccine will determine the rate of the economic rebound.

“We are going to have a really negative second quarter. With a 30% to 40% annual rate of decline as the peak,” Wescott said. “I suspect we are going to take two years to retain the GDP level we had in the fourth quarter of 2019.” However, KeyBridge forecasted that growth will resume along with normalcy in work between June to August of this year.

4. This is likely to be a very tough year for the equipment finance industry. 

The Foundation-Keybridge Equipment & Software Investment Momentum Monitor tracks 12 different equipment verticals of investment activity. Although the matrix for April is not as bad as expected, future expectations are much worse. Ultimately, Jensen said the matrix shows, “Not a pretty picture for equipment and software investment.”

Jensen highlighted the industrial production chart showed its greatest fall since 1946 (see Figure 1). The utilization chart depicts a similar story. It currently sits above the range from the 2008 to 2009 recession but is expected to drop below it.

5. Small businesses are at heightened risk. 

Small businesses are the most vulnerable companies in this economic crisis as they are the least equipped to withstand a drop in revenue. Jensen said, “The quarter we are in right now is going to be four to five times worse than the worst quarter we have ever had.”

The federal government has a crucial role to play in determining how hard citizens get hit. Congress is providing support to small businesses through various measures under the CARES Act. Tax cuts, direct payments to households, and unemployment insurance are some of the means being taken to keep businesses and consumers afloat.

The federal government put $660 billion into the Paycheck Protection Program (PPP), which ensures that businesses can complete their payroll for up to eight weeks. Payroll completions assist the states by deferring lay-offs and, therefore, the amount of people filing for unemployment.

Q&A With Wescott and Jensen

The final 20 minutes of the ELFA/ELFF webinar was dedicated to answering the audience’s questions and provoked some interesting opinions from the two speakers.

When asked what they predict the future of business travel to look like, they compared the initial hesitance to air travel with the post-9/11 environment. They are confident that people are going to get back on airplanes and the industry will recover, eventually. The speakers explained the major shift following COVID-19 will be a technological one. The technological measures that have kept businesses and schools running following shelter-in-place orders are going to advance in the near future and beyond. Wescott also believes there will come a day when virtual doctor appointments are a norm.

One audience member inquired about government debt and whether the government will be able to refinance in a post pandemic world. In their reply, Wescott and Jensen agreed that the U.S. is in a situation of increasing debt, which, in a couple of years, could result in an inflation response. •

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