COVID-19 Economic Update: “No Question” US Is in a Recession

Epidemiological assumptions predict the U.S. will see three to eight million confirmed COVID-19 cases with new infections peaking in May and abating by July. As of early April, the U.S. had 430,000 confirmed cases of COVID-19, which continues to grow, although the slope has started to flatten, demonstrating that shelter-in-place and social distancing appears to be working.

“Stay at home has come at a dear cost to the economy,” says Richard Branch, chief economist at Dodge Data & Analytics, further saying the usual data sources have yet to capture the full extent of the economy’s stoppage.

But March data paints a grim picture that caused several industry economists to declare the U.S. is in a recession. “We are in recession, full-stop, no question about it,” Branch says, predicting it will be “short U” shape. “Now we need to figure out the depth of the recession and what a potential recovery looks like.”

“I can quite confidently say February 2020 will be the official start of the recession,” says Ali Wolf, chief economist of Meyers Research, in an economic update webinar on April 8. She also revised her prediction from a V-shaped to a longer 16-18 month U-shaped recovery, using February as the starting point for future recession analysis. “The bad numbers are just beginning,” she warns.

Labor Market

The unemployment picture is worse than many economists projected. In a three-week timeframe, initial jobless claims tallied 16.8 million, which Wolf describes as “depression-like” levels. Nonfarm payroll employment, which measures net job loss by month, fell by 701,000 in March. Construction accounted for 29,000 of those jobs and manufacturing for 18,000. (Leisure and hospitality were the hardest hit, with a 459,000 drop.) Wolf contrasts this number to the Great Recession, when it took 10 months of net job losses to reach that 700,000 figure.

A positive unprecedented statistic lies with temporary layoffs, which account for 25 percent of the unemployed. “The share of furloughed employees is important because it helps with the restart,” she explains.

Concern in general is mounting among construction professionals. The construction workforce, which Branch describes as “already hobbled by lack of skill and available labor,” will be hit not only in the field, but also in office roles and supporting industries. About 67 percent of those surveyed that are experiencing COVID-19-related delays say that onsite worker availability is the most prevalent reason.

Policy that allots a federally funded extra $600 per week in unemployment and various state measures step in to ease the burden for many and will help the economy at large, which research substantiates. JP Morgan Chase Institute found that if people are re-employed before benefits run out, spending fully resumes within 12 months, but if unemployment lasts beyond the benefits window, all spending drops off. Unemployment insurance benefits avert about 74 percent of the spending drop from a job loss.

Branch predicts a good portion of people who lose jobs in the first half of the year will get re-hired in the second half, but that “it takes a lot to restart a service-based economy. It'll be a bit of a slog to get economy back up and unemployment rate back down.”

Policy Influence

The three phases of legislation (the Coronavirus Preparedness and Response Supplemental Appropriations Act; the Families First Coronavirus Response Act; and the Coronavirus Aid, Relief and Economic Security Act) are intended to make a dramatic impact on the economy. Branch expects a phase 4 stimulus program geared toward relief for individuals and businesses that fell through the gaps in phase 3 and that also includes strong support for infrastructure spending. That likely won’t come until late Q3 or Q4, though.

On April 9, the Fed continued its aggressive efforts by announcing it would release another $2.3 trillion into the economy, which Branch describes as “unprecedented and extremely aggressive action by the Fed.” He pointed to the Fed buying $600 billion of loans through the Main Street Lending program, mainly for companies under 10,000 employees and with revenues under $12.5 billion. It also will provide $500 billion for loans for states and municipalities.

Wolf discussed the value of the $350 billion in aid money as part of the CARES Act that’s allotted for small businesses with 500 or fewer employees. To qualify, an employer must agree to not reduce head count, not cut wages and that 75 percent of the received funds go toward payroll costs and be spent within the first eight weeks. If all of those conditions are met, the debt is forgiven. “[The money] is given to businesses to ensure they can weather the next two months,” explains Wolf. She also said Steve Mnuchin, secretary of the Treasury, announced on Twitter he’s looking to secure an additional $250 billion to add to this.

Commercial Construction Outlook

Branch explains that construction generally hits its bottom point after recessions end. The Great Recession, for example, technically ended in 2009, but commercial construction didn’t hit its lowest point until 2010.

Branch revised his commercial construction starts from -8 percent for 2020 to -16 percent. “There hasn’t been a lot of overbuilding in this construction cycle so it won’t be as dramatic as the Great Recession,” he says. Fundamentals coming into this crisis, such as low vacancy rates, poise the market for a less dramatic decline as well. Branch also credits the Federal Reserve and federal government for being aggressive on the front side of the crisis to maintain liquidity.

He also stressed the importance of evaluating data in a quarterly pattern and by market sector. “The loss is not spread equally, though,” he says, citing retail, hotels and parking garages as having the steepest declines. Looking toward a recovery, Branch says it’s critical to think about the bounce back. Not every building category will recover at the same rate; some sectors could return to normal levels of activity by Q4.

Institutional Outlook

Branch predicts institutional building will decline by 7 percent in 2020, while also noting this sector tends to lag the overall economic cycle by “quite a bit” and that these projects – to include schools, hospitals, recreational buildings and transportation buildings – grow more conservatively than commercial. As with commercial construction, though, predictions vary by market segment. Recreation and dormitories will see declines of 30 and 28 percent, respectively, this year.

Healthcare is predicted to be the strongest sector with a 5 percent rise this year and 8 percent in 2021. Branch says this growth is due in part to infrastructure not keeping pace with population growth, particularly in the western part of the U.S.

Education traditionally is a strong sector, too, including classrooms, lab space, libraries and museums. K-12 building will recede as the current student population isn’t as robust as it was during the sector’s boom when the larger Millennial generation was in school. The college and university market also has declined in the past two years and Branch predicts they’ll be placed under additional financial strain moving forward. He predicts education will fall 2 percent this year and rise 3 percent in 2021.

Manufacturing Building Outlook

Tariffs damaged manufacturing building in 2019 and started 2020 off weak. With manufacturing’s job loss in March, Branch predicts this sector will get worse as Q2 declines and have negative percentages in 2020 and 2021. However, he also anticipates more high value-added manufacturing returning to the U.S., though notes the industry struggles to find skilled high-tech employees, much as construction does. 

Residential Outlook

Dodge Data & Analytics has been “consistently dour” on the single-family outlook, says Branch, largely due to lack of availability for entry-level buyers and housing affordability. Dodge also includes multifamily in its residential outlooks. He reports the first quarter, however, was “outstanding” in the residential space and the best quarter since 2007.

The current situation prompted Branch to predict home sales will crash in the second quarter by up to 50 percent compared to the first quarter, bringing back “levels we saw during the Great Recession in 2007-2009.” He also predicts the spring and summer selling seasons for single-family homes is gone and that weakness could continue into Q3. “Economic damages to households will take time to repair and heal,” says Branch, who expects to see residential construction regain strength in 2021.

Restarting the Economy

The economic restart won’t be without its hiccups. Wolf anticipates fear will loom around when people will feel safe enough to go out, uncertainly about if COVID-19 could return in the winter and insecurities around employment. Macro considerations include the global economy, debt burden, how individual sectors recovery and the long-term impact on supply chains.

She quoted Henry Paulson, former U.S. Secretary of the Treasury, that fear is the enemy, and that to come out successfully individuals need to focus on their real work so they aren’t playing “catch up” when the new world emerges and that it’s vital to focus on the future. “Make sure you know your job and show up each day giving the hardest you can so we can continue to grow coming out of this,” she summarized.

Branch highlighted numbers that point to work still happening behind the scenes, including that nationwide there are more than 200,000 projects in pre-planning and planning as of March 30 and nearly 17,000 public projects are actively bidding as of April 2. That said, some of those projects could be pushed until later this year or 2021.

“Over the long term, there is a path back to growth,” says Branch, though he noted people may be hesitant to travel until there’s a confirmed vaccine or treatment options. This year and the first half of 2021 will be weak, but the market will be primed to rebound in the back half of 2021.