The following interview follows our most recent webinar, State of the Economy During the Great Pause with John Mitchell. We usually bring John in for an annual event in November, but these circumstances are unprecedented. It’s a crazy time, and we thought it was a great opportunity to have John join us to answer some of your most pressing questions.
My name is Brandon Laws, and I’m the Director of Marketing at Xenium HR. Anne Donovan, President of Xenium, conducted this interview. So, without further ado, here’s our conversation with economist, John Mitchell.
Watch the full webinar here:
Anne Donovan: John, thank you for your flexibility and your willingness to jump into new territory. So let’s kick it off with an overarching question around this “great pause,” as we’re hearing it called. It all has happened so fast, and it’s so shocking to many organizations and workers who’ve lost their jobs. From your perspective, John, where are we as an economy? And how did we get here so fast?
John Mitchell: Well, it’s a fascinating experience. Just a little more than two months ago, we had the lowest unemployment rate in 50 years. The stock market was all-time high, and we expected a growth rate near 2% or slightly above that. But now here we are, basically in free-fall in a very short period of time. You saw this free-fall induced by shutdowns, stay in place orders, dramatically reduced spending by individuals, and the curtailing of businesses.
I like to think of it as a medically induced coma or a neutron bomb. The buildings are still here and the institutions are still here, but the people aren’t. And so we’ve started questioning, “How do we get out of this?” But it’s unprecedented in terms of the magnitude and the rapidity of the decline. It’s like nothing that we have experienced before.
Anne Donovan: And this is the second economic dip in a little over a decade, right? Talk about the key differences between this situation and what we went through in ’08-’09.
John Mitchell: In the Great Recession from 2007 to 2009, we had excesses in the housing market, the housing bubble, and problems in the financial sector that brought that about. That recession was pretty typical in that recessions are often associated with excesses, build-ups and debt, investment decisions gone wrong, and excess inventory.
But that’s not what we’ve got going on now. Instead, this recession was basically induced by politicians responding to the medical situation. Globally, you’ve seen these shutdowns, stay in place orders, with accompanying dramatic declines in output and employment.
Anne Donovan: And the federal government acted very quickly, right? So when it comes to policy responses, talk a little bit about what the Federal Reserve has done with the central banks, and then what about Congress?
John Mitchell: The Federal Reserve learned a lot during the Great Recession 2007-2009, taking interest rates essentially to zero and putting special lending programs in place to support the system. They reacted very, very quickly to this current pandemic and used some of the learning from the Great Recession to inform their decisions.
For example, on the morning of March 3rd, we had a cut in interest rates followed by another cut later. They took the federal funds rate basically down to 0 to 0.25. They have started to support financial markets to forestall major financial problems. I think the Fed has done an amazing job. And, not to mention, the Open Market Committee met yesterday.
They didn’t change rates because they’re essentially at zero, but they said they’d use all the tools that they had to try to support economic activity. They have done their quantitative easing again — buying government bonds, buying mortgage-backed securities — and they’re buying over a broader range. They’ve also, of course, helped fund some of the small business programs. I mean, the Fed has been very aggressive, acting very quickly in this particular situation.
Now you’ve seen Congress respond as well, with the major piece of legislation being the CARES Act. While this mandated shutdown is in place, this act is meant to support the individual and the firms so that when this ends, they’ll be there to bounce back. There are a number of elements in the CARES program. Of course, you had the $1,200 checks mailed out to eligible parties, the enhancement of unemployment compensation with the extra $600 a week through August 1st, the Paycheck Protection Plan for loans to businesses, and funds for hospitals. Some of that was exhausted very quickly, and there was a subsequent round. Despite what it’s doing to the deficit, we’re going to fund what we have to do to try to keep the economy and support people during this shutdown, presumably enhancing the ability to recover. John
And I checked some of the numbers as of the 17th of April, and after the first round of the Paycheck Protection Plan, they’ve made 1,660,000 loans. And that’s from an agency through the SBA and the banks. The Wall Street Journal and the President said that they did in 14 days what would normally take 14 years. So we’ve seen incredible pressure on the institutions to get that stuff out.
The average loan was $206,000, and 74% of them were less than $150,000, so that’s out there and that’s going on again at the present time. There’s another program that’s been authorized — although I don’t believe it’s started yet — is called the Main Street Lending Program, which is another source of funds for businesses. But unlike the Paycheck Protection Program, that has to be paid back.
Brandon Laws: It does seem like the Feds responded quickly, and it was really just to prop up and protect what we have, but I’m curious… concerning our growth trajectory: do you think that there will be action later on to continue with the growth that we saw early in 2019-early 2020 before this all happened in the first place?
John Mitchell: It was the longest upturn in history, but that’s over. We’re in a recession, so the question becomes, “When the recovery starts, will we get back on that trajectory?” I hope so. For a while, we can grow a lot faster because — remember just two months ago — we were running out of people. You couldn’t find them. That was the problem, not massive numbers of unemployed and excess resources. So there will be a period where we could actually grow faster than that trend to absorb those resources and then, hopefully, get back on that trend.
Anne Donovan: And a lot of younger people in the workforce don’t know anything different, so that’s an interesting conversation too. And I think one of the things that’s on a lot of small business owners’ minds is what happens after that the funding stops?
John Mitchell: If you look at what’s going on now, you’ve already started to see some states are easing up. In one sense, it’s going to be a fascinating experience to watch because one of the virtues of the United States is that we have 50 different laboratories that we can try. People are trying different things, so we’ll see what works or what doesn’t work. We’re starting to ease up now, and that will presumably stop the decline. We’ll have to wait and see how people and businesses behave as they move out of the shell shock. There are an awful lot of unknowns out there.
Anne Donovan: Let’s pivot a little bit to the data. What kind of data do we have about how the economy is performing right now? How about we start with unemployment claims.
John Mitchell: Okay. Well, one of the things you have to remember is that a lot of our labor market data at the federal level is from March 2020. Now, the March unemployment rate ticked up to 4.4%. And if you and I had been having this conversation two or three years ago, we’d have been happy with those numbers. But right before the pandemic hit, we were doing much better than even that.
But those March numbers are backward-looking because the pandemic didn’t really hit our economy until late March. And March saw a decline in payroll employment of 701,000 with a significant part of that being — as you might expect — in travel, leisure, hospitality, restaurants, that sort of thing. When we get the April data, which will presumably come in a week from tomorrow, that is going to be horrendous.
And with the numbers that came out this morning, over 30 million people have filed for unemployment in the last six weeks, and that will be reflected in the next labor market data. Yes, the labor market data is horrid, but one of the things you also have to remember is that the people who can draw unemployment — with that $600 on top of the state rate — are receiving significant income replacement that will presumably help them through this time period.
Anne Donovan: And we’ve been hearing from our clients who are concerned about getting those employees back because, in some cases, employees are making more on unemployment than they were making when they were working.
John Mitchell: Yes, that’s exactly right. There was a well-known piece this week in the Wall Street Journal from an Oregon restaurant owner who said he was having trouble getting people to come back to get a Paycheck Protection loan because they’re making more money on unemployment. This could be an unintended consequence of this relief legislation. I mean, these decisions were made very quickly in an effort to support people, but that may be a problem if we open up before that ends on the 1st of August. There was a presentation by an Oregon labor market economist who said that, in the state of Oregon, the average person on unemployment is fully replacing their wages with that $600.
Anne Donovan: Now, let’s move on to retail. Tell us what your thoughts are about how our retail sales will be impacted.
John Mitchell: If you look at retail sales, in the latest release, they fell 8.7% from the month before — that was the March data. But it’s interesting because we could talk about grocery stores who’ve had phenomenal shortages in sales. As shopping patterns have changed, restaurants closed, the supply chain had the shift to eating at home. And then at the other end, you’ve got department stores. If you look at the data for the clothing stores, sales were down about 50% over the month.
You’ve undoubtedly seen the headlines — not to pick on anybody, but whether you’re talking about JCPenney or Neiman Marcus, legendary companies are near filing for bankruptcy. And outfits like Costco, of course, have done extraordinarily well.
Grocery store chains have gone from trying to provide all of the various items that people want to, all of a sudden, having empty shelves where toilet paper or hand sanitizer used to be. And it’s because we’ve shifted our preferences and the supply chain is still trying to catch up. Overall, though, I think these chains have done a remarkable job.
Anne Donovan: I wonder how it will change, John, as we move back into the workplace and even to limited restaurants. What will change about the retail and grocery stores when that happens?
John Mitchell: You may see a partial shift back, but I think it could be a long time because if you think back to before this started, people were spending roughly half their food dollars on meals out, and that’s over. Because people are getting accustomed to cooking at home, trying different stuff, and there might be that residual concern about going out, we can’t really predict how people will behave.
Anne Donovan: Let’s shift a little bit to the collapse in oil prices.
John Mitchell: Yesterday, West Texas’ crude spot price was about $15 a barrel. Now, that’s sort of shocking because at the start of the year it was up around $60 a barrel. The futures market briefly went negative a week or so ago, and you had the pandemic which reduced demand — whether we’re talking from China, from airlines, from auto travel.
And then you had Saudi Arabia and Russia who got into a competition to try to increase market share, increase production, so the world was flooded with oil and we had this collapse in oil prices. What I think is absolutely fascinating is that we had the United States — which is now the leading oil producer — arguing to boost the price of oil. If you think about over the course of your life, my life, Brandon’s life, we’ve always heard “we’ve got to keep the price of oil down.” But now we’re a major oil producer, and with what’s going on in the Permian Basin in Texas and the Bakken up in North Dakota fracking, we’re a big energy producer. And so that fall in oil prices is a nightmare for the oil producers in the United States.
Anne Donovan: How about industrial production?
John Mitchell: In the last reading we had on industrial production, it was down 5.4%. If you think about it, we’ve got closed auto plants. Look at what was going on in the Seattle area with Boeing, and that started long before, but it obviously had different implications after the pandemic stay-at-home orders. Boeing’s forced to shut down, and industrial production is declining and is likely to continue to decline in this quarter. If you’re in food processing, that’s still going, but a lot of sectors have been forced to cut back. And as we start to ease up, you’ll likely see that start to change, but we’re not there yet.
Anne Donovan: And how is the housing market impacted by this current pandemic?
John Mitchell: It’s interesting because, in the first-quarter data that came out yesterday, housing was up. Now, you started to see some weakening in late March because when you go into a shutdown mode and the visits become more difficult or have to be done virtually, housing declines. Our resales have declined, builder confidence has plummeted. It’s on hold.
But look at interest rates. They’re extraordinarily low. Although housing was expected to be a source of strength in 2020, it’s suffered not because of affordability or interest rates but because of the shutdown of the institutions. There still is that underlying shortfall in the sense that we have not kept up.
So when things loosen up, and when the labor market starts to improve with the continued low interest rates — which are likely to last for a long time — I think you could see housing resume that upward trend. The unknown is whether people are going to be willing — given their worries about the labor market — to go out and buy a house.
Anne Donovan: Let’s move on and talk about consumer confidence. As of today, April 30th, what do we know about where we stand with consumer confidence and what should we expect in the future?
John Mitchell: The irony is that the Michigan Survey and the Conference Board Survey came out yesterday and, as you might expect, consumer confidence has collapsed given what people have seen. Now, it’s going to take an easing of the stay-at-home orders. It’s going to start to change when you see the narrative change and you start reading increased employment and hiring, good numbers on industrial production, and stronger housing sales. The narrative has to change because I really am concerned about people just getting buried in the repetitive. It’s not like there’s new news every night; it’s the latest illness count.
Anne Donovan: Right. And that’s a nice segue into a discussion about access to a vaccine or to treatment. Presuming that the vaccine is about 12 to 18 months out, what are your thoughts about how we’ll be affected?
John Mitchell: Well, that’s the magic bullet. If we were to wake up tomorrow morning and somebody said, “We found a vaccine that works and it’s readily available,” that could induce people to change behavior very, very quickly. But, as you say, that’s not likely to occur. Since it’s going to be a while until the vaccine is widely available, I expect a restrained upturn.
As we slowly loosen restrictions, hopefully we don’t get another surge in cases. There probably will be some jump, but we’ll gradually get back to a new normal. But the full recovery is probably going to await an effective treatment and a vaccine. It gives people more confidence.
Anne Donovan: All right, let’s talk about the behavior of employees and companies post-COVID. John, what do you think about remote work and other effects of the pandemic on businesses?
John Mitchell: People are doing Zoom meetings, more webinars, and all of this begs the question: do we need to have as many in-person meetings post-COVID? The technology is good, maybe that’ll change us. I also think you’ll see businesses place greater emphasis on resiliency in the future, whether it’s about improving supply chain or gaining more capital.
One of the things about the supply chain stuff: given the outbreak of the protectionist sentiments that we’ve seen in the last couple of years, some of that had been starting to unwind stuff coming out of China, maybe going into Vietnam, or India, or other places, Mexico or Canada, developing alternatives. And I think this is going to speed that process.
I’m not saying total de-globalization; that’s not going to happen nor would we want that to happen. But I think that you’ll likely see a lot of talk about regional groupings. You serve your North American markets from North American producers — not just in the United States, but Canada, Mexico. You serve your Asian consumers from an Asian market arrangement. There may be some more moves toward that.
Anne Donovan: Interesting. Okay, now let’s talk about the deficit.
John Mitchell: Last week, the Congressional Budget Office said that this year’s deficit is going to be a little under $4 trillion. You’ve had massive increases in spending and, of course, weakening in some of the revenues. Now, you haven’t heard a lot about it lately, but it’s going to take the debt to GDP ratio in the United States over 100% this year. It’s going to take us back nearly to where we were at the end of World War II when we had massive spending. This year the deficit is expected to be about 17-18% of the Gross Domestic Product.
Now, is it a problem now? Have you seen a big increase in interest rates? Have you seen a surge in inflation? Is anybody not willing to buy US paper? That stuff’s not happening, but this will end. And when we start to get the upturn, that debt’s still going to be there. So there will be an interest payment burden on that and, at some point in time, rates are likely to be higher.
That interest burden will arise and will potentially crowd out other things the government wants to do. That’s a long-term issue. And then we’ve still got this problem of an aging population with all the demands that come from Social Security and Medicare. So even though the front pages don’t talk about it, it’s still an issue that’ll have to be dealt with down the road.
Anne Donovan: Well, let’s talk about the generational impacts of the pandemic. For example, how will this pandemic affect retirees or pre-retirees? What about younger generations?
John Mitchell: I think the experience of different generations is very different. Let’s suppose you’re somebody in your early 60’s who is planning to retire at 65. But then, the stock market is down by 25% when it comes time, or they’ve lost their job and they have to dip into retirement. That can cause a problem.
Now, the other thing — and this is worrisome — is that some people could decide to tap social security at 62. However, their monthly benefit would be reduced, and they have to live with that for the rest of their lives.
People like you, Brandon, started your careers in the Great Recession and then — here we are, 12 years later — and you get slammed again. And a lot of the people of that generation — two months ago — they were doing pretty well. They had strengthened the labor market, they were rising as a share of new home buyers, they put off marriage and family, and now they get hit again.
Another interesting demographic is relatively unskilled workers — those with a high school degree or less graduation. They’ve been hit very hard. Two months ago, they were doing extraordinarily well. They were taking advantage of rapidly rising incomes and the opportunities they got due to tight labor markets. And if you look at the demographics of the layoffs — for example, in Oregon — it’s concentrated amongst young people and people with less high school or less education.
Anne Donovan: Okay, let’s pivot to the topic of business leadership. As business leaders, how do we make decisions when the future is so uncertain? What are your thoughts about that?
John Mitchell: Well, there is a new book by Mervyn King called Radical Uncertainty, and it talks about the difference between risk and uncertainty. What we are experiencing right now in the sense is unimaginable, and we definitely didn’t expect it.
So I think businesses need to start thinking about the notion of resiliency. Ask the question, “What are some low probability things or things we haven’t even thought about that could really hit us good?”
I also think that there will be interesting opportunities for business owners when this ends. There will be some firms that won’t make it, that will not reopen, there will be assets, people that one might be able to use to expand or to grow your own business. Those are some off the top of my head thoughts anyway.
Anne Donovan: Out of adversity comes a lot of innovation and new ways of thinking, and this will clearly change our world, right?
John Mitchell: Absolutely. It’s interesting to watch. When you go online, you see companies that have pivoted distilleries to make a hand sanitizer or clothing companies to make masks. They’re showing an incredible sort of flexibility, entrepreneurial kinds of activity. Look at meal delivery services and grocery delivery services. It’s amazing how they’ve grown and changed. It’s going to be a very exciting time. And, hopefully, that we’ll be able to cushion the human tragedy and impact of it.
Anne Donovan: Okay, next question. Do you think we’re headed for a depression? If so, what are the criteria?
John Mitchell: Quite honestly, I’m not sure. I’m also unsure about how we actually define a depression. We have, of course, the 1930s as an example. And from a quarterly standpoint, we may see annual rates of decline and output declines in employment that approach those numbers. But that was stretched out over a period of years, and you didn’t have the income support programs that are in place now. Basically, in the 30s, the Federal Reserve blew it.
Recessions are defined by the three D’s: depth, duration, and diffusion. There’s no question that this is going to be a very deep decline. But the duration could be quite short. And diffusion, yes, it’s very broad-based through the economy. This pandemic and resulting economic impact are outside our norm of experience, but hopefully the duration will be short.
Anne Donovan: Speaking of prior economic downturns, there always seems to be government policy changes that end up sticking around long after the downturn is over. Similarly, do you anticipate any policy changes coming out of this?
John Mitchell: Social Security and housing assistance came from the 1930s. If you look at 2007 to 2009, you had different rules put into place for financial distributions. With 9/11, you had the Homeland Security Department. Shock to our economy clearly results in changes in policy that persist.
Currently, we’ve extended and accelerated unemployment compensation and compensation for gig workers. Think about medical care under the Affordable Care Act. Originally, there was a mandate to have insurance or pay a penalty, but that was repealed. Now, the idea of having people without coverage during a medical pandemic is, of course, scary. And the family leave or paid sick leave — there will likely be more emphasis on that.
Brandon Laws: John, what are your thoughts on the education system, both short-term and long-term? Do you see the system changing because of the pandemic?
John Mitchell: That’s a great question. Let’s face it. Education doesn’t change very rapidly, but the pandemic forced a change very quickly. And, all of a sudden, every kid needs a computer and broadband or internet access, so I think access to these tools is going to get more attention. And there may be some models that work well.
We’ll learn from the experience and possibly get set up so that these tools and methods can be on a reserve basis when we need them. If we have this set up, it may also help us deal more formally with kids who are sick and who can’t miss school.
Similarly, colleges have had to learn from the experience to teach effectively. Presumably, one professor could teach not just 200 students, but with thousands. This certainly enhanced the widespread dissemination of knowledge.
Brandon Laws: And what about socioeconomic status when it comes to having internet access and the right equipment? Are kids getting to be left behind if they don’t have them?
John Mitchell: That question comes to the fore when you’re forced to do this. I believe it was one of the Seattle school districts who got contributions to make sure every kid got a computer. When tough times hit, communities seem to be coming together with regard to this issue.
Anne Donovan: Earlier, you mentioned resiliency. Of course, it’s scary right now and that’s something that we have to work our way through, but do you think there’s hope on the other side of this?
John Mitchell: Oh, I think so. Even though there are some serious struggles, we’ve got a remarkably flexible system. All of a sudden, we’re pivoting toward developing the vaccine, and there is flexibility in the market system that lets that happen. That’s been our strength and, hopefully, it will continue to be our strength.
Anne Donovan: Okay, last question. John, I know there are a lot of unknowns, but can you say anything about 2021?
John Mitchell: Well, let’s put it this way. Assuming that we see declines through the second quarter, then we start to loosen up and the economy bottoms out, then I think you’ll see growth in the second half of this year. That means that we’ll likely see growth in 2021, barring some other unexpected event out there.
We’ve got support put in place. And with the relaxation of restrictions and a gradual improvement in confidence, I think you’ll see growth return.
For More Information
Once again, we want to thank John Mitchell for answering all of our questions. At Xenium, we’re committed to helping our clients, listeners, and readers get through this tough time armed with as much information as possible. Check out our podcast for more on COVID-19 and your business.