Two-thirds of workplaces in major hubs have yet to reopen

 


Even as COVID-19 cases drop across the nation, most workplaces in large metropolitan areas remain closed.

Only 27% of U.S. workplaces in America's 20 largest metropolitan areas will be reopened by the end of September. That's the finding from a poll of more than 1,000 executives by the Conference Board between August 19 and 26, which was shared exclusively with Fortune.

Another 8% of workplaces in large metros plan to reopen before the end of the year, and 21% sometime in 2021. While 40% have either no timeline to reopen (35%) or are waiting for a vaccine (5%). And 3% say they'll stay remote permanently.

This spells trouble for both the finances of big cities and small businesses, like restaurants and shops, which are dependent on foot traffic from nearby offices.

And as workplaces in big cities remain closed, some employees are already looking to leave town. Americans living in urban areas are twice as likely to say they'll move out as a result of the pandemic (11%), compared to Americans living in rural areas (5%), finds a Fortune-SurveyMonkey poll of 2,478 U.S. adults between August 17 and 18.

The Conference Board poll was conducted among 1,100 businesspersons across 20 US metropolitan statistical areas. It included CEOs, C-suite executives, vice presidents, and senior managers.

The nation is awaiting a vaccine that can halt the COVID-19 pandemic in its tracks, allowing life – and the battered U.S. economy – to return to normal.

But a new study suggests the crisis has generated fears that are likely to dampen risk-taking and economic output for decades by increasing the “perceived probability of an extreme, negative shock in the future.” Over time, the economic cost of that warier outlook is “many times larger” than the short-term damage, the study says.

The study, titled, “Scarring Body and Mind: The long-term belief-scarring effects of COVID-19,” attempts to quantify such long-term economic losses by assessing the toll taken by other economic upheavals, such as the Great Recession of 2007-09.

“While the virus will eventually pass, vaccines will be developed, and workers will return to work, an event of this magnitude could leave lasting effects on the nature of economic activity,” says the paper, which was released at the Federal Reserve Bank of Kansas City’s annual conference last week. “Businesses will make future decisions with the risk of another pandemic in mind.”

A riskier world than we thought

Consciously or subconsciously, firms will likely fear the possibility of not just viral outbreaks but other unforeseeable events that could upend the economy and their business plans, the study says.

“We learned that the world is riskier and more unpredictable than we thought,” the report says. “The shocks that hit one sector may hit another tomorrow, in ways that are impossible to foresee.”

When cities and states around the country began imposing lockdowns and closing places of business in March, most restaurateurs probably assumed that they'd be taking only a temporary break. With that in mind, many tried -- with varying degrees of success -- to keep going in the interim with takeout and delivery services. As the lockdown stretched on and on, though, even those who had been able to struggle through the crisis began to wonder if they'd ever been able to recover financially from months of lost or diminished business. Even as restaurants were gradually allowed to reopen for outdoor and limited indoor service, many found it impossible to break even. And when jurisdictions that had eased the rules for dining out were forced to reimpose them as COVID-19 cases spiked in various parts of the country, many operators simply gave up. ( These are states where recently reopened bars and dining rooms are closing again .) As with so much else related to the pandemic, the restaurant landscape changes constantly. According to the trade newsletter Restaurant Dive, "Unlike retail, restaurant closures have fluctuated from March through July based on the rapidly evolving and disparate mandates that have been put into place at local levels." At one stage, food service business analysts predicted that major chains might have a better chance of surviving shutdowns and capacity restrictions than independents. This doesn't appear to have been the case, with such enterprises as TFI Fridays, Denny's, IHOP, and Dunkin' shutting down numerous units, and standbys like California Pizza Kitchen declaring bankruptcy. Independent restaurants are being affected even more, however. According to a study conducted for the Independent Restaurant Coalition, as many as 85% of the nation's smaller restaurant groups and individual establishments might close permanently by the end of 2020. With a leadership team that includes such culinary stars as José Andrés, Tom Colicchio, Andrew Zimmern, and Nancy Silverton, the Coalition is an organization of hundreds of independent operators dedicated to trying to save America's restaurant industry. Pointing out that their industry employs some 11 million people, the Coalition is currently lobbying Congress to pass a $120 billion bailout bill for small and medium-size restaurants. Whether or not they are successful, it is obvious that restaurants are among the small businesses that need the most help during the COVID-19 crisis. Meanwhile, some of the country’s most popular eating places -- including everything from decades-old institutions to newcomers that smashed hits before the pandemic hit -- have been transitioning from temporary to permanent closure with alarming speed. Even celebrity chefs on the order of Andrés, Wolfgang Puck, Thomas Keller, David Chang, and Daniel Boulud have been victims of the pandemic’s brutal impact.
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Think of a child who touches a hot stove or suffers abuse. “A child who is mistreated becomes very afraid of a lot of things,” says study co-author Laura Veldkamp, a finance and economics professor at Columbia Business School. “We’ve learned that really risky stuff can happen.”

The study comes as Congress remains deadlocked over another stimulus package that would provide lifelines to unemployed workers and small businesses on the brink of failure. Such assistance could go a long way toward curtailing not just short-term economic losses but the long-run casualties fostered by more skittish investors, the paper says.

“Preventing bankruptcies or permanent separation of labor and capital could have enormous consequences for the value generated by the U.S. economy for decades to come,” the paper says.

Economy shrinks at a record pace 

The pandemic led states to close down restaurants, malls, and other outlets across the country to minimize contagion. Although businesses are reopening in phases, flare-ups, particularly in the South and West, prompted nearly half the states to pause or roll back reopening plans. The economy contracted by a record 31.7% at an annual rate in the second quarter and shed an unprecedented 22 million jobs before recovering 9.3 million positions from May through July as shuttered businesses reopened and brought back at least some workers.

Several top economists believe as much as half the temporary job losses and furloughs could become permanent and thousands of businesses could go bankrupt. Moody’s Analytics doesn’t expect the economy to recoup all the jobs lost in the crisis until late 2023. The Fed paper, however, looks beyond even such longer-term damage to gauge the more nuanced toll caused by altered perceptions and reduced investment years and decades from now.

For example, the pandemic is making certain “capital” – such as equipment and buildings – obsolete, depreciating their value. Restaurants are closing or using just a portion of their capacity. Offices sit empty as more people work from home. And many cruise ships will never sail again.

 In a normal economic cycle, such idle capital eventually would be replaced by new assets that generate similar or even greater output. The study, however, finds that the lingering caution among investors spurred by the crisis will leave a gap that keeps the production of goods and services well below what it otherwise would have been. And fewer machines or buildings in use means there’s less need for workers to run the assets.

Similarly, widespread defaults and bankruptcies discourage entrepreneurs from starting new businesses, the paper says.

Worse than the Great Recession?

The study examined the long-term scarring effects of events over the past 70 years, such as the oil crisis of the late 1970s, the early 1990s recession, and the Great Recession, which by far led to the most severe long-term fallout, Veldkamp says. Yet it found that the coronavirus crisis will result in even deeper long-term damage.

The long-run effects are nearly 10 times the projected 6% to 9% decline in U.S. gross domestic product this year, the study says, with changes in beliefs accounting for most of that drop. Depending on whether the U.S. has just one or multiple lockdowns, the lasting effects of the crisis are likely to reduce economic output over 70 years by the equivalent of 57% to 90% of a year’s worth of GDP pre-COVID, the paper says.

That translates into millions of fewer jobs created, Veldkamp says.

“This is worse than the Great Recession,” she says. “It’s certainly more sudden, and part of the suddenness is the shock value.”

UK business activity grew rapidly in August as the country recovered from the coronavirus lockdown, but job losses in the private sector accelerated.

The IHS Markit/CIPS Composite Purchasing Managers’ Index (PMI), a monthly gauge of activity in services and manufacturing companies, rose to a six-year high of 59.1 from 57.0 in July.

Still, that was revised down from a preliminary flash reading of 60.3, hinting at a weaker end to activity last month.

The survey’s index of employment declined for the first time in three months – chiming with widespread reports of layoffs from major employers grappling with the hit from the pandemic.

There are worries that the close of the government’s furlough scheme at the end of October could lead to widespread job losses.

Chris Williamson, the chief business economist at IHS Markit, said companies’ ability to cope with the withdrawal of economic support measures like the furlough program was now the “burning question”.

The government’s job retention scheme has supported almost 10 million jobs in total since its launch in April.

“Worryingly, many companies are already preparing for tougher times ahead, notably via further fierce job cutting,” Williamson said.

“Policymakers face a huge challenge in sustaining this recovery and avoiding a ‘bounce and fade’ scenario.”

The services PMI jumped in August as consumer spending increased following the end of lockdown.

The seasonally adjusted IHS Markit/CIPS UK Services PMI Business Activity Index registered 58.8 in August, up from 56.5 in July.

The latest reading was much higher than the average in the second quarter (29.8) and signaled the fastest pace of output growth since April 2015

Higher levels of output were primarily attributed to the reopening of the UK economy after the coronavirus lockdown in the second quarter.

Survey respondents noted a strong recovery in domestic consumer spending.

Higher volumes of business activity were linked to a post-lockdown bounce in both business and consumer spending during August, the survey said. However, the rate of job shedding across the service sector was the

steepest since May.

The euro zone’s rebound from its deepest economic downturn on record faltered in August, surveys showed on Thursday, with some countries in the bloc suffering more than others from restrictions imposed to limit the spread of the coronavirus.

FILE PHOTO: European Union flags flutter outside the European Commission headquarters in Brussels, Belgium August 21, 2020. REUTERS/Yves Herman

Overall growth in the dominant service industry - which has been harder hit than manufacturing from lockdown measures - almost ground to a halt, suggesting the long road to recovery will be bumpy.

Last quarter the bloc’s economy contracted 12.1% as lockdowns led to businesses being shuttered and citizens staying home, official data showed.

A Reuters poll last month predicted a bounceback this quarter with growth of 8.1% but said a full recovery would take two years or more. [ECILT/EU]

But as infection numbers have risen some restrictions have been re-imposed, and IHS Markit’s Final Composite Purchasing Managers’ Index, seen as a good gauge of economic health, suggested the economy was still floundering.

It sank to 51.9 last month from July’s 54.9 - close to the 50 marks separating growth from contraction, albeit slightly better than an initial flash reading of 51.6. The services PMI fell to 50.5 from 54.7, better than its flash reading of 50.1.

“The recovery is already cooling down a little bit and it is very uneven among countries. Some countries like Germany have performed relatively well and other countries like Spain and to a lesser extent France are sending more worrying signs,” said Daniela Ordonez at Oxford Economics.

While Germany’s services PMI fell, it nevertheless remained relatively healthy. French business activity growth also eased, with new orders stagnating as the euro zone’s second-biggest economy battled the disruption to trade caused by the pandemic.

On Thursday, the French government detailed its 100 billion euro stimulus plan to erase the economic impact of the coronavirus crisis over two years, lining up billions of euros in public investments, subsidies, and tax cuts.

Meanwhile, the services PMIs for Italy and Spain, both of which rely heavily on tourism, dropped back below the breakeven mark as travel restrictions put in place by many European countries have hit the summer season.

Greece’s economy, also largely reliant on tourism, contracted 14% last quarter, official data showed on Thursday.

In Britain, outside the currency union, the composite PMI was at a six-year high but job losses accelerated in a bleak sign ahead of the closure of the UK government’s coronavirus furlough scheme at the end of next month. [GB/PMIS]

WEAK DEMAND

Demand stuttered across the currency union, despite firms cutting prices, and headcount was reduced for the sixth month.

Inflation turned negative last month for the first time since May 2016, official data showed on Tuesday, and the composite output price index remained below the 50 lines at 48.5. That was below a flash reading of 49.0 but above July’s 48.1.

The European Central Bank would like inflation just below 2% and has already bought record amounts of debt to keep borrowing costs down and support the economy.

ECB Chief Economist Philip Lane recently warned complacency risked entrenching low inflation and reducing price growth expectations, making it even more difficult for the ECB to deliver on its target. Some economists took his words as a hint the bank is preparing to expand stimulus even further.

“It depends on how inflation goes but it is reassuring the ECB is ready to act ... and the pressure is increasing on the ECB to act,” Ordonez said.

That extra support may be needed as the new business index for the service sector fell below 50 to 49.8 from July’s 51.4.