As the world’s leading economies move to an unprecedented level of lockdown, we enter uncharted economic territory. Even during wartime and under siege, cities have historically maintained their markets, their transit, their schools, their offices, their nightlife, and their social gatherings. Massive sectors of both national and local economies are predicated on people venturing beyond the confines of their homes. What happens when all this activity stops?
The first casualty is travel and tourism. Getting there becomes irrelevant if nobody is going anywhere. Means of transportation, including airlines, cruise lines, railways, subways, taxis, car rentals, and ridesharing services lose virtually all the bookings related to leisure travel and a massive portion of the bookings related to business travel. This part of the impact is comparable to a wartime economy when most travel is repurposed for troops and supply chains, but the difference is that unlike most wars that are localized, this impact is affecting the entire world.
Correspondingly, providing both business and leisure travelers with the means to room, board, and entertain is no longer needed when there are no travelers. All aspects of hospitality, including resorts, hotels, motels, bed and breakfasts, hostels, and Airbnb style short-term rentals are facing massive vacancies that make covering operational overhead untenable. With tourism drying up, travel agencies are closing and online travel sites are struggling.
The second casualty is the service industry that not only supports travel and tourism, but also locations where people gather to eat, drink, exercise, and entertain. In many cities, event venues, amusement parks, casinos, theaters, restaurants, bars, gyms, and nightclubs are being closed indefinitely. Foodservice establishments are either suspending operations or moving to a delivery-only model. That means the demand for hosts, waiters, caterers, bartenders, dishwashers, ushers, performers, reservationists, doormen, bellhops, trainers, cleaners, and other service roles is plummeting.
The third casualty is the retail industry that depends on consumers’ willingness to leave their homes and travel to retail locations. With people in many cities reducing their travel to the bare minimum necessary to procure essentials, retail stores are empty. As consumers hunker down at home, clothing, and appearance are simply not a priority. As a result, the retail sector is being devastated from shopping malls and department stores to dry cleaners and specialty stores to beauty salons and barbershops. In turn, this affects all the players in the supply chains serving those retailers, including manufacturers, shippers, and wholesalers.
The fourth casualty is real estate. With workers abandoning offices en masse, the market for office space is at a standstill. As companies in the hardest-hit sectors shut business operations, they leave behind unused commercial spaces that cannot be leased. At the same time, people are hitting pause on residential real estate purchases, with most understandably believing that until the coronavirus situation resolves it is neither the time to move nor to invest. In turn, this slowdown in real estate is significantly impairing the brokerage, architecture, construction, interior design, furniture, moving, and office equipment industries.
The final casualty is energy. With a large-scale drop in the number of vehicles to propel and locations to power, the global demand for oil and other energy sources is dropping dramatically. Fewer airplanes in the sky, ships in the water, and cars on the road means far less need for fuel. Empty office buildings, arenas, concert halls, hotels, theaters, nightclubs, and other spaces means no electricity is being used to power their outlets, lights, computers, elevators, and HVAC systems.
In the United States, there are approximately 17 million workers in the hospitality and leisure sector, 5 million in retail, and 20 million in real estate, wholesaling, and manufacturing. Given the tremendous impacts on these sectors, it is all but assured that millions of workers will be furloughed or laid off in the coming weeks. It is a race against time to contain the impact. Smaller businesses cannot afford to pay employees after a few weeks of inactivity. Larger corporations may have the reserves to maintain their workforce in the absence of revenues for longer than a few weeks but will be forced to start rounds of cuts after one or two months.
The recently unemployed will be entering a market where jobs outside of healthcare are scarce. Some will be forced to switch industries or accept lower positions and salaries while many others will remain unemployed. Without income to pay the bills, consumer defaults will spike across mortgages, auto loans, credit cards, and student debt, profoundly impacting the financial industry and further curtailing consumer spending. With consumers on the ropes, investors will take their chips off the table in the hopes of waiting out the storm. The resulting effect will be comparable to the Great Depression when snowballing cycles of unemployment, consumer debt, falling spending, and production slowdowns brought the global economy to its knees.
The one silver lining is that the United States government is applying the lessons of history and making a real effort to get ahead of the economic tsunami. Loose monetary policy and large-scale fiscal spending are serving as breakwaters to the rising tide. The challenge is that truly kickstarting the economy will require the rehabilitation of the worst-hit sectors, which can only happen after the pandemic is contained and the cities return to social normalcy.
Jack Plotkin is a Harvard graduate and the CEO of Cardinal Solutions, an advisory and investment firm based in New York City that focuses on companies that care deeply about their social impact. He has advised more than a hundred Fortune 500 firms across virtually all major industries and is a key contributor to VirtualHealth, a leader in enterprise healthcare technology.