Recently, we posted about what employers are doing to combat the coronavirus. This included news about wage increases for grocery store clerks, drivers, and other jobs experiencing a surge in business, current trends and recommendations around sick pay extensions, and support for healthcare practitioners through the production of PPE equipment by U.S. manufacturers and apparel brands.
Now it’s time to turn our attention to the current state of the economy. Recently, the news has been ringing with announcements of layoffs and furloughs as many businesses have had to shut their doors or whittle down their teams in order to stay afloat during this period of social distancing. However, the uniqueness of the situation makes it difficult to act decisively.
The conventional wisdom is that economic activity will continue to contract through the second quarter with some bounce back beginning in the third quarter, but some scientists say social distancing could last a year or longer.
How long social distancing is required depends on how seriously it is adopted and enforced right now and how quickly we can devise effective testing and treatments for the coronavirus or a vaccine to prevent the spread of infection. In markets that have taken the most severe measures to enforce the policy early, social distancing is having the desired effect of flattening the curve. For example, social distancing is working in Washington State, where government-mandated social distancing was enacted on March 23, 2020 and non-essential services were closed on March 25, 2020.
However, according to the Institute for Health Metrics and Evaluation (IHME) on Covid-19 projections, the United States as a whole is still well above the curve and aggressive measures will be necessary across the country to flatten it nationwide. When we compare our reaction to other nations like Italy, it is clear that we are not overreacting to the threat of the coronavirus.
Social distancing relieves pressure on the healthcare system but closing businesses to save lives strangles the economy. How long can we endure this situation? What has the impact been to the economy so far and what is the outlook on economic recovery? Finally, what should you do in response to this situation as an employer, especially as regards compensation?
The Current State of the Economy
Economists are starting to sound the alarm that the U.S. has entered a recession, though they disagree on the severity and expected duration. The U.S. Recession Tracker, a model created by Bloomberg Economics, now predicts that a recession is 100 percent likely in the next 12 months.
However, we can’t officially say we are in a recession now. Traditionally, a recession is defined as two consecutive quarters of negative GDP growth. The current situation hasn’t lasted two quarters and the data is slow to catch up to the week-by-week reality we are all living in, but the indicators of a recession are nevertheless strong and loud. The National Bureau of Economic Research defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” Certainly, we have seen a significant decline in all of those areas — just in weeks instead of months.
In January, we assessed whether a recession is coming in 2020 by looking at three markers: the treasury yield curve, trade and production, and the health of the labor market. Let’s take a look at those markers again now.
Federal Interest Rates and the Treasury Yield Curve
The treasury yield curve is often touted as a harbinger of an impending recession. When it is healthy, it rises like a hill, showing that investing is profitable, leading to an economic boom. When the treasury yield curve inverts into more of a valley, or u-shape, it means that investments are not making a return and that a recession is on the way or already here.
However, the treasury yield curve isn’t very informative at present. It appeared more inverted in February and March than in April. Right now, it is flat and showing meager returns of less than 1 percent with very long investments, but not precisely inverted. This is because federal interest rates have been cut and held to extreme lows to make borrowing easy and keep the economy as healthy as possible. Federal funds rates have been cut by 1 percent to a range of 0-0.25 percent, the largest emergency cut in 100 years.
National GDP and Trade
The U.S. gross domestic product (GDP) is the sum of the value of all goods, services and structures produced in the United States during a specific time period. GDP is calculated quarterly. The U.S. Bureau of Economic Analysis (BEA) publishes an advance release four weeks after the quarter ends and a final release three months after the quarter ends. That means we won’t know how the GDP faired in the first quarter of 2020 until the end of April and we won’t know the impact of the current state of the economy until the numbers for the second quarter are released at the end of July.
However, economists have made predictions. Some forecasters have predicted a sharp decline of the U.S. GDP by 30 percent in the second quarter. In recent days, some have gone as far as to predict a 40 or 50 percent decline in GDP, which is unprecedented. However, others have opined that these predictions are for annualized GDP, and that international economic-statistics compilers don’t use the annualized number and report just the actual quarterly change, which will be closer to 7.5 percent. This is still a significant decline, more than the 2008-2009 recession of 5.1 percent overall (although it was 8.9 percent in the fourth quarter of 2008), but not Great Depression levels, which are estimated to be around 13 or 14 percent.
Trade has also taken a hit from the coronavirus. Supply chains are shorter as manufacturing companies focus on domestic markets in the face of export restrictions, travel restrictions, and uncertain markets abroad. Lingering tariffs from the Trade Wars of 2019 are also continuing to impact trade and supply chains. While some warn of the possibility of shortages in food, medical supplies, and other important goods if global trade remains stymied, others are promoting nationalism and protectionism, calling for increased reliance on domestic production and distribution.
U.S. Labor Market
In a reversal from January, the labor market has been thoroughly shocked by the pandemic. In the last three weeks, nearly 17 million people have filed for unemployment.
In January, the unemployment rate was enjoying a 50 year low at 3.5 percent. By March, in the wake of the coronavirus, the unemployment rate jumped to 4.4 percent with payroll for non-farm workers dropping by 701,000. Layoffs only picked up steam in April, with predictions that the unemployment rate now might be as high as 13 percent.
The 16.8 million job losses has caused Heidi Shierholz, policy director of the Economic Policy Institute to declare in the tweet that “The labor market has been upended.”
The number of job losses has motivated the federal government to try and speed up financial aid and other legislation to stimulate the economy, but with the coronavirus still not contained and testing still lagging behind where it needs to be to contain it, social distancing will continue and unemployment can continue to rise. Some analysts have tried to predict total job losses due to the pandemic. Goldman Sachs has predicted 19.8 million job losses by July, which would bring most U.S. states to unemployment rates in the mid-teens.
Re-Employment and Economic Recovery
Although we need several months of data to analyze the current state of the economy properly and won’t officially know if we are in a recession until later in the year, we can definitely say that we are experiencing an economic retraction or an economic downturn that is significant and far-reaching.
The severity and duration of an impending recession depends on our ability to contain the coronavirus. Hope comes in the form of clinical trials that may reveal effective treatments for the coronavirus, which can shorten hospital stays and raise the capacity of the healthcare system to handle more patients. Help to the economy might come in the form of people who have recovered from the virus, obtained immunity, and can potentially re-enter the workforce. However, the real clincher will be the development and distribution of a vaccine, which may take a year or longer.
The next question to ask is “how quickly can the economy recover once the coronavirus is controlled?”
Many analysts have predicted that the sharp decline in the economy will resolve with an equally sharp, “V-shape” recovery.
One way to think about the situation is to imagine the economy as a flowing river. River water levels are highest from autumn to spring when the rains are heavier and lowest in the summer season when the climate it hot and dry. Economic booms and recessions are similarly cyclical in normal circumstances. However, in the case of the coronavirus, the social distancing that has shuttered economic activity is more like a dam in the river. The obstruction was made on purpose to save lives. If our ability to test for, treat, and prevent the coronavirus improves dramatically over the next few months, the obstruction can be lifted, and the economy will flow again.
How fast the economy improves depends on how much damage was done while the dam was in place. Some businesses may be able to hire back all of their furloughed workers and replace people who were laid off. If this happens, unemployment will decrease rapidly, though perhaps a bit more slowly than it grew as hiring takes time. However, some businesses — especially small businesses — may remain permanently closed. Whether they can re-open or new businesses can replace them will depend on the availability of loans and interest rates.
The other part of the equation is consumer spending. We don’t know at this time how badly individuals will be hurt financially by the current crisis. The hope is that the stimulus package will keep coffers at least partially full and that once business resumes, people will emerge from their homes and flock to restaurants, theaters, sports arenas, gyms and other businesses that have closed or stymied. However, the people hardest hit by this crisis may not be able to afford this, which will slow economic recovery. This will also happen if businesses hire back significantly fewer people than they let go or pay them less than they did before the crisis.
The other concern is that social distancing will have to remain in effect until we have a vaccine, as it has been postulated that social distancing restrictions being lifted too soon will only result in a resurgence of the virus.
Finally, there is the possibility that many people will remain shut-in out of fear, and that it will take time and incentive to get people who have become used to isolation and anxious about contagion to venture back out into the world to stimulate the economy. Many industries may be hit in a similar manner as the shift to online shopping during this time period may have permanently impacted consumer behavior. Of course, this also creates opportunity for new forms of business that may take off in a new normal.
In short, no one knows what the future will bring. The current state of the economy is in flux and new information changes the picture weekly. Most likely, there will be a resurgence of employment, but not completely to previous levels, followed by a slower but gradual recovery. When exactly this will happen depends a lot on our ability to contain the coronavirus pandemic.
What Does This Mean for Employers and Compensation?
How each business reacts to the current state of the economy is going to vary by industry, location, and overall financial health. A few industries are thriving, some are stable, and others are struggling to survive.
Regardless of what each business has to do to remain financially operational during this crisis, HR has emerged as an important strategic resource for managing the workforce. Employees are frightened, workplace norms are changing weekly, healthcare and sick pay benefits are critical, and communication is essential.
Arguably, compensation practices are even more important than ever in the current state of the economy. Employees need to know that they are valued, even if the business has to conduct lay-offs, pay freezes, or pay cuts. Employers need to understand who they are underpaying and overpaying and must rely on the freshest salary market data available to manage compensation and make strategic adjustments.
Compensation communications are even more critical, especially in beleaguered industries like healthcare, retail, and transportation which may require temporary changes to compensation to meet demand in hazardous conditions. Being able to explain pay decisions using fresh, verified, accurate market data from multiple sources will go a long way in building trust between employees and HR in a difficult time.
Finally, although the current state of the economy is all-consuming, HR must look to the future and apply long term strategy to hiring decisions, workforce retention, and employer branding.
For example, there is a great temptation to lower wages or low-ball salary offers during an economic downturn. This is only advisable if it is done according to a compensation strategy that is temporary, applied fairly throughout the organization, and transparently communicated as a means of getting through this crisis. Low-balling offers just to save a little money in the near term can result in significant losses in the long term. It will also slow economic recovery as people will have less to spend. In the Great Recession of 2007-2009, PayScale found that it took four or five years for wages to return to pre-recession levels for employees, well after the recession was over for organizations and corporate profits were climbing.
Keep in mind that we don’t know how long the current situation will last. It is possible that hiring will start to ramp up again in just a few months, especially for businesses able to adapt their business model to one that profits from current consumer behavior and needs. If you make low-ball salary offers now, without any kind of correction plan in place when things start to improve later, your new hires will have soured on their experience with your brand before they even sign the paperwork. They may still sign, but they may also walk out the door as soon as a better offer can be secured. In addition, you will create pay inequity in the workplace, which may come to haunt you through low morale, disengaged workers, negative reviews, bad press, and — eventually — unproductive turnover.
In addition, taking the time to create a compensation strategy and structure now, when hiring is at a lull, will also prepare you for when hiring returns at a frenzy. The more sophisticated your approach to culture, compensation and total rewards, the more nimble and sure-footed you can be in snagging the best talent available.
Times of hardship is when loyalty is either created or broken. Principles and core values are tested under pressure. The decisions that employers make now that show how they value their employees — and the manner and care with which those decisions are communicated — will be remembered by current employees forever and will affect employer brands for years to come.
Further analysis by PayScale on the impact the coronavirus is having on wages across industry, occupation and geography will be forthcoming.
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