Washburn Professors address “Pandemic Economics”
The US economy, declined by a record amount in the 2nd quarter of 2020. What do you think is the outlook going forward?
Manaf Sellak
Assistant Professor of Economics
Gross domestic product (GDP) reflects our nation’s income. It is the broadest measure of economic activity. In July, the Bureau of Economic Analysis reported the US economy lost 32.9% of income relative to last year as consumers cut back in spending; businesses reduced investments, and global trade locked up. This economic contraction was about three times the economic recession in 1957 (10%), and eight times the economic decline of 2007-2009 (4.3%).
Economic theory suggests that when a global event, like COVID-19, hits an economy, the government should design policies that put the economy back to track. The current economic contraction would have been more severe without the “CARES Act,” in which the government distributes $3 trillion of aid to households and businesses.
The Federal Reserve Bank lowered the interest rate to 0.25% to boost consumers’ and investors’ spending. These fiscal and monetary policies have reduced the unemployment rate from 14.7% to 7.9%. The continuous increase in the number of COVID-19 cases and the uncertainty about vaccine preparedness create an economic environment where spending would fall, and more businesses could temporarily shut down. Many economists recommend that congress maintain aid to the households and businesses—another stimulus package—until we have a better treatment and/or a vaccine to end the pandemic.
Is there any fear that the banking and financial sector is under stress?
Sungkyu Kwak
Professor of Economics
The pandemic induced recession shows up in the banking sector. The combined net income of more than 5,000 banks who report to the FDIC was $18.8 billion in the second quarter of 2020, a big drop from $55.78 billion in the first quarter of 2020 and $62.52 in the second quarter of 2019. Still, the ratio of noncurrent (bad) loans to total loans, an important measure of banks’ health, has not increased much—it was 1.08% in the last quarter, compared to 0.93% a year ago. And only two banks have failed so far this year, compared to four last year and more than 100 in 2009 and 2010 in the aftermath of the Great Recession.
The situation is better in Kansas. Important measure in banking, such as the return on asset, the capital ratio and the ratio of noncurrent loans to total loans, have not deteriorated. However, there are some warning signs. The Federal Reserve stress tests for the nation’s 34 biggest banks to see whether they can endure current and expected financial stresses. The most recent test from June 2020 showed that a quarter of them will nearly breach the minimum capital ratio if the economy doesn’t recover soon from the recession. Accordingly, the Fed temporarily restricted shareholder payouts by the country’s biggest banks.
How has a world-wide pandemic affected global trade? What is the long-term outlook?
Dmitri Nizovtsev
Professor of Economics
Understandably, the initial shock of the pandemic news caused a dramatic drop in world trade activity in March through May. Containers were stuck at ports or customs because of partial or complete lockdowns, and new social-distancing and sanitary regulations reduced the throughput capacity of ports and other transportation hubs. The fact that different countries went into lockdown at different times also didn’t help. There is, however, evidence that companies are adapting to the new environment and learning to operate in it.
The most recent U.S. statistics shows the August 2020 trade volume being 13% smaller than in August 2019. Exports in particular decreased by 18 percent year-over-year. Perhaps due to the U.S. stimulus measures, the imports are recovering faster and are only 9% lower than a year ago. It is, however, the export drop that is the most disconcerting, because weaker international demand for U.S. goods and services negatively affects the U.S. job market therefore everyone’s long-term livelihood. For that to change, we depend on other countries’ purchasing power and we do not know how long the global economic recovery will take. The good news, however, is that international supply chains took years to build, and it is unreasonable to expect them to disappear in the matter of months. Once more normalcy returns, these supply chains will still be in place and ready to be utilized to the full extent.
Unemployment was extremely low prior to the pandemic and economic shut-down. Will we ever get back to where we were before March?
Rosemary Walker
Professor of Economics
The unemployment rate will not recover to pre-COVID-19 levels until businesses are fully open and government mandates removed. The three states with the most stringent COVID-19 restrictions: Massachusetts, California, and Hawaii, as reported by WalletHub, currently have unemployment rates between 11.3% to 12.5%. States with the fewest COVID-19 restrictions are South Dakota, Idaho, and Utah. Their unemployment rate is between 4.1% to 4.8%; currently some of the lowest rates in the country.
The longer the COVID-19 shutdowns are maintained, the longer it will take for jobs to recover. Since March 1, 2020 we have seen a steady increase in the number of businesses that have closed permanently. YELP’s economic impact page, shows that restaurants; shopping and retail; and beauty and spas were hardest hit by permanent closures during the pandemic. Home improvement, professional services, and auto services have had the least number of permanent closures. It will take longer for employment to recover from permanent business closures than temporary closures because an entrepreneur with capital must determine that the economy is robust enough to make the investment in starting a new business.
Locally, we have followed the national trend. The unemployment rate in Topeka on March 2020 was 3.0%. With the COVID-19 related shutdowns in the middle of March, the unemployment rate increased dramatically in April 2020 to 11.7%. As the state started re-opening in May, Topeka’s unemployment rate rebounded, declining to 6.5% in August. If the current COVID-19 restrictions are eased in Topeka, the employment situation should improve.
State and local governments are facing budgetary shortfalls due to declines in tax revenues. What has happened locally, and do we face long-term issues?
Paul Byrne
Professor of Economics
State and local governments rely on a mix of income, sales, and property taxes. In 2019, 51% of the State of Kansas’ general fund came from income taxes and 38% from sales taxes. For Shawnee County, 73% of its budget came from property taxes. The City of Topeka received 23% of its revenue from sales taxes and 18% from property taxes. According to the Bureau of Economic Analysis, wages and salaries in Kansas declined by $4.5 billion in the 2nd quarter. In spite of this decline, personal income increased by $9.2 billion. The reason for this divergence is that the CARES Act drove a $17.4 billion increase in transfer payments in Kansas. An estimated 44% of the growth in transfer payments came from the one-time Economic Impact Payments, 10% from the state’s share of unemployment insurance (UI) payments, 28% from the federal government’s $600 per week UI supplement, and 4% from the federal government’s unemployment payments to uncovered gig workers.
These stimulus programs prevented a devastating drop in income and sales taxes at the height of the shutdown. In Shawnee County, taxable sales for January through June are down only 0.9% from 2019. Increased UI payments will go a long way in preventing large drops in personal income taxes through July (when the largest federal program expired). Going forward, the Federal Reserve Bank of Atlanta is predicting 3rd quarter GDP growth at a 35.2% annualized rate. While this recovery is strong, it will still leave the economy below pre-pandemic levels. Although property taxes are very stable, in the absence of federal stimulus propping up income and consumer spending, income and sales taxes will start to reflect the weakened economy. Until the measures to prevent the resurgence of COVID-19 are no longer needed and consumers are willing to return to their pre-COVID activities, weakness in sales and income tax revenue should be expected to persist.
