Wednesday, May 20, 2020

Eller Profs: Economic Recovery to 2019 Level Could Take Until 2022

Posted By on Wed, May 20, 2020 at 10:00 AM

The University of Arizona has launched a new webinar series aimed at analyzing the ways COVID-19 has impacted the university, the state, and the entire world, and what our post-pandemic future might look like.

In the first installment of the series, professors from the Eller College of Management discussed the varying impacts on the local and national economy and highlighted how some industries are affected differently than others.

By April, more than 20 million jobs were lost nationwide due to the COVID-19 pandemic. At that time, more than 400,000 Arizonans were filing for unemployment benefits.

George Hammond, director of the Economic and Business Research Center at Eller, said Arizona unemployment numbers tend to reflect the national average. But restaurants, travel, tourism, retail stores, salons, and childcare services are the ones who are majorly affected by the pandemic.

“The rest of the economy is going to feel the ripple effects as those shocks spread through the economy,” Hammond said. “So we’ve experienced a big hit. The big question now is what will the recovery be like?”

He explained that economists have drawn up a variety of predictions for the recovery from COVID-19. The most optimistic follow a “V” shaped curve, where businesses are able to bounce back as quickly as they fell. The most pessimistic follows a “W” shaped curve, where economic impacts are felt well into the future, and recovery is shaky.

Hammond predicts a “U” shaped recovery for Arizona.

“We are going to start to recover, we are probably recovering now … but I think it will take some time for us to repair the damage that has been done just because the hole is so big,” he said. “So I currently see Arizona getting back to that 2019 level sometime in 2022.”

While recovery is still uncertain, lawmakers at state and federal levels are throwing money at the problem to prevent a complete breakdown of the economy. Price Fishback, the Thomas R. Brown Professor of Economics at Eller, said the government has adopted some never-before-seen policies in reaction to the COVID-19 pandemic.

The federal government has distributed $1,200 stimulus payments to taxpayers and provided generous business loans, tax breaks, and unemployment packages. This combination has resulted in a government spending increase from 21 percent to about 34 percent of the national GDP.

Fishback said the talk on Capitol Hill about another round of stimulus payments totaling $3 trillion would increase federal spending to nearly 50 percent of GDP, which he sees as unsustainable.

“We’ve got a big problem,” Fishback said. “We’re going to have to live with this virus for at least another year or two, there’s no expectation of a vaccine coming anytime soon. So we need to target this much more explicitly.”

He recommends an alternative plan. Since COVID-19 impacts older populations and people with pre-existing conditions the hardest, Fishback said those are the people who should be self-quarantining and the government should support them financially in that effort.

He recommends younger and healthier people begin returning to work and school with safety precautions in place, and governments and employers should increase hazard pay for workers who are most exposed to the virus. Fishback said this strategy will likely cost less than what the federal government is doing right now.

Experts believe the residential housing market in Arizona will be able to bounce back relatively well from COVID-19. Hammond said that job and population growth are the main drivers of the market, which have been impacted considerably as the economy contracts and people stay in place.

But he added that Arizona has historically done a good job of attracting people from out-of-state, and Tucson, specifically, is a less dense, car-based city that might attract people from larger metropolitan areas who are looking to move away from the threat of COVID-19 spread.

In the healthcare sector, job losses exceeded the economists' expectations. Hammond said they were driven by Gov. Doug Ducey’s executive order that restricted elective surgeries in hospitals during COVID-19.

In addition, dental offices and related professions are currently locked down to emergencies only because of the high-risk nature of their jobs, and telemedicine is being used more frequently, which removes the need for some administrative staff.

“That has been an area that has lost a lot more jobs than most of us thought was going to happen going into the outbreak,” Hammond said.

Other sectors, particularly entertainment, will likely be hit the hardest by the virus and their future remain uncertain on both a local and global level.

“I think the last industry that’s coming back is sports and concerts and theaters and things along those lines because people don’t want to go into big crowds in those kinds of settings,” Fishback said. “Also, if you’ve still got the possibility of an epidemic, that’s the last thing you want to have happen is to have big crowds.”

Meanwhile, grocery stores, warehouse-based businesses, online retailers, and similar professions are expected to thrive during COVID-19. Hammond anticipates a possible repurposing of commercial real estate to meet the needs of increased online shopping and delivery services.

These changes in the economy will undoubtedly impact all local governments, which rely significantly on sales tax revenues and hotel bed tax revenues as funding sources. Fishback and Hammond believe the full impact on local municipalities have yet to be seen.

“What we see in both Phoenix and Tucson is that the purchases that are card-based are down in the 25 to 30 percent range compared to where they were before the outbreak and the expenditures at hotels and restaurants are down 60 percent or so,” Hammond said. “There’s going to be a big hit to their revenues in the short run, it will just depend on how the recovery plays out as to what the longer-term budget impacts are going to be like.”

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