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The Economy

The Outlook for the American Economy and Industry

May 22, 2020 


      The purpose of this paper is to provide some insight into what you can expect your revenue recovery to look like.  Using a variety of federal, reserve bank sources and private industry expertise, the paper firstly attempts to forecast what level of economic activity will occur across the whole of American commerce, in the aggregate.  It then attempts to forecast which Sectors will experience relatively slight impacts from the economic slowdown, and which will be most severely and persistently affected. 

       The conclusion of the paper is that those sectors which are primarily selling to Consumers (Demand-side organizations) will be most severely affected by the long-term changes in behavior wrought by the coronavirus pandemic; they will have little ability to change that new behavior; and will be most in need of creative solutions to develop revised channels to market and new revenue models.  Those sectors which are primarily manufacturers or producers (Supply) will be able to mitigate the effects of the pandemic (albeit at some cost) without greatly altering their revenue models, but will themselves be affected by the disruption being experienced by their eventual customers, who are Demand side ultimately. 

The only thing the author can be sure of is he is wrong;  but hopefully, this paper will provide some insight into what you might need to plan for as you contemplate the revenue and cost outlook for your organization.


     Attributed (wrongly) to Ronald Reagan, a recession is when your neighbor loses his job; a Depression is when you lose yours.  By any measure, the USA, along with the rest of the world, is in a Depression, if only by virtue of the unprecedented increase in unemployment.  Since the start of the pandemic, nearly 40m Americans have lost their jobs, and unemployment hit 14.7% of the working population, a figure not seen since the Great Depression in 1929. Goldman Sachs is now forecasting that this cycle will see the same unemployment rate of 25%.


     The consensus of commentators, somewhat optimistically, is that this Depression will not mirror that of our forefathers 91 years ago, and that we will see a rapid recovery as lock-downs ease and consumers start doing what consumers do again – consuming.  Nonetheless, even under this scenario, the Congressional Budget Office does not see the country achieving its former levels of GDP for several years.

Real GDP.png

   And, given that real GDP needs to grow at between 0.5% and 1% to maintain steady employment levels, it can be seen that, even under the assumptions underpinning the CBO’s projections, the Demand side of the economy will carry a considerable burden for at least 5 years.

The CBO’s assumptions include:

  • the possibility of a reemergence of the pandemic.

  • the current extent of social distancing across the country will continue—on average and with regional variation—through June 2020.

  • the degree of social distancing is projected to diminish by roughly 75 percent, on average, during the second half of this year relative to the degree in the second quarter and then to further diminish in the first half of next year.

  • social distancing is projected to continue, although to a lesser degree, through the first half of next year.

     No-one can know at present whether the forecast fully reflects the downside scenarios or whether the future will turn out to be sunnier than these projections.  Other factors, not considered by CBO, such as spillover of bankruptcies into the High Yield Debt and CLO markets could gravely aggravate the outlook, notwithstanding the Federal Reserve buying junk bonds through ETFs.  On balance, we believe the risks are to the downside rather than the upside, and any business planning should countenance possible further downside.  As more data becomes available regarding consumer behavior in response to the self-preservation, the suppression or otherwise of the virus, and the unemployment and GDP activity, we can hope to get an increasingly reliable view of what we can all expect.


             Data is starting to emerge about the impact the response to the pandemic is having on individual organizations, and therefore extrapolations are possible for that sector.  Virtually no sector has been unaffected by the social distancing, lockdowns and restrictions on all but essential workers.  The effect of this has been to sharply curtail economic activity, with the Demand side of the economy being especially hard-hit.  Airlines and Cruise lines are reporting 95%-100% drop in traffic, dine-in restaurants similarly. 

Goldman Sachs recently published the attached table in a weekly report monitoring the reopening of America:

GS Graphic.png

What is less clear is how will the economy behave once restrictions ease; we believe that both sides of the economic dynamic will be persistently affected:

  • Supply – those Sectors that, under their prevailing operating model, require their employees to be in close proximity to one another, will continue to experience constraints, as cleaning, distance and testing lay a burden on their productivity and cost of production.  The duration of this requirement will largely depend on the duration of the threat from the COVID-19 virus.  The WHO is predicting it may take 4-5 years to get it under control.  These organizations will also need to be mindful of the risk of incurring liability for any of their employees who fall ill, unless Congress provides some relief.

  • Demand – similarly, those Sectors that depend on close proximity with their customers will also continue to be affected.  Zapfel Group believes the Demand side impact will be more enduring and more significant in depressing economic activity than the Supply side.  Unlike employment, much consumption is elective, and consumers cannot be compelled to put themselves (as they may perceive it) in harm’s way.  And, despite assurances from the Administration, much of American society remains deeply skeptical that the risk has been eradicated.  This will only be exacerbated by any recurring flare-ups of the illness, which seems likely to be an inevitable consequence of the re-opening of the economy, and which will be widely publicized by the traditional and non-traditional media.  Finally, consumer behavior will have been irrevocably changed as a result of the 2-month lockdowns, and consumers’ preferences will continue to skew towards their more recent experiences where those experiences were positive.

Despite the massive impact on the global and domestic economy, we believe that the operating models and economic experiences of some Sectors will be relatively unaffected by the fall-out of the pandemic, and their revenues will broadly match the aggregate economic activity.  Indeed, some Sectors will benefit because of the difficulties experienced by other Sectors – think Zoom and Amazon, as consumers skew towards the same activities that can be undertaken without social proximity.  However, Sectors that exhibit Employee proximity will experience prolonged constraints on their Supply; Sectors that require Customer proximity will experience prolonged and even permanent reductions in Demand.  Any Sectors where both factors apply will be very severely impacted.

     The table below sets out, at the highest level, the degree of disruption that we expect will be experienced by different Sectors, based on NAICS codes.

Affected NAICS.png

     There will be many exceptions to the rule within the 2-digit NAICS codes and each sub-industry and organization needs to understand the exact impact of the changing employee and customer behaviors on their situation.  Nonetheless, this shows the Sectors which will be relatively lightly affected, those which will need to accommodate new ways of operating their Supply facilities, and those which will need to access entirely new ways of interacting with their customers, or risk oblivion.

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