AUM assistant professor of economics discusses implications of COVID-19 on Alabama’s economy
As Alabama’s economy slowly reopens following the shutdown of non-essential businesses and enforcement of social distancing orders to counter the spread of COVID-19, both consumers and businesses should anticipate the recovery effort could be short-lived, according to Auburn University at Montgomery Assistant Professor of Economics Agnitra Roy Choudhury.
“The number of COVID-19 cases will rise as things open up, and this is expected,” Roy Choudhury said. “If the numbers grow exponentially, there will be no other choice but to close things down again.”
The COVID-19 pandemic and stay-at-home measures put in place since March forced the state’s unemployment rate to rise and the shutdown of non-essential businesses — such as entertainment venues, salons, night clubs and gyms — while limiting restaurants to drive-through, delivery and curbside services. As a result, many businesses — both small and national chains — have been left with no other option but closure.
Assistant Professor Dr. Agnitra Roy Choudhury
Roy Choudhury said such closures are an indication that despite assistance from the federal government through the CARES Act and stimulus payments to American households to encourage consumer spending, it may take time to restore Alabama’s economy and consumer trust.
“The uncertainty involved with the nature of the pandemic has likely made many people reluctant to spend and to get into investments right now,” he said. “They do not know how long this will last and might rather keep their money for a rainy day than invest and spend in an uncertain market.”
In the following Q & A, Roy Choudhury further shares insights on COVID-19’s impact on the state’s economy, umemployment, and what it means for residents as local governments ease restrictions, and with Governor Kay Ivey’s recent dismantling of the last stay-at-home orders to reopen the state.
Q. What are the economic implications of the COVID-19 pandemic?
A. The main implication has been a massive reduction in aggregate demand within the nation’s economy and a reduction in overall spending. This pandemic has affected, and will continue to affect, all sectors of our economy. Firstly, the real gross domestic product (GDP) for goods and services in the U.S. has declined from the fourth quarter in 2019 to the first quarter of 2020 by 4.8 percent, according to the U.S. Bureau of Labor Statistics. The second major impact on the U.S. economy from this epidemic is the massive increase in nation’s unemployment rate. In January 2020, the unemployment rate was 3.6 percent and in April 2020, the unemployment rate increased to 14 percent. That is a huge increase in the unemployment rate figures. To give a perspective of the numbers, the highest unemployment rate during the Great Recession was 9.5 percent in June 2009, with a continued gradual increase from 2007 to 2009. I speculate that most of the unemployment figures are from the non-essential retail, restaurant, hotel, and leisure sectors of the economy. Consumers also need to know that while we see a rise in unemployment rates, there also may be a rise in underemployment, meaning some people who are employed are probably working fewer hours. We also have to account for other sectors, including health sectors, that have been affected massively by COVID-19. However, my guess is that the impact on health care varies by region. Regions that have higher cases of COVID-19 infections, such as New York, have hospitals functioning at full capacity, resulting in shortages in providers, while regions with fewer cases are likely seeing a reduction in health care services.
Q. How has COVID-19 impacted consumer spending in terms of people being more cautious about how they invest and spend?
A. Consumer spending accounts for approximately 70 percent of the U.S. GDP. In Alabama, the high unemployment figures would suggest a reduction in spending. We would expect a reduction in spending on luxury items and a modest increase for necessities. Markets do not like uncertainty. Keep in mind that the COVID-19 epidemic happened at a time when the stock market was doing really well. Even so, many people who have money right now might decide to invest in certain types of stocks. For example, telecommunication like Zoom has increased in value, and so has Netflix. Another market that might see increased investment is pharmaceutical companies. However, many people who are living paycheck to paycheck will not be able to do so because they are likely experiencing a liquidity crisis. Also, the high unemployment rate means that many people do not have a job right now and might be struggling with liquidity. While the net effect on investment would be an empirical question, the uncertainty involved with the nature of the epidemic will probably make many people reluctant to get into investments right now. They do not know how long this will last and might rather keep the money for a rainy day than invest in an uncertain market.
Q. How has the pandemic impacted spending for necessities like food and cleaning supplies?
A. Spending on necessities will probably increase but not by much. This is because of the unemployment effect. People without much savings that have lost their job will not buy much necessities either. We should also observe that the unemployment checks do not come immediately. I would expect increases in grocery purchases and increases in online purchasing like from Amazon. I also think that once people get more accustomed to shopping online, consumers will continue this type of buying even after COVID-19 has ended. Also, I assume that the utilization of DoorDash and other food delivery services is becoming more common. The problem though is we might see shortages in some of the products since there are strict regulations against different forms of price gouging. The extent of this really depends upon how broad the market is. Additionally, we must not forget that the COVID-19 epidemic has affected the supply side of the market as well. Many big farms are having trouble maintaining production due to COVID-19 related regulations. If the supply goes down, people will have problems getting those products even if they want them, leading to more shortage problems.
Q. What are the long-term implications on the state’s economy from the closure of non-essential businesses?
A. One type of negative long-run implication is some businesses being forced to exit the market. To put matters into perspective, restaurants employed over 199,000 people in 2019, or approximately 10 percent of employment in the state. The states that lift restrictions, such as Alabama, will probably see lower economic cost. However, we have to be careful that we do not focus on the short term gains and forgo long term gains. If opening up soon leads to many more infections and more deaths, then we will see a big negative impact in the long run. Another market that has been affected is higher education. Some private schools and colleges in the country are staying closed through fall and some employees have already been laid off. I expect this will be a bigger issue in the northern states such as Pennsylvania and New York than Alabama. However, given that many parents are now home-schooling their kids, we might see an increase in home schooling. This might mostly happen in two-parent households where only one parent is working. If this happens, we might see some schools closing down. However, this depends on what the population catered by the schooling district really looks like in the first place.
Q. Did the first stimulus package and stimulus checks to Americans help to reboot the economy?
A. The purpose of the stimulus checks was to implement a cash injection that would theoretically incentivize people to spend more and create a fiscal multiplier effect on the economy. However, research has found that the impact of the stimulus checks has varied. Researchers found that the stimulus check was primarily utilized by people who had $500 or less in their bank accounts. People belonging to richer households did not respond to the stimulus check. Their research also highlights that most of the spending was towards household essentials, paying bills, rent, or utilities instead of on durable goods. While there has been no national-level analysis on this topic, I expect that even if people find some impact of the stimulus check, the impact might be very mild and may vary across industries. In my opinion, the stimulus checks had a modest impact, and that the impact varies by income level of the population at large.
Q. What should be top of mind for Alabama businesses and governmental entities as society attempts to “re-set”?
A. The bottom line is businesses will not get many customers if they cannot assure safety to the customers first. Given that restaurants and bars operate in very competitive markets, the owners need to think of ways that will attract more customers. Giving gift cards or loyalty rewards that accumulate over time with greater purchases would be a good way to keep customers. Alternatively, giving discounts on some items would be helpful if the customers are more price sensitive. This is something that each business owner needs to think about because they know their customers better than I would. For example, if you are the owner of the only pizza store in town, and you start giving discounts, you may actually see your revenue decline. This is because this pizza store is not facing much competition and has a price insensitive demand curve. Knowing the customer base will be very important for businesses right now. Governments need to think of regulatory responses, or relaxing regulations rather, to better assist businesses in recent times. For example, making business loans available for small businesses that are struggling might be one way to help. Another way of helping might be to temporarily allow some establishments in the restaurant businesses to sell alcoholic drinks on the curbside or outside the establishment in a takeout container. Such changes in the way business operate do not have to be permanent but when put in place might be helpful.
Q. What steps will local government entities need to take to restart the economy in terms of supporting businesses and protecting residents from evictions?
A. The biggest challenge that we will face is to restore some sense of confidence and trust in the population. The second biggest challenge will be to manage how federal and state funding is allocated towards businesses that are helped during these times. We are battling an invisible threat and the choices in front of us are very limited. We cannot keep businesses closed indefinitely until a vaccine comes along. Local governments can relax some regulations that affect businesses directly through occupational licensing laws. I made the alcohol sale example before. Since alcohol sale is a state monopoly in Alabama, changing regulations temporarily to assist businesses selling alcohol may be an easier fix. The Federal Reserve has kept interest rates very low, so right now would be a very good time for people to get a loan or a mortgage. The eviction ban in place between March 27 and July 25, can also be a good thing for people who cannot pay rent at the moment. However, there is a concern that some people will abuse this by not paying rent even when they can afford to pay. Policy makers might need to think of how to prevent this type of behavior.
Q. What do you expect Alabama’s economic recovery to look like post-lockdown?
A. A lot of the changes post-lockdown are quite theoretically ambiguous at this time. The hope is that things will get better once we have a vaccine or cure available to us. However, that will take some time. The answer truly lies with whether the average Alabamian has a high or low tolerance for risk. Some people have started going to restaurants and bars as soon as they were allowed to open. However, over time we may not see much response because people are still scared of getting the virus. Travel markets will be volatile for the most part. Even after a vaccine becomes available, I expect the travel industry to be shaky. People who want to travel more might see an increase in prices of airfare. However, it is also possible that once consumer confidence is back, people will increase their demand for such services. Americans are risk takers. So, I think that once we see better numbers, people will start traveling. We must also remember that many airlines are giving credit and they have extended the expiry deadline for those credits. Consumer spending on restaurants and bars will take a dip between now and when we get a vaccine. Most economists believe that we will not experience a major recession as long the number of COVID-19 cases do not spike to freak out the markets. We believe that there will be a V-shaped recession, with the market picking up fairly quickly. In fact, if we look at the Dow Jones Industrial Average, the market went down in March but has been getting better since April 3.
