The Main Street Recession

The Main Street Recession

Thursday, October 15, 2020 from Floor Covering Weekly Prime Edition

All economic recessions have distinguishing characteristics. For some, it is rampant inflation. For others it is a collapse of a sector of the economy — technology, banking, real estate or basic manufacturing are recent examples. Even with the variation that we have seen in recent recessions, this pandemic-induced downturn is unique among several dimensions. Probably what is most unique is that some businesses have seen devastating losses, while others are largely unaffected or even seeing unexpected growth. We have gone through the alphabet soup of describing the shape of this recession. First it was expected to be a “V” shaped recession, then it was a “U”, followed by a “W” and then a “  “(swoosh). The current thinking is that the economic recovery will take the shape of a “K”, meaning that different sectors of the economy have moved, and will continue to move in different directions in the coming months. Some will see a strong recovering economy while others will continue to suffer through a downturn.

This dichotomy is apparent in comparing what’s going on with the goods economy as opposed to services. The goods sector is generally very strong. Overall retail sales, for example, have recovered to their pre-pandemic levels. Low interest rates have pushed up demand for things that are typically financed, like homes and cars. The services sector, particularly those services that require in-person interaction, are still not seeing signs of recovery. Personal care, entertainment, lodging, hospitality and even discretionary health care continue to see weakness. Employment for these industries is down 15 percent to 20 percent from pre-pandemic levels, compared to about half that decline for the overall economy according to U.S. Census Bureau data reported by Opportunity Insights.

However, even within these categories, the performance of larger and smaller companies has diverged. Larger companies often have access to equity markets, which currently are soaring. Technology companies in particularly have seen huge gains in their stock prices even during the pandemic, but the broader stock market has recovered surprisingly quickly. Additionally, though, larger companies have better access to credit markets than smaller companies. And, even though interest rates are near historically low levels, this does not always benefit small businesses because banks are tightening conditions on loans to them given the economic uncertainty. This disparity in access to credit often allows bigger businesses to remain operating even at reduced levels when smaller businesses may be forced to shutter their operations. This fuels inequity between large and small companies, because customers that used to frequent small businesses may turn to their larger competitors, making it more difficult for small businesses to reopen even when they otherwise might have. Finally, the economy is diverging by income. Workers that were in the bottom wage quartile have seen employment levels decline by around 15 percent since the beginning of the year. Workers that were in the top income quartile have seen virtually no job losses over this same period.

Factors that are separating success from failure in this economy are often interconnected. Many service sector operations that are characterized by in-person interaction are also predominately small businesses that largely employ lower-paid workers. Some of these businesses have been successful in adjusting their business model to cope in a pandemic world. Others are hunkered down and waiting for the economy to recover up so that they can reopen. Still others unfortunately will not survive as this recession drags on, which will change the character of Main Street even as Wall Street continues to thrive.

Kermit Baker is the senior research fellow for the Joint Center of Housing Studies at Harvard University. He may be reached via e-mail at [email protected]

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