More than any other in recent memory, this week is a make-or-break for the national economy, and particularly Pennsylvania’s, as the fallout from the COVID-19 pandemic starts to hit home.
Rents and bills throughout the Midstate and across the country will come due April 1, two weeks after a screeching halt in the economy caused the largest unemployment spike in recorded history.
Approximately 890,000 Pennsylvanians have filed for unemployment since COVID-19 restrictions began, according to the most recent numbers published by the state Department of Labor and Industry. Pennsylvania also had the largest number of new filings of any state for the week ending March 21, according to the federal Department of Labor.
A total of 2.9 million Americans, 3.3 million seasonally adjusted, filed for unemployment in the third week of March. In the same week in 2019, that number was 215,000, according to the Labor Department.
Economists have struggled to wrap their heads around the potential fallout of families and businesses being unable to make their payments.
“We’re all struggling to quantify that, we absolutely are,” said Scott Ehrig, a financial analyst with FMA Advisory in Harrisburg.
“We don’t know how long this runs,” he said. “The longer this runs, the less it’s going to be like flipping a light switch to turn those parts of the economy back on.”
Midstate businesses and workers have the same concerns, particularly for the self-employed who effectively function as both.
Cristina Boyle, a massage therapist in Hampden Township, closed her practice on March 16 as soon as Gov. Tom Wolf issued his initial guidance for business closures to stem the spread of COVID-19.
“Luckily I had some money put aside in savings for bills in April,” Boyle said. “But beyond that, there’s nothing.”
Sole proprietors like Boyle are in a tough position. Not only does she need to provide for herself and her daughter’s personal needs, she also has to maintain fixed business expenses.
Boyle estimated that rent, utilities and supplies for her massage studio come to about $2,000 of overhead business expenses per month. Most of that cost will remain, while the $6,000 in monthly revenue she averages has gone away.
“I did talk to my landlord, and he said he would work with me,” Boyle said. “I think everyone is kind of questioning where that next paycheck is coming from.”
Deb Ickes and her husband run a day care out of their home in Newville. Such centers are allowed to stay open under Wolf’s directives to care for the children of essential employees. But that still means that four of Ickes’ six clients, who pay $130 per week, have pulled out.
“I still have all the normal bills other people would have,” Ickes said. “But the income is, in one day, gone.”
Ickes said she tried to call Labor and Industry to find out about qualifying for unemployment under the federal stimulus proposals, even though she operates as an independent contractor and normally wouldn’t be eligible for benefits.
She was told she was number 322 on the waiting list to speak with someone, Ickes said.
The department said it is swamped with claims and questions, and encouraged Pennsylvanians to file unemployment claims online, even if they’re not sure they qualify, in order to keep the phone lines clear.
The CARES Act, the federal coronavirus relief bill signed by President Donald Trump over the weekend, provides enhanced unemployment benefits to be paid by the federal government through state unemployment insurance programs.
This includes coverage for freelancers, gig workers and other self-employed Americans, as well as an additional $600 per week in benefits for claims through the end of July.
But the effect isn’t immediate. As of Monday, Labor and Industry said it was still waiting for federal guidance on how the money will be doled out.
“Right now, we don’t have the details. We are still waiting on the federal government to issue guidance,” said Susan Dickinson, the state’s director of unemployment compensation benefits policy.
Even after the federal money begins flowing, there may be administrative delays. Backlogs at Labor and Industry mean that workers may not be issued a PIN, which is needed to make their bi-weekly claim within the first two weeks of their unemployment.
“If their week expires and they have not filed, we are going to open up more weeks for them to file,” Dickinson said. “Normally people file two weeks at a time; we will open it to file three or four weeks at a time.”
Laid-off workers are encouraged to file online, which allows for much faster processing of most unemployment claims.
Further, workers face the loss of their employer-sponsored health insurance. Some may qualify for Medicaid if their household incomes dip low enough. An expansion of Medicaid qualifications was sought by some members of Congress, including Sen. Bob Casey, D-Pa., but did not make it into the CARES Act.
Other options, such as continuing their employer’s plan through COBRA or purchasing a plan on the Affordable Care Act marketplace, are available, but at a significant cost.
Estimates of the broad impact vary, but most are dire. Goldman Sachs estimates a 24% contraction, on an annualized basis, of the nation’s gross domestic product for the second quarter of 2020, and an unemployment spike to 9%.
This is particularly worrying for real estate investors, who take in a collective $81 billion per month nationwide, according to Bloomberg. Even larger tenant businesses, such as Cheesecake Factory, have announced that they won’t make rent in April.
“Look at even the most well-run REITs [real estate investment trusts] and you’re going to see tremendous price pressures on them,” Ehrig said. “The longer this goes, the deeper this haircut will be.”
The CARES Act contains roughly $350 billion in new small business loans, and $500 billion will go to the Federal Reserve to provide guarantees to the Fed’s continued purchasing of corporate bonds, giving big businesses trillions of dollars in liquidity.
A liquidity surge has already been seen on one end. Corporate bond issues considered investment-grade — i.e., borrowing by relatively safe companies — set a record $150 billion in new issuance by U.S. companies in March, according to the Financial Times.
What remains to be seen is if the Fed’s intervention will help prevent yields from further spiking for those companies who may be considered more speculative investments, and which would otherwise become insolvent without borrowing, even at high interest rates and low bond prices.
“It’s a matter of preventing a liquidity problem from becoming a solvency problem,” Ehrig said.
For the average Midstate worker, this means a few things. Individuals and businesses should, in theory, be able to weather the COVID-19 shutdown with new cash, either in the form of direct payments from unemployment and stimulus checks, or from federally supported credit markets.
But the fixed income may force many businesses to cut back, and for some, it’s going to be difficult to re-start.
“If the checks don’t start soon, it’s going to be difficult for us,” said Linda Reilly, who lost her job as a salesperson for a running and outdoor retailer.
Reilly’s husband is still working at the U.S. Army Heritage and Education Center in Middlesex Township, but she’s concerned about how long the family will have to weather a reduced income. Much of Reilly’s pay came from commissions, meaning her checks are directly tied to consumer spending.
“People need a good pair of running shoes, but it’s not like groceries or something like that,” she said. “The margin will definitely get thinner.”
“Who knows truly if it will come back and when it will come back,” said Ickes, the day care owner. “If we only knew this would be two weeks and we could buckle down and figure this out, it would be different.”
The biggest impact of the uncertainty is that it may cause firms to jettison some of the workers they’ve recently brought on board during the tight labor market of the past few years, Ehrig said.
That market has created opportunities for marginalized and disadvantage workers, but they’ll likely be the first to go and the last to come back once the pandemic subsides.
“Even in this last economic cycle, it took a long time for unemployment to grind below 4% and for those gains to spread broadly,” Ehrig said. “Those gains for workers are probably going to be deferred to the later stages of this recovery before they come back.”
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