A Dose of Economic Reality

As I kick off my new website and blog during a time of major uncertainty in our stock market and economy as a whole, I’d be remiss if I didn’t start off with a post covering my thoughts about what’s happening. 

To be clear, I’m not a medical expert, and won’t pretend to play one on TV.  What I will opine on is the effect this is having on our economy up to this point, and what I think some consequences of this could be going forward.  As I type this, we’ve just seen 3 weeks in a row of unprecedented jobless claims, to the tune of about 17 million total, and counting every day.  For reference, it took about 18 months during the “Great Recession” of 2007-2009 to exceed 15 million job losses.[1] 

Countless small businesses are laying off staff everyday.  Most small businesses especially operate on relatively small profit margins.  So to put it plainly, they spend $100 to make $105.  If you have a month or two where revenues drop to $80, to stick with the example, there might be enough cash reserves to cover that.  However, going from $100 to $20, or even $0 in a lot of cases, for a couple months, it’s a death sentence. 

I think a lot of focus has been on storefronts, for example restaurants, barber shops, movie theaters, etc.  What’s not getting as much notice are the supply chain ramifications involved in all of these businesses being shuttered.  Your favorite restaurant orders its food ingredients for example from farms.  Farmers transport those ingredients via trucking companies.  Trucking companies may not be shut down per se, but they’re losing a lot of business.  Think of a local strip mall full of “non-essential” businesses.  Does your dentist, tailor, or dry cleaner have enough cash on hand to withstand no revenue for a few months?  The median small business has on average 27 days worth of cash reserves.[2]  Here in KY, as I type this, we’re sitting on day 25 of non-essential businesses being shuttered.

So all these local businesses are bleeding cash, and then decide to cease advertising.  Now you’ve got radio stations, TV stations, and newspapers losing their main source of revenue.  Furthermore, with sports being shuttered, it’s tough to justify continuing to pay a local sports reporter while advertising revenue has collapsed.  Not many people will feel sorry for major airlines, and I’m not here to sing their praises.  However, from a local standpoint, think of all the local travel agents, airplane mechanics, flight attendants, and airport employees that stand to lose their jobs. 

For any business you can think of, think about the supply chain ramifications.  Our $21 trillion economy[3] is an extremely intricate game of dominos.  Once that first domino falls, the chain reaction is causes is enormous.  And what we’ve done from the supply side of our economy, effectively shutting it down without notice, is a heck of a domino to knock over.

We will defeat the virus, that goes without saying.  And there’s an argument to be made for some companies that this is a good opportunity to lean up and become more efficient.  Very true.  And while the short term ramifications are obvious, the longer term ramifications can’t be underestimated.  You can’t flip a switch and expect things to go back to whatever normal was a month ago.  The economy will adapt.  There will be a new normal going forward.  I’ll be addressing that topic in future blog posts.  But it’s important to note the heavy price we are currently paying as a society, and the importance we must place on preparing our finances to overcome situations like these in the future. 

[1] https://www.politico.com/news/2020/04/09/coronavirus-unemployment-claims-numbers-176794

[2] https://www.jpmorganchase.com/corporate/institute/document/jpmc-institute-small-business-report-exec-summary.pdf

[3] https://www.investopedia.com/insights/worlds-top-economies/

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