4 Types of Economic Damage Experts Predict From COVID-19

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The coronavirus pandemic has upended lives and livelihoods and will leave long-lasting damage to the U.S. economy, analysts warn.

The Brookings Institution think tank predicts that people will travel less, businesses will space workers and customers apart, restaurants will serve fewer customers at once and stadium-filling sporting events and concerts will remain off-limits for a long time.

“Even if the rules allow, many people may be reluctant to return to life as it was before the pandemic,” Brookings says.

While many want to get their hair trimmed and see a doctor, fewer than 1 in 3 this summer expect to stay in a hotel, fewer than 1 in 4 plan to fly and fewer than 1 in 5 expect to attend a concert or sporting event, according to survey results.

The Brookings report identifies four broad categories of damage to the U.S. economy. Here’s a look at each.

1. Consumers’ ability and willingness to spend

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The industries most battered by the coronavirus pandemic — retail, hotels, transportation — rely on the comfort of consumers, Eric Rosengren, head of the Boston Fed, tells CBS’ “Face the Nation.”

“It’s not just that you have to open up the businesses,” Rosengren says. “Consumers have to be comfortable going back and shopping and going out on planes and into hotels.” The comfort level Americans experienced before the pandemic hit may take “either a vaccine or other medical innovations that make it much less risky to go out,” he says.

Until then, the economy may lag and unemployment may remain high.

Less than half (47%) of all U.S adults in an April 2020 Pew Research survey said they had money set aside to cover expenses for three months in case of an emergency. Pew’s responses varied widely by income group: 23% of lower-income people had the three-month cushion, compared with 48% in the middle-income bracket and 75% with upper incomes. Viewed through the lens of race, 27% of blacks, 29% of Hispanics and 53% of whites said they had the savings to weather an emergency for three months.

Laid-off workers may drain savings, delay mortgage and credit card payments, and suffer declines in credit ratings, the Brookings report says.

“That means that — even once the economy opens up again — they may be unable or unwilling to spend as readily as they did before the virus appeared,” Brookings says.

2. State and local government finances

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State and local governments from Florida to Alaska are dealing with drastic drops in tax revenues that impair their budgets just as they see demand for services due to the pandemic spread, as we detailed in “Where COVID-19 Is Hitting State Revenue Hardest.”

For one example, Ohio Gov. Mike Dewine announced in a Twitter thread in early May a “difficult budget cut decision” to eliminate $775 million in state spending over the next two months.

“While we do not know what the coming months will hold, we do know that COVID-19 is here with us and will be here for quite some time. Nevertheless, it does not exempt us from balancing our budget, which we are legally obligated to do.”

Income- and sales-tax revenues are plummeting and the demand for Medicaid and other programs is increasing, the Brookings report says. State and local governments will have to cut spending — mostly by cutting employment — or raise taxes, Brookings says.

“It took 10 years for state and local employment to rebound to pre-recession levels after the Great Recession,” the report continued.

Brookings recommends federal aid to offset states’ coronavirus-caused loss of revenues and added spending.

“Such assistance would prevent them from cutting public services to balance their budgets and also would increase the odds of a robust recovery,” Brookings said.

3. Bankruptcies and lower investment by businesses

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New businesses need to find financing, locations, suppliers and workers, the Brookings report says.

“If a business declares bankruptcy and shuts down during the pandemic, that whole process will have to begin anew. That will take time and money, and make the recovery slower,” it says.

Firms fearful of a coronavirus resurgence or a new virus may shun spending on equipment or research and development. Their reduced productivity could hold down the economy, Brookings adds.

Small businesses, which employ nearly half of American workers, are economically fragile, according to a paper by a group of researchers from major universities. They surveyed 5,800 small businesses in early May. Small businesses’ responses to the survey “suggest that many are likely to fail absent assistance,” the researchers concluded.

4. Lost human capital

Unemployed worker
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Matching laid-off workers to jobs also may slow the economic recovery, the Brookings report says, noting that the relationship between workers and employers is valuable.

“If businesses lay off their workers during the lockdowns, those workers might start looking for other jobs, or they may leave the labor market altogether,” the report says. “That means that all that human capital will be lost.”

However, two-thirds of Americans responding to an April Qualtrics poll, including all age groups in roughly equal proportions, expressed discomfort about the safety of returning to work.

Among popular safety measures, wearing masks and social distancing ranked high, the poll showed, with a majority (57%) saying they wanted all employees to be required to wear masks.

Those polled said that assurances from medical sources like the Centers for Disease Control and Prevention (63%) or the World Health Organization (45%) would make them feel comfortable going back to the workplace. About half would be comforted by assurances from state and local governments; 42% said they would feel safer if the federal government said it was safe.

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