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This is NSPR’s special program about the local and regional effects of COVID-19 in the North State.Originally broadcast each weeknight, as of late July 2020, the show is now weekly — airing Thursdays at 6:30 p.m. and rebroadcast at 8:30 a.m. the following day. NSPR will continue this special coverage as long as our community needs it. Our mission with this show is to provide accurate news and information about COVID-19 in our region.

Q&A: COVID-19’s Impact On The National And Local Economy

Sonoma State

Another 2.1 million Americans filed for unemployment insurance last week as the coronavirus continues ripping through our nation’s economy. There are now 40 million people unemployed, translating to an official unemployment rate of 14.7%.

Is this just a blip? Or do long-term economic impacts lie ahead?

To make sense of this exploding unemployment and its ripple effects, NSPR’s Marc Albert spoke with Dr. Robert Eyler, professor of economics and director of the Center for Regional Economic Analysis at Sonoma State University. He’s also the dean of the School of Extended and International Education at Sonoma State. 

Here are highlights from their conversation. You can listen to the full interview at the top of the page

Interview Highlights

On what’s happening with the American economy

What's happening is basically two major items. One is that demand has been reduced, because we've decided to reduce our economic lives based on shelter-in-place. So part of that is that without demand, I don't have revenues at a business. The first thing I'm going to look for — where can I cut costs to try to remain in business during this sort of hibernation time? And usually the first place businesses look at is jobs, because they have other fixed costs that they can't easily relieve themselves of. 

The second piece, which is maybe the more positive piece, is that as we start to come out of shelter-in-place, those high magnitude numbers will hopefully reduce relatively quickly down to some, at least initial steady state. And the game right now we're playing is, the more those numbers rise and the longer this goes on, and this is the key, where we start to lose businesses such that the economic capacity to rehire the folks that have lost their jobs are going to go away. 

So those are the two major items that are feeding into those high unemployment rates is that you might have some business losses, and initially job losses in a situation like this are kind of classic recession entry points. It's really dependent on how we lose capacity in the economy to bring those jobs back.

On how much trouble we’re in

The problem becomes larger and starts to, in a sense, expand quickly when businesses go away. So there's also two angles on that. One angle is that there's a bunch of businesses who are already marginal, that all this did was exposed the cracks in the cement, and basically, the earth swallowed them up. It's something that recession does a lot. And people have written about this for hundreds of years that at some point, the cycle ends where some of the businesses that just were already creaking, basically topple over. So there's that part of it and that loses capacity. And that's kind of classic recession. 

The problem in this one is there may be some really good businesses, who simply through the lack of demand or the timing of this in the cycle, because especially if you're a tourism business, a restaurant, a hotel, something where this time of the year is where you really bank on those additional revenues to get you through the downtime — you might be a really good business otherwise, it that just happens to have seasonality inside of it. But the longer this goes on, and the more it eats into that revenue year, the trickier your ability is to keep that good business going. 

So that's where the depth of this gets a little deeper and a little more structural versus cyclical, and that for an economist, that's one of the biggest warning signs about entering recession is what policies do you put together to try to keep most of the good structure of the economy in place? And that's why fiscal and monetary policy have been so big and so responsive, at least in the last couple of months.

On the ‘alphabet soup’ of recovery (V shape vs. U shape vs. L shape)

The alphabet soup of recovery is something we saw at the end of the Great Recession as well. A lot of people out there sort of selling forecasts that had different doom-and-gloom scenarios as well as more optimistic scenarios. 

The V-shaped recovery depends on the structure of the economy remaining in place such that jobs will come back relatively quickly. So if businesses are not lost, and they say, OK, great. we've now opened up from shelter-in-place, I see the future is bright, I'm going to rehire the folks that I let go and we're going to slowly come back to where we started 2020, in a sense. And we'll get back to the baseline relatively quickly. If there's very few recession episodes, especially when there's been such a contraction in demand like this, that we're going to have something that you'd think of as V-shaped. So a lot of the hypotheses around that sort of twofold: one, don't lose structure in the economy. The second, it's more like a natural disaster — that once we get out of this disaster mode, we're going to want to go right back and reclaim our economic lives. The problem in this situation is so many people have lost their job, that the supposition is they'll all be rehired again, with the same capacity of the economy bets on a relatively small number of business losses. 

The U shape is where those business losses happen, you have the sort of depth hit and you get a short-term steady state, where you're trying to figure out where the economy is going, then entrepreneurship, adaptation, innovation take place, businesses are reborn, or new industries are born and we start to move back up the ladder. That's more of that flat period where we kind of go down, stay down for a while, and then we go way up maybe a little bit more quickly. And that's kind of how the Great Recession played out in California. It's sort of a modified U, where we went down, stayed down for a couple years, once we figured out the housing market and new technology and realized that there was a lot of capacity in the economy ... we got going pretty quick. 

The L shape is where we go down, stay down, because there's been structural change we haven't filled. So imagine, we lose 25% of the restaurants in California, or we lose 25% of retail in California. And there are a structural change in those markets such that there's no reason for those businesses to come back. They won't be able to compete. That means that the the potential outcomes in the economy have shifted down, potentially permanently. And that's where the L idea comes from, that you go from where you were straight down and then flattened to a new steady state that's actually medium to long term. That's kind of the baseline alphabet soup out there. 

There's also a W scenario where there's a double dip. You go down quick, you start to go up, then we get reinfected. We don't have a vaccine, we go back down because of a second shelter-in-place. And then we come back up again.

On the outlook of the real estate market

Generally speaking, the real estate situation seems to be stable, for now. A lot of that depends again on the duration of unemployment. So what housing economists right now are forecasting for a relatively flat year, in this sort of rolling window toward 2021. 

There was initially some optimism out there that rural California would see a renaissance in real estate that people would want to abandon the urban or let's say, large suburban settings, port their portable job to a more rural or smaller suburban setting, like Chico, Redding, etc., in sort of the North State. And now that has somewhat reversed with the idea that people are most likely to stay in place for the for, let's say the next year, to try to figure out their economic lives and then may make a change. So there's actually some positivity there for small suburban and rural California to see an influx of high-tech jobs in kind of a weird way in that economic development not necessarily bring them, but that people's want to be out of the urban center and having the flexibility to work off-site now may lead them to a place that is less densely populated, less expensive, but has all the same sort of infrastructure otherwise, including the outdoors and lifestyle considerations that you can't get in the city, we will see if that takes place. 

But for right now, we're expecting a pretty flat year where supply and demand might just kind of walk hand-in-hand with a little bit more supply than demand. But with lower interest rates, and potentially developers being nervous about building a lot of additional housing units, because they don't know where demand is going, a lot of the housing market is going to depend on how many existing units go on market. And if people start to lose it, or people have long durations of unemployment and say, you know, we just can't afford to stay in the house, that's where you might see a sprinkle of let's say, the Great Recession round two in housing. I don't think it's going to be as severe. But again, a lot of it depends on how fast people who own a home, get their jobs back.

On how the current crisis will affect college towns where universities are moving to distance-learning

Certainly in the short term, it's going to be very interesting to watch how towns like, let's say Chico and Davis specifically, react to a general movement online, even for six months, because of how much of the economies of those towns are tied to the university's movements. 

Now, both Davis and Chico are just relatively local examples and Chico State being a very local example for you — they have expanded and become more balanced. And that's certainly something that economic development in both places has been very keenly aware of and has done a great job of the last 10 or 15 years in diversifying the economies. But that diversification also feeds off labor that is available from the universities. And that shift away from having people come in not only affects the university as a business, but in concentric circles, affects almost every other business in those areas. 

So it is unfortunate for those town's versus, let's say, smaller universities in larger areas. So for example, the university I work for, Sonoma State, is going to have a lot of problems on campus as a business, but the concentric circles in the community will be smaller than in Chico and Davis because of the broader and bigger economies that surround it. So yeah, there's no doubt about it that in small suburban and rural California where there is a university that has now gone online, while that continues, it's going to transmit some pain into the local economy.

On indicators of a positive or negative outlook for the local economy

Three local indicators to watch are housing prices, because that's something that will potentially either turn into a good cycle of consumer confidence — I've kept the wealth in my house, a lot of people aren't leaving the area, which means the basic economics of the area might remain stable, and I'm not going to feed off that sort of mass psychology and suddenly put my house up because I think the party's over. So as long as housing prices stay stable, that's a harbinger of good things. And it's certainly an indicator to watch. 

The next one is taxable sales. So the consumer confidence piece is one thing, but that's a survey instrument. The next piece is whether that consumer confidence becomes taxable sales, for two reasons. One, it suggests that people are buying something other than non-taxable goods like food. And the second, it starts to feed back into our municipality sales tax revenues that they're going to need. And then of course, the housing price thing is also something that will give a lot of municipalities a breath of fresh air in terms of not affecting property taxes. 

The third piece, which is the most tricky, is the flow of tourism and ultimately whether or not we see the number of cases spike again. So when we open up our economies, especially ones that depend on a flow of people, what we're going to hopefully see is we're gonna see people flow in, and we're going to see relatively minimal changes in the number of COVID-19 cases. And the reason I say it that way is because probably the biggest threat specifically to a place like Chico is going to be inbound people from outside, where you may have some localized dealing with COVID-19, who might bring it with them, and then lead to another spread. But you need that flow of people to support the tourism businesses. So whether or not for example, hotel occupancy goes up, and there's an array that are harbingers underneath that category. Do you see a hotel occupancies go up? Do you see more taxable sales spinning there too? 

But the third is whether or not the case load rises in terms of COVID-19. So if those three things happen positively, plus the other things I just told you, where the taxable sales kind of tie both to the residential spending and into the tourism spending, those will all be good things for stabilizing the business capacity in the Chico area. Where it goes from there is going to then have these concentric circles. Will the continued rebuilding of Paradise happen or is this going to put the brakes on? We could say another harbinger is continued building in Paradise where those developers see continued good things in Butte County and they don't want to stop the momentum that was there as we move into 2020. Will you see students come back and be able to feed off that positive capacity that's they're still in growing momentum on the positive side in the spring? Assuming we turn the corner, potentially get a vaccine sometime early next year. All that stuff is sort of the second order effects that might be coming after those first harbingers take place, but we need those things to happen if we want our economies to sort of, utilize the lifting of shelter-in-place to their fullest extent.

On how this crisis compares to previous crises

If you think about it, this is really the Great Recession and 9/11 stacked on top of each other. Because 9/11 had an effect on tourism that lingered for about a year. And then we finally started to reclaim our movements around planet Earth. This is going to have a very similar effect on how we look at travel and ultimately places like Chico, how it looks at inbound visitors, students and tourists alike. 

And so one of the things about the Chico area because it had a disaster almost two years ago now, that has changed Butte County in ways that have affected the city of Chico both positively and negatively. The housing market is going to probably be the critical factor in how the city and the county ultimately come out of this, because consumers tend to be relatively fickle. And once they feel some positivity, they tend to spend again, but the duration of unemployment is kind of the fulcrum factor there between consumer confidence then leading to housing market confidence. Because if people are out of their jobs for a longer period of time and consumer confidence sags, it might lead to houses going up on market, and we might have more of a repeat of the Great Recession and we might lean more toward that than the quickness of the recovery after 9/11. So that's just a way of thinking about historic perspective. That's how I've tried to describe it to people. And we are trying to avoid that big problem in housing again, if we can help it. But the longer people are out of work that are homeowners, the trickier it's going to get.

This interview has been edited for brevity and clarity. Click the “play” button to listen to the entire interview.

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