On March 31 we said “The Odds of a V-Shaped Recovery are Zero.”
The analysis still holds — and the case has only grown stronger.
On March 31 we pointed out that the retail, restaurant, and travel industries account for 73.4 million jobs by self-reported estimates, accounting for nearly half of all U.S. jobs.
In terms of layoffs, those three industries — restaurants, retail, and travel — were hit first, and arguably hit hardest, by the COVID-19 mitigation response.
That is where the first wave of job losses came from. The second wave will be white collar — and it will hit people working from home.
Over the past five weeks, more than 26 million unemployment claims have been filed. (Many more should have been filed, but were not, because state-run systems crashed and phone lines were jammed.)
More filings will come as real-economy breakage translates into revenue-and-profit losses for all manner of businesses. Those filings will increasingly be executive-level, or “knowledge-worker” level — impacting the workers who avoided the first wave.
According to U.S. Census data, 5.2% of Americans worked from home in 2017 — an increase from just 3.3% in the year 2000.
And yet, according to the Bureau of Labor Statistics (BLS), roughly 29% of Americans — almost three out of 10 — have the capability of working from home, given the nature of their job.
Given these statistics, we can broadly divide the U.S. workforce into 30% who can work from home and 70% who cannot.
That rough dividing line, somewhere between 30-70 and 40-60, also overlaps with a long-standing divide between Americans who were doing well economically — prior to the pandemic at least — and those who were struggling.
In the first wave of pandemic layoffs, created by work stoppages via stay-at-home and shelter-in-place orders, the 70% of Americans who could not work at home were immediately hit, for obvious reasons.
As soon as a restaurant or a shop stops serving customers or selling merchandise, it becomes immediately and painfully cash-flow negative, and the majority of these businesses do not have more than a few weeks of emergency cash on hand; perhaps two or three months, if that.
For more computer-oriented or knowledge-oriented jobs, however, the pain was not so immediate.
There has long been a giant gap between the 5.2% of Americans who were already working from home and the other 24% who could do so in theory. The pandemic closed that gap, which meant a great many white collar and executive workers getting accustomed to working from home, and interfacing via Zoom meetings, versus taking an immediate job hit.
Unfortunately, however, the thing that happens next is a transfer of pain from the “physical” economy — meaning the 71% of jobs that require a physical presence — into the “digital” economy, meaning the 29% of jobs that can be done from home.
This transfer of pain is inevitable because such a large share of revenue, profit, and economic activity emanates from the real economy. More than 70% of Americans have physical jobs, and more than 70% of U.S. Gross Domestic Product is (or was) powered by consumer spending.
As an example of pain transfer from the physical economy to the digital one, think about the marketing and advertising industry.
To a large extent, advertising is about as digital as it gets. You have creative departments coming up with advertising ideas, and graphic design departments creating logos and brochures with software programs, and media-buying departments designing social media and TV ad campaigns, and so on.
And yet all of that stuff depends heavily on real-economy clients — businesses with roots in the physical world. Which clients need to advertise? Restaurants. Sports venues. Event holders. Trade shows. Retail shops. Travel destinations. And so it goes.
As real-economy clients reduce their budgets — or stop having budgets entirely — digitally oriented service companies will see revenues shrink substantially.
As a result of this shrinkage, profit margins will shrink even more, as their base of operational expenses is carried by a smaller gross income.
For instance, if a business has $400,000 a month in operating expenses and $1 million a month in revenue — and then the revenue drops to $425,000 — the profit picture suddenly becomes quite scary.
The natural response to this is to reduce operating expenses, which will mean cutting back on costs. And some of the first costs to be cut will be white-collar workers with expensive carrying costs (in the form of wages and benefits).
Nor is this just a small-business problem. The big corporate behemoths are cutting back, too. Even companies with dominating business models and fortress-like balance sheets are slashing costs now, in preparation for the structurally lower revenues to come.
Take the Coca-Cola Co., for example. On April 21, Coca-Cola revealed its global business volume fell 25% in April, and warned it could fall yet further.
As it turns out, people drink a lot of Coca-Cola products at restaurants, amusement parks, sporting events, and other mass-gathering type events that have all been temporarily canceled. Coca-Cola also knows these events are likely to come back not with a bang, but in slow and creeping fashion, and will likely require a vaccine (a year away, if we’re lucky) to resume full force.
As a result of this, Coca-Cola’s revenues are way down, and could fall further. That means operational expenses will have to be cut, which means advertising, marketing, and consulting budgets will be cut.
Even the corporate juggernauts — with a few rare exceptions like Amazon, which is hiring tens of thousands at a clip — will have to get lean.
Google is a poster-child for this phenomenon, too. On the one hand, Google is perhaps the most digital company on the planet. They had little trouble, at least comparatively, instructing their entire North American workforce to work from home weeks ago.
And yet Google is planning to slash its marketing budgets by as much as 50%, according to CNBC, and has put a hiring freeze in place. Google is even chopping its compensation for summer interns, a relative pittance in the big scheme of things.
So why is Google — a tech juggernaut with more than $100 billion in cash on its books — taking drastic measures like cutting marketing in half, freezing new hires, and paying interns 50 cents on the dollar?
Because Google, like Facebook, depends on advertising revenue as its lifeblood. And a lot of that lifeblood comes from businesses tied to the real economy, and consumer spending habits tied to physical workers in the real economy.
Given this reality, the pain being felt in the world of the 71% (those who cannot work from home) is going to directly impact the outlook for the 29% (those for whom working from home is feasible).
This new wave of layoffs has not hit with full force yet. It will also be felt in hard-to-see ways, like the hiring freeze Google has put in place. In addition to jobs being lost, normal sources of high-salary hiring will dry up and disappear.
For the stock market, this means 401(k) accounts are going to be raided. As white-collar workers and knowledge workers find themselves downsized at the margins, many of them will flip from being regular contributors to a 401(k) plan to thinking hard about raiding their 401(k), or otherwise limiting their exposure to equities, in order to preserve emergency cash.
All of these factors, and more, are already baked into the economic cake. The secondary wave of white-collar layoffs on deck is another key reason, in our view, why the bounce was more hope-driven than realistic, and why the S&P 500 has not seen its low.