Looking Ahead: The Economic Impact of COVID

BY Brian Loftus
4/2/2020 - HVAC Market Intelligence , COVID-19

Imagine you are driving down the highway on a pretty day, listening to Jason Bader interview a HARDI member on his Distribution Talk podcast.  Everything is fine but then something terrible happens.  You have had an accident and are off the road, still in your car but badly hurt.  Your mind is racing as you begin to comprehend the predicament.  How long will I be here?  How long will I be in the hospital?  Will I be able to walk or run again?  What is going to happen to the plans I made for the next week or months?  The arrival of the COVID-19 pandemic is like that for the health of our economy.


The death toll from COVID-19 in the US is rising.  All 50 states are in various stages of infection and preventative lock-down.  The heartbreaking stories from China in early February about the strain on their healthcare workers are now being repeated here.  The treatment to survive the pandemic has essentially been a medically induced coma for our economy as nonessential workers have been told to remain at home.  Recognizable names like Macy’s and Marriott have furloughed workers while thousands of smaller employers have closed their doors indefinitely.  The fading memories of the Great Recession are now ugly flashbacks as the unemployment rate swings from 50 year lows to 50 year highs within a matter of months.


Source: McKinsey & Company

There are a wide range of possible outcomes for the occupants of a car after an accident.  The same is true for an economy that has crashed.  The graphic above from McKinsey does a wonderful job of summarizing the various potential economic scenarios ahead of us: a V for sharp contraction followed by a sharp recovery;  a hockey stick illustrating a long gradual recovery; as well as a U for the Great Recession scenario when a sharp decline was followed by an extended period of weak performance.  We are in the “small v” economic outlook camp.


The chart above is from our monthly HARDInomics report illustrating the composition of our $22 trillion economy.  Net exports and fixed investment are modest contributors relative to the Personal Consumption Expenditures (PCE).  Much of the PCE is recurring in nature like groceries, health care, utilities, etc.  The red bars illustrate our “small v” expectation and produce a calendar year 2020 GDP decline of 5%.  One reason we are in the “small v” camp is due to the record of Italy, Spain and South Korea while battling the virus.  We are hopeful the arrival of hot and humid weather will act like rain to a bad fire season and suppress the spread of infection, while the population develops their own resistance after exposure. In such a scenario, PCE would steadily normalize as quarantines end, driving consumer spending upwards and stabilizing the economic sectors most exposed to the economic car crash (restaurant/retail, hospitality, tourism).



A 5% GDP decline in calendar 2020 could include a shocking Q2 GDP decline of 20%.  By the time we see headlines of “GDP Declines 20%” we will already have a much better sense as to whether Q2 was the bottom of the downturn. Along with watching the daily rate of death in the US, we will follow the guidance of former Federal Reserve Chair Janet Yellen and watch the trend of Unemployment Claims, Consumer Confidence and Retail Sales.  Those data points are reported more frequently than GDP so they can be the early indicators that the fiscal policies are having the intended effect of waking us from this economic coma.

Being in a car accident is terrifying.  The concern or fear is compounded by the uncertainty of the amount of time necessary to recover afterwards.  There are many unknowable variables underlying a 2020 economic guesstimate at this point.  Will the infection return with cooler weather causing schools to close once again or could there be meaningful progress with the development of vaccines?  One certainty is that the cooling season will be here soon, and effective air conditioning is an essential service just like the need for effective heating equipment will be later in the year.

How many people will be in Times Square to celebrate New Year’s Eve this year?  That will be one of many examples to illustrate how this COVID-19 lockdown has changed us.  At this point we do not know if Anderson Cooper will be alone to watch the lighted orb descend, but we will have a good idea in a few months after tracking these indicators.  We will keep you informed with state-by-state insights in the quarterly HARDInomics, and with our monthly macro HARDInomics.  Those services are available to HARDI distributors who participate in the monthly TRENDS sales survey, and to supplier members with enhanced membership levels.  We encourage you participate in the TRENDS report so you can benefit each month from the regional market performance insight, and hope that you, your teammates and families continue to be healthy.