With apologies to Sesame Street, the U.S. economy has emerged from six months of the COVID-19 pandemic looking a lot like the letter “K.”
On one end of the economy are businesses that are soaring, as we abandoned offices and classrooms, settled in at home and pretty much stayed there.
Those sectors pointing up on the “K” include grocery stores and technology companies like Zoom and Amazon.
On the downward leg of the “K” are the airlines, restaurants and hotels that many of us haven’t gone near for six months.
In this “K” recovery, “you have pockets of the economy that start to recover at an accelerated rate and others that are going to be in decline for a much longer period of time,” said Tim Sheehy, president of the Metropolitan Milwaukee Association of Commerce.
The contrast is stunning.
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“Depending on where you sit in the COVID economy, business could be booming or on the brink of bankruptcy,” Suzanne Clark, president of the U.S. Chamber of Commerce, said in a statement.
“Long gone is the notion that we’ll have a V-shaped recovery — a deep economic decline followed quickly by a sharp rebound,” Clark said. “Instead, what we’re looking at is a recovery that will be vigorous for some sectors while others remain in free-fall.”
The situation is unlike anything we have ever seen.
“We are in pretty uncharted economic territory,” said Laura Dresser, associate director of the Center on Wisconsin Strategy at the University of Wisconsin-Madison.
Forget about the business cycle or the bursting of financial bubbles. This downturn came about because people were not able to be together, Dresser said.
Social businesses lagging
Many businesses built around people gathering remain in the doldrums.
“Countless companies in the travel, entertainment, leisure, hospitality and food service industries and other employers hit hardest by the crisis — hotels, restaurants, bars, movie theaters, music venues, sporting franchises — may face a long and painful slog before they employ as many people as they did earlier this year,” Clark said.
The uneven nature of the recovery is evident among small businesses.
Loan applications coming into the Wisconsin Women’s Business Initiative Corp. have roughly doubled during the pandemic, said Wendy Baumann, WWBIC president and CEO.
The statewide economic development organization is seeing the varying effects of the pandemic on the businesses in its loan portfolio. About half needed a little support or had to slightly pivot their business model, Baumann said. A quarter are just fine. The remainder are really struggling, she said.
As some businesses struggle, so do the people who work — or formerly worked — for them.
According to state numbers, the “service-providing sector” accounts for 240,400 of the 272,000 lost jobs since February in Wisconsin. Some of those jobs have come back. Some are gone permanently.
If you’re a worker in one of the declining segments, now is the time to make changes and set forth on a new career path, Sheehy said. Employers on the ascending leg of the “K” are counting on it, he added, because they will increasingly need new workers to replace retiring members of the baby boom generation.
“The question is, what do you do to re-skill or up-skill or shift your career if you are in one of the industries that isn’t going to come back for three, four or five years?” Sheehy said.
Tourism wilts, restaurants shaky
Milwaukee was supposed to have enjoyed a blockbuster year for tourism, thanks to the Democratic National Convention and the usual summer festivals and events. Instead, occupancy at hotels has averaged less than 40% in Milwaukee County through the first half of the year. Last year at this time, occupancy was around 70%.
Unlike this spring when occupancy dropped below 10%, some people are choosing to travel again. The city’s tourism and convention bureau Visit Milwaukee is anticipating that occupancy will continue to grow through the end of the year, said Kristin Settle, senior director of communications and public affairs for the organization.
Still, business travel has not yet returned. Neither have big events. Around 100 events that Visit Milwaukee was involved in canceled or postponed in 2020. Already, some events have canceled or postponed for 2021, Settle said.
The haves and have-nots of the economic recovery are clearly reflected in the restaurant business.
Fast-food chains and other restaurants with drive-thru lanes or those with business models centered on takeout, such as pizzerias, are widely seen as holding their own during the pandemic.
Culver’s, based in Prairie du Sac, has more than 765 locally owned and operated restaurants in 25 states. Currently, more than 70% of all its sales are drive-thru and to-go orders.
“We are on track to open several more restaurants yet this year,” the company said in a statement.
That’s not the case for other restaurants.
Among finer-dining restaurants, many have adjusted to offer carryout, which some restaurateurs say isn’t sustainable. Still others have yet to reopen.
“We know that restaurants are really struggling, without a doubt, particularly for anybody who relies on dining-in options,” said Kristine Hillmer, president and CEO of the Wisconsin Restaurant Association.
The biggest challenge for Wisconsin restaurants, especially once winter arrives and outside dining is no longer an option, is customers’ fear of dining inside, Hillmer said.
Since a Chinese study publicized in April that showed a COVID-19 outbreak associated with a Guangzhou restaurant’s air conditioning, health officials have advised that dining outside is less risky.
Hillmer contends that restaurants, with their protocols, aren’t high risk. “We’ve seen in most cases restaurants are not a spreader,” she said.
The Milwaukee Health Department doesn’t have figures readily available, but it confirmed Hillmer’s assertion that restaurants aren’t big spreaders of COVID.
Across Wisconsin, restaurants are doing better in parts of the state that are more open but which also are less densely populated than Milwaukee and Madison, Hillmer said.
The pending arrival of winter certainly comes with a sense of foreboding for restaurants.
“The holiday season is the next big season to see what happens,” Hillmer said. If consumers stay away, “I think Jan. 1 is going to be a brutally hard time for a lot of folks, and they’re going to have to make a lot of hard decisions,” she said.
Among restaurants, “70% might survive,” Hillmer added. “I think the longer this goes on, the less and less likely this is going to be.”
COVID is deciding where, how you shop
The unevenness of the COVID economy is also clearly seen in the retail business.
Grocery stores have seen so much growth that they have barely been able to keep up with demand. Online retailers and big-box discounters are also reporting a huge uptick in sales.
Kroger, which operates 106 Pick ‘n Save, Metro Market and Copps stores in Wisconsin, said Friday that its second-quarter profit nearly tripled (up 175.8%) to $819 million on sales of $30.5 billion — up 8.2% — from the same period last year.
Same-store sales, considered a key retail metric because it factors out sales fluctuations that result when newly opened or newly acquired stores are added, were up nearly 15%. By comparison, Kroger’s same-store sales in the same quarter of 2019 were up 2.2%.
“Grocers still face sporadic outages in the supply chain such as paper products and other items,” said James Hyland, vice president for communications and public affairs for Kroger’s Milwaukee-based Roundy’s division. “Consumer packaged goods manufacturers might not be able to catch up until next year in terms of total replenishment.”
Kroger is the grocery market share leader in Wisconsin and employs more than 12,000 people in the state.
The sales gains across the grocery industry are due in part to the huge growth of online grocery shopping. Although it has shown signs of leveling off, that trend has accelerated during the pandemic.
“Regarding the new normal, it’s still not 100% predictable as to what it will look like …” Hyland said.
Other parts of retail have not fared as well.
Department stores and many mall-based specialty retailers have closed stores, laid off workers and declared bankruptcy.
Men’s Wearhouse, Jos. A. Bank, Brooks Brothers, Lord & Taylor, Ann Taylor, Loft and Neiman Marcus are among the retailers whose parent companies have entered Chapter 11 bankruptcy in recent weeks. The outlet mall in Oshkosh is in receivership after missing months of mortgage payments.
J.C. Penney, which sought bankruptcy protection in May, said Sept. 9 that it has reached a tentative deal to sell its business and stores to a group of mall owners and lenders in a move that would save the department store chain from liquidation.
Other retailers are continuing to navigate the changing landscape as the crucial holiday shopping season approaches.
Menomonee Falls-based chain Kohl’s is expecting that the holiday shopping season could start as early as October this year.
The retailer, which operates stores across the U.S., thinks the same categories — active, casual apparel, home and toys — that have sold well throughout the pandemic will continue to be popular throughout the holidays, said Kohl’s CEO Michelle Gass during a retail conference on Wednesday.
During the pandemic, Kohl’s has seen its customers “gravitating to comfort,” Gass said. Kohl’s already was paring down the goods sold in its stores before the pandemic. That became crucial when reopening stores to allow more space for physical distancing.
“Customers love less in the aisle,” said Jill Timm, Kohl’s CFO during the retailing conference. Kohl’s plans to continue with smaller inventory long term.
Meanwhile, online sales are growing. For retail businesses, that also comes with shipping costs. Kohl’s plans to push customers to opt to pick up at the store to reduce the company’s shipping costs.
Consumers restrain spending
Still, the COVID-19 marketplace is filled with uncertainty going forward.
Consumers have clearly pulled back on their spending.
A credit card debt study conducted by personal finance website WalletHub showed that American consumers paid down $118 billion in credit card debt during the first half of 2020 — the most ever.
“This record reduction in credit card debt has been driven largely by generous unemployment benefits and household austerity measures stemming from the pandemic …” the organization said in a statement.
The second quarter of 2020 marked the first time in 30 years that credit card debt among U.S. consumers has dropped during the April through June quarter, according to WalletHub.
WalletHub is projecting that U.S. consumers will end the year with a slight reduction in credit card debt for the first time in more than a decade, since the end of the Great Recession in 2009.
There’s a ‘K’ in real estate, too
The pandemic’s economic effects so far haven’t hurt development of new industrial buildings, according to Greg Schementi, an executive at Cushman & Wakefield Inc., a Chicago-based global commercial real estate services provider.
Schementi, who is president of the firm’s tenants representation in the Americas region, was part of a recent panel discussion sponsored by the Commercial Association of Realtors-Wisconsin.
One example of new industrial development is natural pet food maker Stella & Chewy’s recently approved plans to build additions that would nearly double the size of the company’s 164,007 square-foot building in Oak Creek.
However, many office tenants are delaying relocation decisions while they continue to assess the pandemic’s effects on the economy, and evaluate the pros and cons of working at home, Schementi said. That could affect demand for office space.
He also said mid-rise buildings might prove more attractive than high-rise office towers.
In Brookfield, Irgens Partners LLC recently started construction on a mid-rise office building at The Corridor mixed-use development.
Actuarial and consulting firm Milliman Inc. will anchor the six-story, 186,000-square-foot building. It will move there in summer 2022 from 15800 W. Bluemound Road, Brookfield.
Milwaukee and other smaller cities will likely see a faster return of downtown office workers because they rely less on mass transit, said Matt Dorner, economic development director at Milwaukee Downtown Business Improvement District.
In downtown Milwaukee, one-third of office employees have already returned to their workplaces, said Dorner, who spoke at the panel discussion. Only one in five office workers say they’re ready to return.
Retail real estate has been hit hard by the pandemic’s economic effects, said Cory Sovine, a senior vice president of retail at the Milwaukee office of commercial real estate services provider Colliers International.
Store and restaurant chain bankruptcies have created massive swaths of vacant retail space in malls and strip shopping centers nationwide, Sovine said in a video report on the second-quarter retail real estate market.
Also, CBL & Associates Properties Inc., a Chattanooga, Tennessee-based company that includes Brookfield Square in its portfolio, in August announced it had reached a restructuring deal with its debt holders. CBL said it expects to file a Chapter 11 bankruptcy reorganization plan by Oct. 1.
What about manufacturing?
Manufacturing has always been a big deal in Wisconsin. We make all sorts of things from gigantic machinery to food products.
“Metro Milwaukee and Wisconsin have seen great diversification of the economy over the past 20 years,” Sheehy said. “Having said that, we’re still No. 1 or No. 2 in the country in terms of the percentage of our workforce in manufacturing.
“It’s a really important part of our economy,” Sheehy added. “These are high value, high wage jobs.”
The impact of the pandemic on this sector is less clear-cut.
“Demand and business disruptions due to the COVID-19 pandemic severely challenged the manufacturing sector earlier in the year,” according to a report issued Thursday by the National Association of Manufacturers, a trade group.
Manufacturing production dropped 20.2% between February and April, according to the NAM.
Since then, the outlook has become decidedly brighter.
In the latest quarterly Manufacturers’ Outlook Survey, conducted Aug. 14–28, 66% of respondents reported a positive outlook for their company in the third quarter, up from 33.9% in the second quarter.
“Positive sentiment in the manufacturing sector has nearly doubled since May,” the NAM said.
Just over half those surveyed — 50.6% — predicted an increase in production during the third quarter compared with the second.
Sheehy said that based on his conversations with those in the manufacturing business in the Milwaukee metro area, slow growth is on the horizon for the sector.
But that would be slow growth for a sector that has been complaining for years that it can’t find enough skilled labor.
“So, while COVID is putting the brakes on some of (the business activity), what it hasn’t done is put the brakes on demographics,” Sheehy said. “Our working-age population grows by less than 1% between now and 2040.
“So, as baby boomers start to retire in greater numbers, even though it’s slow growth, you are going to have lots of job openings in manufacturing.”
This story included reporting from Guy Boulton, Tom Daykin, Carol Deptolla and Sarah Hauer of the Milwaukee Journal Sentinel. USA TODAY and the Cincinnati Enquirer also contributed.
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