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Sunday, December 27, 2020

Question #10 for 2021: How much damage did the pandemic do to certain sectors?

by Calculated Risk on 12/27/2020 04:55:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2021. I'm adding some thoughts, and maybe some predictions for each question.

10) Economic Scarring: Some sectors were hit especially hard during the pandemic, like travel (hotels, airlines, cruise ships), and entertainment (restaurants, theaters, concerts). Also some areas of Commercial Real Estate (retail, hotels, offices) might suffer long term damage. How much damage did the pandemic do to certain sectors?

The pandemic will likely cause some medium to long term economic scarring. As an example, the lack of in person education for part of the year, might slow learning for many children. But that is beyond the scope of this question - I'm focused on the impact on the 2021 economy.

If we could flip a switch, and end the pandemic today, there would be certain sectors that would still have problems.  And the end to the pandemic will probably be more like a dimmer switch, and slowly fade away in Q2 and Q3 (we hope).

There are some long term trends - like online buying and remote working - that picked up sharply during the pandemic.  It seems likely that people will not return completely to pre-pandemic behavior, and that is likely bad news for brick and mortal retailers, and possibly for office building owners.  Additional bad news for Commercial Real Estate (CRE) is that a number of restaurants went out of business during the pandemic (and some other businesses), and it will take time to find new tenants.

My sense is certain CRE sectors will struggle in 2021.   And there will likely be little investment in Office, Retail and Hotels this coming year.   Also apartment owners are getting hit by a decline in timely rent payments, and the multi-family mortgage delinquency rate has been increasing.

The Architectural Billings Index has been below 50 for nine consecutive months.  This represents a significant decrease in design services, and suggests a decline in CRE investment through most of 2021 (This usually leads CRE investment by 9 to 12 months).

AIA Architecture Billing Index Click on graph for larger image.

This graph shows the Architecture Billings Index since 1996. The index was at 46.3 in November, down from 47.5 in October. Anything below 50 indicates contraction in demand for architects' services.

Entertainment and travel was hard hit during the pandemic.   See: Seven High Frequency Indicators for the Economy (updated every Monday)

For example, airline travel is down about 60% compared to a year ago.   And hotel occupancy is at record lows.  And movie attendance is off 95% (there has been a long term trend away from movie theaters to home entertainment, and the pandemic might have accelerated that trend).

There are other areas - like trade shows, conventions, and cruises - that are essentially non-existent.   

However, my sense is people will return to travel and entertainment activities once the pandemic ends (maybe less business travel - that would be a negative for airlines and hotels).  The return might be slow at first, but people will gradually gain confidence.

So, once the pandemic subsides, my guess is certain sectors of CRE will still struggle, and possibly sectors related to business travel will be negatively impacted.    

Even more important, there are a large number of people that have lost their jobs, and they might suffer long term economic hardships.   I'll have more later on employment and the participation rate.

Here are the Ten Economic Questions for 2021 and a few predictions:

Question #1 for 2021: How much will the economy grow in 2021?
Question #2 for 2021: Will all the jobs lost in 2020 return in 2021, or will job growth be sluggish?
Question #3 for 2021: What will the unemployment rate be in December 2021?
Question #4 for 2021: Will the overall participation rate increase to pre-pandemic levels (63.4% in February 2020) , or will it will only partially recover in 2021?
Question #5 for 2021: Will the core inflation rate increase in 2021? Will too much inflation be a concern in 2021?
Question #6 for 2021: Will the Fed raise rates in 2021? What about the asset purchase program?
Question #7 for 2021: How much will RI increase in 2021? How about housing starts and new home sales in 2021?
Question #8 for 2021: What will happen with house prices in 2021?
Question #9 for 2021: Will inventory increase as the pandemic subsides, or will inventory decrease further in 2021?
Question #10 for 2021: How much damage did the pandemic do to certain sectors?