Coronavirus Regional Economic Impacts and Policy Responses
Most regions were beginning to see an acceleration in economic growth during January and February 2020. The 20-state Heartland was poised to see a notable improvement in economic performance that will now be tested due to public health measures implemented to contain the spread of the coronavirus. The additional $200 billion in purchases of grain, industrial supplies and manufactured products over the next two years that China agreed to in the Phase I trade deal will benefit the Heartland greater than any other region of the nation. While that stimulus will be delayed until early summer, there will be a meaningful boost to the Heartland’s economy that should aid its recovery rate from COVID-19. The federal (both monetary and fiscal policy), state and local policy responses will be essential to mitigate the severity of the impacts and spur a more rapid economic recovery.
Regional Economic Impact Framework
To better understand the risks to regions of the country stemming from the coronavirus, and the Heartland, in particular, it is useful to consider the sources of the potential economic dislocation. In many respects, the practical impacts are similar to those experienced in the aftermath of the 9/11 terrorist attacks on New York and Washington. As in the case of 9/11, the economic injury will take aim disproportionately at a handful of sectors – travel, tourism, lodging, dining and recreation– the ramifications on communities and individuals will be acute in the near term. In the aftermath of the 9/11 terrorist attacks, commercial and private airline flights were grounded for nearly three weeks and travel and related economic activity was curtailed and resumed slowly. For a detailed analysis of the economic impacts stemming from the 9/11 terrorist attacks, many of which are applicable in the case of the coronavirus, please see “The Impact of September 11 on U.S. Metropolitan Economies,” on which I was the lead author and is available from the Milken Institute available at: assets1b.milkeninstitute.org/assets/Uploads/LegacyPublication/National-Metro-Impact-Report.pdf
However, the Centers for Disease Control (CDC), in a public health effort to contain the spread of coronavirus infections and associated deaths, has encouraged local officials where severe outbreaks have occurred to close restaurants, bars, sporting venues, museums and other locations where large gatherings occur. Many local officials are closing the venues voluntarily where inflections are just developing. People might have been forbidden to travel on planes after 9/11, but they were permitted to go to the local pub. Other communities are beginning to practice social distancing based upon recommendations from the CDC and NIH. The near-term negative impacts will be substantially more onerous than in the period after 9/11. The immediate impact is reflected in the new weekly state claims for unemployment insurance, which are poised to jump more in the coming weeks. Additionally, foreign air travel from Europe and many other countries have been banned by the federal government for a minimum of 30 days. International travelers to the U.S. occupy hotels for more nights while adding dollars to our economy during their visit.
Existing Infection Rates
The first mechanism to examine the likely magnitude of economic weakness is the number of cases by geographic area. The data will provide measures for assessing which locations will have the most severe restrictions on social interactions. For example, the seven-county San Francisco Bay Area has undergone a mandatory shelter-in-place order. Now the entire state of California is under a similar order. Based upon the latest information from Johns Hopkins Coronavirus Resource Center, the Seattle metro area is the most at risk for further restrictions on public gatherings and other mandatory shelter-in-place actions.
New York City and its suburbs will likely see further restrictions as well with new infections growing exponentially. At this point, the Governors of New York, Washington, Illinois, Florida, Texas, Pennsylvania, Connecticut and New Jersey have issued shelter-in-place orders with varying degrees. Thus far, New Orleans has the highest coronavirus infection rate in the Heartland as it is a major foreign tourist destination. Louisiana and Michigan are next in line and other states will soon join locations with mandatory shelter-in-place orders. These restrictions will likely stay in place longer and harm their economies more than other locations with lower infection rates. The good news is that so far the infection rate in most Heartland communities has been low. However, this might be a false sense of security as there are limited test kits available for COVID-19 and strict protocols for administering, leaving many Heartland locations with clear undercounts.
Another measure to consider as a gauge for future cases of the coronavirus is the prevalence of Chinese-born residents. Chinese-born residents have the highest propensity to travel to China and provides a measure of potential exposure before the full threat of the coronavirus was fully understood. Here, the West Coast has the highest susceptibility as already displayed by the outbreak so far. The San Jose metro area and its neighbor to the north, San Francisco, have the most significant exposure. Now that COVID-19 infections have spread to Europe, the foreign-born share of the population provides a better indication for its future spread. economy.com/economicview/analysis/378726/Quantifying-US-Regional-Exposure-to-COVID19
The New York metro area has substantial exposure, as well as the entire Northeast corridor from Washington, D.C. to Boston, and Chicago’s exposure is the highest in the Heartland. Heartland metros do not appear to have much exposure from likely travel to China and Europe, but it is not negligible.
Population density affects the epidemiological spread of the virus. Chicago is in the crosshairs here, but New York, Los Angeles and San Francisco are at the highest risk from density. However, Houston and Dallas also have exposure attributable to density, also. See map.
Another predictive demographic characteristic to benchmark the future impacts is the elderly share of the population as coronavirus death rates are much higher among this group of Americans. Retirement communities in South Florida, both on the Atlantic Coast, and increasingly on the Gulf Coast are most exposed. Phoenix and Las Vegas have large retirement communities, too. The elderly share of the population should be a good predictor of which communities will implement the most draconian measures of social distancing. The Heartland is in pretty good shape on this category, but many of the former manufacturing centers have an elderly population aging in place. Cleveland, Detroit, Milwaukee and other northern Heartland metros are most at risk. See map.
Supply Chain Impacts
Another source of economic disruption is supply chain effects. Measures of the interconnectedness of the global economy are metrics to consider. Initially, imports of intermediate goods from China would be a critical measure as low inventories could shut down U.S. manufacturing operations and place pressure on logistics companies like trucking. Now, we need to consider supply chains connected to intermediate goods from Europe. Additionally, airline flights on a per capita basis to China is an important metric, and now, we must include Europe. On exposure to China, the West Coast has the most, particularly the Los Angeles metro area due to the ports of Long Beach and Los Angeles through which a majority of Chinese imports come into the U.S. Riverside-San Bernardino has sensitivity due to the warehousing and logistics operations of these Chinese imports. Northwest Arkansas has high exposure to supply-chain and logistics ramifications as the nation’s largest trucking company, J.B. Hunt, is based there. Omaha, Nebraska has high sensitivity due to the reduction in imports from China as Union Pacific suffers from the decline in intermodal containers being shipped. The Dallas area has exposure due to it being the headquarters of Burlington Northern.
U.S. manufacturers that are heavy exporters to China will experience substantial negative impacts. Grain shipments to China do not appear to be heavily curtailed as Chinese leaders attempt to meet their obligations under the Phase I trade agreement with the Trump administration. So, Heartland farmers will not experience slumping Chinese demand for grains and meats. China imports a substantial number of high-tech products from the U.S—among them communication chips, specialized semiconductors, networking gear and a range of other IT gear. Much of this equipment originates in San Jose, Anaheim, San Diego, Portland and Phoenix. The Dallas and Austin metro economies will experience lower exports of these products as well.
Travel and Tourism
Travel and tourism encompass a wide variety of sectors that sell private services to U.S. and foreign visitors. These industries employ thousands of workers across the country. The leisure and hospitality industry employed 16.3 million Americans in 2019.1
There are ripple effects as domestic and foreign travelers not only are significant consumers of direct output but purchase a substantial share in intermediate products from supplying industries. Hotels and lodging places, eating and drinking establishments, and museums and galleries are significant travel benefactors.
Tourism purchases and vital contributors to local employment in major cities across the U.S. include,amusement and recreation services, travel accommodation, air transportation, water transportation (cruise lines), theatrical producers and musicians and sports and other entertainment will be profoundly affected. The geographic impacts on eating and drinking establishments will be widely felt relative to those experienced in the aftermath of 9/11 as mandatory shelter-in-place in place orders are in effect and other communities follow similar voluntary guidelines.
Relative to the size of its economy, Flagstaff, Arizona, has the most exposure to a decline in travel and tourism, with 23 percent of its employment in leisure and hospitality and many other related sectors. However, Las Vegas will see severe economic harm stemming from its high concentration in leisure and hospitality, as it represents 29 percent of total employment. Reno has high exposure, too. However, Atlantic City, NJ, Ocean City, NJ, Myrtle Beach, SC, Brunswick, GA, and other Carolina locations will be hit. Orlando has high sensitivity, along with South Florida metros and Panama City. Honolulu’s economy will be harmed from dependence on travel and tourism.
Gulfport-Biloxi-Pascagoula, MS has the highest dependence on travel and tourism—nearly double the national average— of any Heartland metro. Travel accommodation employment is nearly six times more important in Gulfport than in the nation overall. New Orleans has the second-most sensitivity to travel and tourism in the Heartland, closely followed by Rapid City, SD (think Mount Rushmore). Additionally, Hot Springs, AR, is a well known tourist destination. Hourly, low-wage workers are heavily employed by the travel and tourism industry and are in considerable risk for loss of income and employment. Mitigation effects must focus on this most vulnerable job sector.2
Travel restrictions caused by the coronavirus will deal the U.S. airline industry a bad hand, and the ramifications will be witnessed across the nation and the metropolitan economic impacts will be substantially different than within the tourism sector. Travel bans on most international flights will devastate airline operations. Even without a domestic travel ban, consumers are, of course, apprehensive about the health safety of airline travel. Business travelers will be traveling less, in most cases mandated by their organizations. We will see a substantial fall in overnight visits to U.S. cities and travel through airports.
The Heartland will receive one of its hardest blows from the cutbacks in airline employment. Dallas-Fort Worth will be among the most severely affected metros in the country as it is the corporate headquarters of American and Southwest Airlines. And both have major air passenger operations. In Fort Worth alone, scheduled air transportation is more than eight times as important as compared to the nation. Combined, American and Southwest employ 35,000 in the Dallas-Fort Worth metro area. The Chicago metro area’s economy will be harmed as O’Hare is a major airline hub and United-Continental and American employ 22,500 in the region. Other Heartland locations such as Louisville, Tulsa and Houston will be detrimentally impacted. Outside of the Heartland, San Francisco, Miami, Atlanta, Anchorage, Honolulu and Miami have high levels of exposure to cutbacks in air travel.
Commercial aircraft and its related suppliers represent another highly exposed sector for cities. Commercial aircraft orders began tumbling before the COVID-19 outbreak as Boeing’s problems with the 737 Max caused airlines around the world to pause. Now, as airlines lay off workers and downsize capacity, the aircraft and parts industry is likely to suffer drastic employment losses over the next two years and will unlikely experience much of a rebound after the pandemic abates.
Aircraft production is highly concentrated in a few locations around the United States. Some might believe that Seattle has the most exposure due to the manufacturing operations of Boeing; however, you would be wrong. Here is where the Heartland will experience one of the most devastating economic impacts: Wichita has the highest dependence on aerospace and parts manufacturing with major employment at Spirit AeroSystems Inc. (11,500), Textron Aviation (9,000), Bombardier Aerospace (1,600), Johnson Controls Inc. (1,500) and Boeing Integrated Defense Systems (1,000). In the aggregate, aerospace and parts manufacturing are 30 times more concentrated in Wichita than for the nation overall. Waco, Brownsville, Dallas-Fort Worth, Abilene, TX and South Bend, IN all, have exposure among the top ten in the nation. As the corporate headquarters for Boeing, Chicago will lose many high-paying jobs.
The impacts of Seattle’s economy are not insignificant. Boeing’s production operations employ over 64,000 in the Seattle metro area. But the industry’s importance to Seattle is roughly one-half as compared to Wichita. Boeing has expanded operations in Charleston-North Charleston, SC, with 7,000 employees based there and aerospace and part manufacturing is five times more concentrated than the nation. Palm Bay-Melbourne-Titusville, FL, has a high dependence on aerospace as well.
The most extensive negative consequences of COVID-19 on the Heartland will be from the indirect impacts of reduced oil and gas exploration and extraction operations. Lower oil demand in China is now spreading around the world as supply from the U.S. shale production was accelerating. In this environment, the Saudis and Russia could not reach an agreement on a plan to curtain production, and oil prices plummeted to as low as $20 per barrel. While many U.S. shale producers can remain profitable with prices around $30/barrel, oil exploration and production will plunge at these price levels.
The Permian Basin in West Texas, Eagle-Ford Basin in Central and Southern Texas, the Bakken in North Dakota and Oklahoma fields will witness the worst impacts. Midland, as the capital of the Permian Basin, will likely be among the most severely affected metros in the nation overall. Midland produces one in five barrels of oil in the U.S. and is the most reliant on oil activity in the nation. Odessa, Laredo and Houma-Thibodaux, LA will be impacted. Dallas and Houston, as home to major oil operations, will be harmed, along with Tulsa and Oklahoma City.
Other areas outside of the Heartland, such as Greeley, CO, Bakersfield, CA, home of the Monterrey shale formation, western Pennsylvania and Alaska, where royalty payments to state residents are likely to be sliced, will be harmed by lower oil prices. Many shale producers will be forced into bankruptcy as they were carrying a heavy load of high-yield debt.
Within the financial services sector, the securities industry will suffer substantial shocks to income and employment as equity valuations retreat due to uncertainty related to the extent of the spread and economic fallout from the COVID-19 pandemic as it spooks investors. As New York City and its surrounding suburban locations have been one of the epicenters for the coronavirus infections, their most important industry, securities, will be impacted as well. In addition to New York City, Bridgeport, CT, and Wilmington, DE, are among the most reliant on the securities industry. However, other financial centers are dispersed around the country. Most likely to be heavily impacted outside of the Heartland are San Francisco, Charlotte, NC, and Jacksonville, FL. Within the Heartland Chicago has the highest exposure to the securities industry, but Dallas has substantial operations.
However, in addition to the direct impacts on the securities industry, the coronavirus will transmit itself in other ways to regions of the country. Regions with a large retiree population that are reliant on dividends, interest and rent, places many more in jeopardy. Additionally, metros with higher ownership of equities will be harmed. Located in the center is South Florida. The exposure in the Heartland is limited but will harm consumer purchases through a negative wealth effect.
Heartland Impacts Summarized
With the activation of public health measures being taken before COVID-19 infections became elevated, most Heartland locations should experience fewer cases per capita and lower economic fallout than coastal areas in particular. The Heartland, overall, has a lower share of the foreign-born population that should minimize the infection rate spreading from other nations. Heartland population densities are lower outside of a few metros such as Chicago, Dallas and Houston. Without a high share of retirees, the extent of mandatory shelter-in-place orders should be less draconian. This should mitigate the deleterious impacts on retail, restaurants and service sectors in the Heartland.
Nevertheless, the Heartland has extensive exposures attributable to its mix of industries that are susceptible to the ripple effects of the coronavirus. The widest-ranging exposure is in the oil and gas sectors. Midland, Odessa, Laredo, TX, and Houma-Thibodaux, LA, will be impacted. Dallas and Houston will be hit, along with Tulsa and Oklahoma City. North Dakota will see adverse effects from its huge Bakken Shale. Wichita’s economy could be the most severely impacted over the next two years given its high dependence on aerospace and parts manufacturing, but Waco, Brownsville, Dallas-Fort Worth, Abilene and South Bend all have major operations. Supply chain effects will harm essential trucking, rail and logistics operations. Northwest Arkansas, Omaha and Dallas have the most exposure. Gulfport-Biloxi-Pascagoula, New Orleans, Rapid City and Hot Springs are the most exposed to the fallout in travel and tourism. Further dislocations will stem from reliance on commercial airline operations in Dallas-Fort Worth and Chicago and a scattering of other locations in the Heartland. Chicago has exposure from its securities sector.
Federal Policy Responses
After an initial muted response to the coronavirus crisis, the monetary policy response by the Federal Reserve has been aggressive. The Fed has cut interest rates to zero. This is the effective lower bound to add more firepower, the Fed announced a new round of quantitative easing. The Fed will add $500 billion of Treasury securities to its portfolio and $200 billion to its holdings of agency mortgage-backed securities. Additionally, the Fed announced it will no longer allow principal payments from its holdings of agency debt and agency mortgage-backed securities in the agency to run off—they will be reinvested. The Fed eliminated reserve requirements, increasing capacity for banks to redeploy around $140 billion into other areas such as the repo market, which has suffered from a lack of capacity. The Fed released a statement that encouraged banks to increase their lending to households and firms through the use of their liquidity and capital buffers.
Further action is in place to align the discount rate and the overnight rate, an aggressive response to obviate the stigma that is attached to accessing the Fed’s discount window. The recently opened dollar swap lines with many central banks that should assist in keeping liquidity flowing throughout the global financial system. The Fed seems committed to providing liquidity. Chairman Powell noted in his statement accompanying the actions that the Fed will hold rates near 0 percent “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
Early March 23nd, the Federal Reserve announced an expansion of its open-ended QE and new action to provide direct loans to firms, displaying its intention to not just provide liquidity, but support the economy in its recovery phase. The Fed stated that it will expand its large-scale asset purchases “in the amounts needed.” At $75 billion a day in Treasury securities purchases, if it continues at that pace, that translates into a $1.6 trillion per month. Additionally, it will scale up MBS purchases to $50 billion per day. The Fed is increasing the range of assets it will purchase to include agency CMBS & MBS. This is essentially quantitative easing to infinity.
The Fed will create a range of new credit facilities in coordination with the Treasury. The Fed believes this will support close to $300 billion of new financing to firms and households. The Treasury will provide $30 billion of capital from the Exchange Stabilization Fund to cover losses. As part of the $300 billion, the Fed will establish a new secondary market corporate credit facility that will purchase corporate bonds rated BBB or better with a maturity of five-years or less. That seems to permit the Fed to circumvent the Federal Reserve Act which currently prevents the Fed from buying corporate bonds directly. These are unprecedented measures.
Many financial market participants are concerned that with rates at zero, there isn’t much else the Fed can do to mitigate the impacts of COVID-19 on the economy. However, there are more non-conventional actions that the Fed could take. Among the most aggressive would be direct purchases of stocks. Former Chairwomen Yellen has suggested this as an option. This would require enabling legislation from Congress but remains a policy option.
Congress has passed legislation providing just over $8 billion in aid to mostly defray public health costs associated with testing and treating COVID-19. President Trump declared a national emergency that allocates $50 billion in funding to address the pandemic, and he has instructed the federal government to grant some forbearance to student loan borrowers with government loans. He conferred on the Small Business Administration the ability to make $7 billion in loans to qualifying small businesses to mitigate economic damage.
Additionally, Congress passed a second stimulus package to address worker impacts during COVID-19. Key elements of this legislation included expanding unemployment insurance eligibility to employees facing layoffs or reduced hours due to coronavirus, mandatory paid leave to workers at firms with fewer than 500 employees (the costs of which are reimbursable to firms through a one-time payroll tax credit equal to 100% of expenses), free coronavirus testing, and additional food and health care aid.
As of this writing, Congress and the administration have not reached a final agreement on the fiscal stimulus package, but what started as a discussion around a package of $1.0 trillion is likely to reach a final size closer to $2.0 trillion. It will include a series of actions in one form or another. Adjusted for the size of the economy today, it compares favorably with the fiscal response to the Financial Crisis in 2009 and will pack a punch. Among the likely pieces are:
Forbearance on small-business loans
Forbearance on mortgage payments
Delay of tax payments to July 15
Increase the federal share of Medicaid by 10%
$1,000 to Soc. Security recipients (1x)
Pay for COVID-19 diagnosis & care
$1,000 payment to workers (1x)
The last piece of the fiscal stimulus puzzle appears to be an increase in state and local aid, hopefully, focused on distressed regions. It had been missing in action in the prior discussion on the fiscal response. Without fiscal stability provided by the federal government, regional economies across the country might collapse. Something around $500 billion seems appropriate.
While it is difficult to project the likely economic impacts of COVID-19, as they depend upon how long mandatory and voluntary stay-in-place orders persist—which rely on when the infection rate peaks—we can make an educated guess. Assuming that the size of the fiscal stimulus approaches $2 trillion and new infections peak in late April or early May, Heartland real GDP should fall at an annual rate of around 5 percent in the second quarter, while the rest of the country experiences a decline at an annual rate of 10 percent. As previously discussed, the coasts have much more exposure to the negative economic fallout. This would result in the U.S. real GDP falling at an annual rate near 8 percent in the second quarter. Heartland real GDP should be flat in the third quarter, while the rest of the country witnesses a further decline of 2 percent at an annual rate. By the fourth quarter of 2020, Heartland's real GDP should expand at an annual rate of 3.0 percent and the rest of the country at 3.5 percent. For 2021, the economic recovery should approach 3.2 percent for the Heartland and 3.5 percent for the non-Heartland.
The Heartland needs to use the COVID-19 pandemic as an opportunity to change its economic development paradigm to provide greater emphasis on aiding entrepreneurs in starting new firms and scaling them. Such effort builds upon the existing resources in the region, like existing wealth in farmland and natural resources, a strong work ethic, and number of research universities and other institutions of higher education; resources which may be difficult to acquire from other parts of the country due to the economic response to COVID-19. Times of economic disruption, as now, often catalyze new innovations and reveal new economic opportunities to utilize existing resources in novel and productive ways.
The Heartland historically has not created jobs or entrepreneurs to the extent possible. There are multiple causes for the subpar rate of job creation over the past decade or two in the Heartland besides low engagement in entrepreneurial activities. Lower educational attainment with less emphasis placed upon innovation tied to research and development stands out among them. However, no other single factor can claim a higher explanatory power than a lack of emphasis on entrepreneurship for job creation. Substantial financial incentives to lure manufacturing facilities or other operations is no longer cost-effective for the Heartland. This is an opportunity for the Heartland and Heartland Forward will be announcing a significant initiative in this area in the coming weeks.
Muro, M., Maxim, R., & Whiton, J. (2020, March 18). The places a COVID-19 recession will likely hit hardest. Retrieved March 23, 2020, from https://www.brookings.edu/blog/the-avenue/2020/03/17/the-places-a-covid-19-recession-will-likely-hit-hardest/?utm_campaign=Metropolitan Policy Program&utm_medium=email&utm_content=84990033&utm_source=hs_email
Ross, M., Bateman, N., & Friedhoff, A. (2020, March 19). A closer look at low-wage workers across the country. Retrieved March 23, 2020, from https://www.brookings.edu/interactives/low-wage-workforce/?utm_campaign=Metropolitan Policy Program&utm_medium=email&utm_content=84990033&utm_source=hs_email