This is UHERO’s second interim forecast update to address dramatic recent developments associated with the novel coronavirus pandemic.
Much has changed since the interim forecast update that we released three weeks ago. COVID-19 has spread to more and more countries, with disastrous impacts being seen in several major European economies, including Italy and Spain. Nationally, the disease has exploded: the US as a whole now leads the world in detected cases. New York, the US epicenter, is struggling to address unprecedented demands on local health care. Business in many communities has largely shut down, either because of falling demand or stay-at-home regulations. Those rules are now in place in many communities and states, with no clear indication of when it will be safe to lift them.
The economic impact of these necessary actions will be a sharp temporary drop in measured activity and employment. New claims for unemployment compensation have surged dramatically over the past week nationwide. The stock market has tanked, as profit projections were yanked downward and fear set in. US gross domestic product will drop at a double-digit annual rate in the second quarter. Policymakers have responded quickly, yet it will take some time for the impacts to be felt. The Federal Reserve has slashed interest rates to zero and has brought back many of the extraordinary measures it developed during the 2007-2009 financial crisis to keep markets liquid and encourage lending to affected firms to get them through the crisis. The US Congress just enacted the largest economic recovery package ever, $2 trillion, including an array of tax incentives and support for airlines and other affected industries, expanded support for employment and income, direct grants to states, and other measures.
In Hawaii, tourism has been deliberately shut down to try to isolate the Islands from additional transmission from outside the state. The Governor’s initial plea to potential visitors to stay away for a month has been followed by a mandatory two-week quarantine requirement, which has brought visitor arrivals essentially to zero. Airline flights to Hawaii have been reduced to “bare bones” levels, as the CEO of Hawaiian Airlines put it, and a number of hotels have closed their doors for now. Following the lead of county Mayors, the Governor announced a state-wide stay-at-home order that is intended to limit participation at work places to essential workers and limit trips outside the home to essential activities. All entertainment venues and parks have been shut down, and restaurants are limited to take-out service only. Hard to believe, but all of these unprecedented changes have unfolded over only a week or so!
While it is too early to assess the full impact of these dramatic actions on Hawaii’s economy, it is clear that they will be sharp and painful. The clearest indication of this pain is the surge of 80,000 new unemployment claims so far in March, with several filing days remaining in the month. Job counts will fall precipitously in industries tied to tourism and local activities now banned by the stay-at-home order. Other industries will suffer from the general decline in spending.
By the second quarter, we expect the non-farm job count to fall by more than 140,000 from its recent peak, a roughly 20% year-over-year decline. Losses to income will be somewhat less severe, because of enhanced unemployment benefits and the direct payments to US residents included in the recent federal recovery legislation, but they will still be historically large. Real personal income will fall about 5% by the fourth quarter. With a strong start to the year pre-virus and some recovery expected to commence by late spring and early summer, annual figures will show less severe drops. Still, the job count will average 11% lower than 2019 for the year as a whole, and real income will be more than 3% lower. Visitor arrivals for the year will be down an astounding 41%.
It is important to note that some aspects of the recent federal legislation will likely attenuate the job losses reported here and may further buoy income. Those aspects of the economic relief package will take time to evaluate and so are not incorporated in this interim forecast update. In addition, we expect further federal legislation focused on stimulating the economy as it begins to emerge from its current time-out.
The biggest unknown at this point is how long the shut-down will last, and how long the recovery will take when it eventually comes. We are assuming (for now) that the visitor and local shutdowns last through the officially-announced end date of April 30, but that recovery to “normal” after that will take quite some time. While local consumption of goods and services may resume relatively quickly, the return of air travel and the tourism economy is highly uncertain. First, there is the uncertainty about when the pandemic will peak and how long it takes before the near-global economic halt comes to an end. Even then, when and to what extent conditions and sentiment in major tourism markets will pick up is unknown. And both of these sources of uncertainty depend crucially on the policy response of governments at home and abroad. Our view is that recovery to normal conditions will be a very gradual process. To the extent that there is any lasting damage to the visitor industry—including airlines—or to local business and household finances, overall local economic recovery will take longer.
We will continue to track economic developments and policy responses in the weeks ahead and provide additional updates as warranted.
12 thoughts on “Interim Forecast Update: Hawaii’s Economy is Shut Down to Deal with COVID-19”
“The economic impact of these necessary actions will be a sharp temporary drop in measured activity and employment.”
Given the increasing attention to mass testing, contact tracing, and face mask use, why do you say these steps were necessary? Not being facetious, genuinely curious.
Also, what multipliers are you assuming for the individual cash assistance and expanded UI given the limited ability for consumers to consume?
Laron, thank you for your comments. There is widespread agreement among epidemiologists that aggressive social distancing is crucial to prevent catastrophic virus spread and death in the US. A pressing question is going to be how and when to move away from that as the epidemic is brought under control. UHERO Fellows are thinking about how that for the case of Hawaii, and you can find some their views here: https://uhero.hawaii.edu/category/brief/
We have not assumed an explicit multiplier for cash assistance and UI, they are implicit in our models (which are estimated from historical data – with the caveat that this time is different). The expanded UI is going to people who have no jobs, so it will likely be spent (on food and rent, for example).
Thanks for replying. I don’t doubt your statement but AFAIK, most (majority?) of the studies thus far rely on a static mean R0 rather than a distribution to account for low prevalence of super spreaders and high prevalence of everyone else with smaller R0s. So this ties into a comment on the exit strategy post re: analyzing at the margin. Couple an R0 distribution with group testing and contact tracing, and think about economic activity at each margin of “opening up”. As in, what’s the marginal cost/benefit of mandating gloves/masks to open some retail? Then what about adding in screens and shortened hours? What if any business wanting to open has to submit to group testing? I’m trying to engage discussion that gets away from assuming there are only two options (shut everything down or millions die) and more toward examination through an economic framework, particularly since social norms are now highly risk-averse anyway. Maybe it’s contrarian, but I don’t see these points being brought up much so I’m trying to better understand how ppl are thinking about this.
And just briefly, are your historic multipliers from the state’s input-output model or something similar?
Again, mahalos for taking the time to discuss.
Laron, no we are not using multipliers from an IO model. We are running a dynamic macro model. I have not recently run the simulations needed to calculate multipliers like the equilibrium ones that would come out of and IO model.
Sorry one more question: how do you think the unemployed definitions will impact the unemployment rate? Since the rate has pretty strict definitions for “unemployed” and “in the labor force”, and the current situation really muddles up who’s who, will the defined labor force decline such that the rate doesn’t increase as much as it really should maybe?
Yes, the rise in the unemployment rate could underestimate the extent of damage, if some people leave the labor force. This has happened in past recessions. But the broader measures of unemployment (e.g. the U6 measure) may provide a more comprehensive picture about labor market conditions than just the headline unemployment rate.
Yup, looks like the prime age LFPR did exactly that to the rate released today.
Thank you for a much better analysis than the one provided a few weeks ago. In my comment on that report, I said domestic visitor counts might go down 90%. I was much too optimistic! Visitor counts down 99.5% last week from previous year.
Thank you for the very important and up-to-date information for today and the intermediate update of the UHERO forecast dedicated to the dramatic recent events associated with the new coronavirus pandemic. These are crazy, unprecedented times in which we live. All patience and health!
only vaccine now will save the economy, etc. of any country and citizens return to normal life
vaccine now will save the economy, etc. of any country and citizens return to normal life
At the moment, it has already become clear that Covid-19 will remain with us until the end. It will feel like fighting the seasonal flu all the time. And business over the past two years has already been able to adapt to today’s realities. True, some enterprises will survive with their last bit of strength. They won’t last long.