Coronavirus Hurting Puget Sound Economy: How Bad Could It Get?

Since King County, Wash., became epicenter of the U.S. coronavirus outbreak, local consumers and companies have given new meaning to “cancel culture” as they retreat from public interactions — and the related economic activity.

by Paul Roberts, The Seattle Times / March 9, 2020
A worker wears a mask as he loads new supplies of protective gowns past a sign banning visitors from the Life Care Center in Kirkland, Wash. Monday, March 9, 2020, near Seattle. The nursing home is at the center of the outbreak of the COVID-19 coronavirus in Washington state. AP

(TNS) — Parker Johnson stood behind the front desk of Hyatt Place in downtown Seattle and tallied up the costs of the coronavirus outbreak. Of the hotel’s 168 rooms, said Parker, fewer than half were occupied after a wave of cancellations. “We’re normally at 80% occupancy at this point,” Johnson said as he glanced around the nearly empty lobby Friday. “I had 12 cancellations yesterday alone.”

In the week since King County, Wash., became the epicenter of the U.S. coronavirus outbreak, local consumers and companies have given new meaning to “cancel culture” as they pull back from public interactions — and the economic activity that often goes with them.

Restaurants and movie theaters have seen sharp slowdowns. Barbers and salons have empty chairs. Convention centers have sudden vacancies.

Even companies that work with the region’s tech giants are taking hits. WhirlyBall, an Edmonds company that runs team-building exercises for Amazon, Microsoft and others, had so many cancellations last week that owner Tom Choquette laid off more than half of his 17 employees.

“We’re the canary in the coal mine,” he said.

How bad it will get for the regional economy is difficult to predict.

One possibility, economists say, is that these early setbacks accelerate into a self-feeding cycle of cutbacks and lower spending that results in workers staying home “not because they’re sick, but because there isn’t work for them,” said Anneliese Vance-Sherman, regional economist with the state employment security department. “That’s where it’s possible for … us to enter into a (downward) spiral.”

But Vance-Sherman and other economists said a recession is far from certain, largely because the Seattle-area economy was so robust before the coronavirus outbreak struck. Unemployment rates for the area were at record lows as of January, the most recent month that data is available. The number of jobs across the Seattle-Bellevue-Everett region was also still expanding, Vance-Sherman said.

The tech sector, led by Amazon and Microsoft, has buoyed much of that performance. The companies, which together account for more than 120,000 state jobs, many of them high-wage, have invested heavily in businesses such as cloud computing that could provide a buffer in coming months, analysts say.

Amazon, for example, has grown its cloud computing business to $35 billion in revenue in 2019. That growth could accelerate if potential cash-flow concerns in a recession push even more customers to cloud computing, rather than investing in their own servers and software, analysts said.

Amazon also sells more essential items and food than it did a decade ago. “If you want insurance for a recession, buy a grocer, which is what they did,” said Tom Forte, an analyst and managing director at D.A. Davidson.

Along with the 2017 acquisition of high-end Whole Foods Market, Amazon is building out its own line of food stores, expected to be lower-priced. In addition, its home-delivery business offers a full line of groceries and a large line of private-label items.

“In major metro areas where they have Prime Now, and in even more cities where they have grocery delivery, (Amazon) is well positioned to benefit from a consumer that’s hunkering down,” Forte said. Already, online commerce is seeing a marked uptick from stuck-at-home shoppers in a time of social distancing.

Tech’s strength may offer a hedge against further woes at Boeing, the region’s traditional powerhouse. So far, the aerospace giant has avoided layoffs despite the grounding of its MAX jet and the shutdown of the 737 assembly lines in Renton. The company has also expressed determination to avoid job cuts and the loss of skilled talent that would result — and, in fact, plans to restart its Renton assembly line next month. It’s conceivable that if the coronavirus spread worsens nationally, a sustained decline in air travel would dampen Boeing’s recovery plans.

Yet experts stopped well short of calling the tech sector recession-proof. Amazon, for example, has grown into a major international marketplace, with 27% of its revenue last year from outside North America. A global health crisis like the coronavirus outbreak “could hit Amazon across the board,” Forte said.

A slowdown at Amazon or Microsoft could have a massive impact locally. The wages and other investment that Amazon, for example, has put into the local economy over the past decade have helped support an additional 244,400 jobs, according to a study last fall funded by the company.

For now, some economists are more worried about the cumulative effect of hundreds of thousands of decisions by companies and consumers alike to avoid risk.

In an online post outlining the top economic risks from coronavirus, investing giant Sequoia Capital pointed not only to disruptions in supply chains from China, where the virus emerged, but also impacts that travel restrictions will have for companies that depend on in-person meetings for sales and business development.

Matt McIlwain, managing director of Seattle-based Madrona Venture Group, expects U.S. tech companies to feel the brunt during the second and third quarters, when the impacts of those forgone in-person sales calls would show up in financial results, setting off cutbacks in hiring and investment. “Uncertainty around revenues leads to conservatism on spending,” McIlwain said.

Hart Hodges, an economist at Western Washington University and director of the Center for Economic and Business Research, said he will be watching for a similar dynamic among consumers.

“If people do not go out to eat as much, restaurant owners and wait staff (will) see a drop in revenue, so they in turn spend less,” Hodges wrote in an email Thursday, adding that he had just been notified that a future lunch meeting had been canceled. “So there’s 100 people not attending a lunch in Seattle.”

Dick Conway, an economist who has studied the regional economy for decades, estimates that if consumer spending on goods and services falls by just 2%, “the ripple effect on the rest of the economy” could produce a 3% drop in overall economic activity — potentially enough to cause a mild recession by late 2020 or early 2021.

The real question for the regional economy, some economists said, is one of timing. If the outbreak’s economic fallout drags on for months, or if the outbreak re-emerges in the fall, as some health experts fear, the impacts locally will be much deeper.

But if the economic fallout begins to lift after a month or two, many businesses, especially hotels and other hospitality businesses, might be able to recover some of their losses during the summer, when economic activity peaks, said Jacob Vigdor, an economist at the University of Washington who has studied the regional job market. Grim as things may be appear now, Vigdor said, “it’s not necessarily as bad as if this were happening in summertime.”

Last week, as government officials explored ways to help the Seattle area economy, two companies took matters into their own hands. Both Microsoft and Amazon announced they would continue to pay vendors that provide the hourly workers who staff cafés and shuttles and provide other support on the companies’ campuses, even if the need for that work is reduced because tech employees are working from home.

But whether such moves can counter the wave of disruptions that the region could see in coming months is impossible to say, said Vance-Sherman, the state economist. “We’re all trying to think about all the potential consequences of an event with an unknown magnitude and an unknown time frame,” she said.

 

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