Experts Yahoo Finance has talked with suggest a more muted U.S. economy will emerge post the peak of the coronavirus driven shock. It’s an economy that will usually be characterized by decent 2% GDP growth, less risk taking with cash by Corporate America (yes, that means a more controlled pace of stock buybacks...if at all) and higher structural costs. Those increased fixed costs range from keeping workers at higher hourly rates implemented during the height of the coronavirus (or risk losing them to other businesses trying to recover) to an Amazon committing more money to warehouse cleaning.
Steady dividend hikes by otherwise healthy companies also may not be feasible for some time.
By the same token, do businesses really need to have expensive offices open in urban areas in the new age of Zoom video conferences? The answer is no. And that has implications for property owners all the way down to the Uber drivers that take those rich property owners home after work. In turn, that means less money circulating around the U.S. economy.
“The question is how scarred are consumers, how scarred are companies, how scarred is the government in terms of what regulations they have and put rules and laws around how businesses should be working,” explained Deutsche Bank chief economist Torsten Slok on Yahoo Finance’s The First Trade.
The need to save
Slok says businesses and consumers will need to build up their cash reserves for a rainy day. He also believes the likelihood of a rip-roaring economy a year or more from now is unlikely.
“I think the first response is we will see GDP decline quite dramatically in the second quarter. We will not see a similar rebound in the third quarter as this is likely to take a longer time and we will see a more muted rebound. The more muted rebound is driving by consumers that need to save more. Corporates also need to save more. Savings levels need to be rebuilt in the private sector to make sure we don’t get a second wave. We need higher levels of cash on corporate balance sheets and precautionary cash on consumer balance sheets to make sure we don’t get caught off guard,” Slok added.
Then there are the inevitable costs to businesses from greater government involvement in the wake of the coronavirus. Remember, government money — even if it comes via a $2 trillion relief package - has a long-term cost associated with it that businesses must absorb. How that impacts economic growth is tough to determine.
“The government, especially the federal government will be playing an outsized role in our lives for years to come,’ contends Yahoo Finance editor-in-chief Andy Serwer. He is on the mark with this, and it’s important investors understand what that means to profits (lower) and individual stock multiples (below average seen in Great Recession bull market).
Again, all of this is vastly different than the past 10 years, as it should be given the shock we have all felt.
Reference: Yahoo News
