Via Financial Times

It was November 2007 when Paul Steven Singerman’s Florida law firm led the Chapter 11 bankruptcy filing for Levitt and Sons, the largest by a homebuilder in US history at the time. The fallout from the coronavirus pandemic may not be as lasting as the recession which that corporate collapse heralded, he thinks, but — in the short term at least — he sees it being more severe. 

Mr Singerman was in bankruptcy court again on Monday last week, expecting a smooth sign-off on a sale of the Palm steakhouse chain to Golden Nugget, a casino operator. As the Dow shed 2,000 points that afternoon, however, the buyer demanded $5m off the $50m price tag it had agreed just 10 days earlier. “Our client didn’t have an alternative” but to consent, Mr Singerman said. 

If housebuilders led America into its last recession, restaurants, casinos, hotels, cruise ship operators and airlines are leading the way this time. And after just four weeks in which US equity markets swung from hitting highs to pricing in the reversal Mr Singerman fears, the impact is starting to show in the real economy. 

The outplacement firm Challenger, Gray & Christmas last week attributed more than 600 job cuts so far to the pandemic, including 145 drivers at the Port of Los Angeles and 18 at a toy company, both of which it traced back to the virus bringing Chinese suppliers to a temporary halt. 

But the greater toll may be in industries that have nothing to do with global supply chains, economists believe. Ioana Marinescu, a labour economist at the University of Pennsylvania, predicted a collapse in what she called “human contact industries” such as restaurants, bars and theatres. 

Even before cities from New York to Chicago decided this weekend to close bars and restaurants, many were suffering because their customers chose to avoid crowds. Gotham Bar and Grill, a New York staple, announced last week that it was closing for good because “the unforeseen situation created by the coronavirus has made operation of the restaurant untenable”. 

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The Stranger, an indie newspaper in Seattle which relies on ads for the places to which crowds go, similarly reported that it had “temporarily” laid off 18 employees because of what it called “the hellscape of unforeseen economic events brought on by the coronavirus”. 

Broadway theatres, baseball stadiums and The American Dream Mall, a shopping centre where New Jerseyans could ski indoors, have closed. Even WWE had to withdraw its earnings guidance last week, unable to say how much longer its wrestlers could keep performing for the crowds. 

“It’s not just that people feel less spend-y right now, it’s that they’re terrified to be in those places,” said David Autor, professor of economics at the Massachusetts Institute of Technology, who sees the people who work in services being hardest hit. 

The food services industries alone employ 12m people in the US, up 30 per cent in the past decade. “It’s not a long-term thing, but it’s going to cause a huge amount of pain,” Mr Autor predicted. 

While the likes of Disney, which shut its theme parks for the first time since 2001, pledged to keep paying idled workers, few small businesses have the resources to do so for long.

Most recessions weigh harder on manufacturing than on services, Ms Marinescu points out, as people tend to still need haircuts even if they cannot afford to buy a car. Early survey data from China, however, show that during the peak of the outbreak there, services collapsed. 

“Most services are human contact, and that’s exactly what people are trying to avoid,” she said. 

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Those industries also tend to be dominated by smaller businesses with less cash on hand and less access to credit, she notes. Restaurants in particular have a high failure rate at the best of times. “We can expect those businesses to fail,” she said. 

Even as some cities encourage food delivery to keep restaurants afloat, gig economy workers are also at risk as the pandemic changes consumers’ behaviour, added Karen Harris, managing director of Bain & Company’s macro trends group. 

“If you decided to take your kids out of school and stay at home you’re going to spend more on groceries but if you have a dog walker you don’t need that person, so you are withdrawing spend.”

Concern about the human cost is growing with economic fears. A group of large New York landlords has agreed to go easy on eviction notices, while the Salvation Army warned that it was preparing for “a significant increase” in the need for emergency assistance from low-wage employees facing lay-offs. Travel and hospitality workers were among those most at risk, it noted, and these are industries that have driven much of the job growth in the US since the last recession. 

As events were scrapped and companies clamped down on travel, hotel occupancy in New York fell 13 per cent in the week of March 3 while Seattle experienced a 26 per cent drop, according to STR, a hospitality data company. By last week, one hotel investor told Mr Singerman, occupancy in some properties had fallen to single digits. 

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“You can’t ever resell a hotel room from last night,” the bankruptcy lawyer pointed out: “I’m worried how thinly-capitalised hospitality providers and travel businesses are going to make it, and when you look at the ripple effect of those industries on parties in their supply chains it is dramatic.”