Industry Prospects a Year after the Pandemic

Prepared by BMO Capital Markets Economic Research

Around the world, national, regional and local governments are contemplating the prospects for reopening large swathes of their economies that were closed in response to the COVID-19 pandemic. While some jurisdictions are moving faster than others, a few as early as this week, the reopening process is shaping up to be more of a dimmer switch than a toggle for economies. For example, the Trump Administration’s “Opening Up America Again” plan for state and local governments is a three-phased process that only commences once certain epidemiological and medical criteria are met, with each phase requiring additional criteria to be satisfied before moving on to the next one. Importantly, even after the final phase, there will still be some restrictions in place (such as limited physical distancing and sanitation protocols), presumably until herd immunity or a vaccine against COVID-19 is achieved. Various governments in Canada paint a similar staggered “phasing in” picture.

Turning on the lights fully for the U.S. and Canadian economies, i.e., getting back to pre-pandemic levels of activity, could take a long time, with the length of inter-phase intervals very uncertain. There are also structural considerations. Some businesses won't reopen, succumbing to insolvency. Some household and business discretionary spending may be constrained persistently by financial pressures. Some activities could return in a meaningful way only after a vaccine arrives (taking a cruise comes to mind). Meanwhile, there are also non-virus factors affecting the recovery. For example, the collapse in oil prices could have negative ramifications for years. Throughout the U.S. and Canadian economies, the pace and extent of industry recoveries could be quite varied depending on their economic importance, degree of human interaction, and dependence on discretionary demand that could remain weak due to still-high joblessness.

Below, we look at the major sectors of the economy and some key subsectors to subjectively assess the scope of individual recoveries. Looking a year down the road, our objective is to provide a ranking relative to each industry’s pre-pandemic sales volume or level of activity—100% means completely recovered and, given elevated uncertainty, we are working with 10-ppt ranges. The overriding goal is to get a sense of how much of the economy will be up and running a year from now.

Our ranking of the worst-to-best performing sectors a year out follows (see also Table 1) [1]:

Air transportation (50% to 60%): Business travel is likely to return first, but, forced to videoconference out of necessity, more businesses will likely now be comfortable conducting client visits and staff meetings electronically. International travel will be particularly impacted without widespread inoculation. Travel restrictions are likely to remain in place for the foreseeable future. If customs lines in Asian countries that have started to reopen are any indication, it will take much longer to fly than in the world before the crisis. In the near-term, government support programs will help keep carriers aloft. But, consumer demand will be critical for sustaining the airline industry and it will take a long time before it returns to normal.

Accommodation (55% to 65%): COVID-19 has led to a dramatic decline in the demand for hotel accommodations. In the U.S., revenue per available room was down 84% y/y for the week ending April 11 and in Canada the same figure was 88%. As business travel returns, hotels in major centres will see their occupancy rates recover, but international guests will likely be absent for some time. The potential for concerts, conferences, and festivals to be pushed off until next year will also weigh on occupancy rates. We may see more domestic travel over the next year, which could make up for some of those lost revenue sources. In the near-term, government support will be important for the sector.

Arts, entertainment and recreation (55% to 65%): Gyms may be allowed to open up in Georgia on Friday; but, the relevant question is: Will anyone show up? Concerts, sporting events, and fitness facilities all rely on consumers being comfortable in crowds. Before there is herd immunity or a vaccine, large gatherings might not draw the crowds needed to see a full rebound of this sector. Initially, it seemed that many of the spring and summer events that were cancelled would take place in the fall. But, the cancellation of Munich’s Oktoberfest in the soon-to-open German economy raises concerns that many of those rescheduled events might be taking a full-year off. In California, Governor Newsom and Mayor Garcetti of Los Angeles have suggested that large gatherings be pushed back a year. Major professional sports could resume earlier, playing without crowds. But, without ticket sales and related spending, only television and merchandising will be available for revenue. There have been a number of creative new initiatives in the last six weeks by artists providing concerts over social media or fitness studios offering virtual classes, but revenue is unlikely to match in-person sales.

Food services (60% to 70%): With more than 30% of food spending in Canada and the U.S. dedicated to food away from home, the near shuttering of the restaurant industry over the last six weeks has led to a dramatic shift in spending. It has already showed up in the employment statistics, with U.S. payrolls for food services falling 29% y/y in March. Returning to normal will be a challenge for the sector. Thin margins mean that the business model often involves cramming as many people into a small space as possible. With health-imposed capacity constraints around 50% likely to stay in place for some time, it will be hard to sustain a full complement of staff in the restaurant industry. Business closures are a heightened risk in the sector. Recent survey data from Alignable suggest that food service firms expected to be the least likely to be open after the outbreak (only 15% of firms thought they would remain in business if the closures last up to six months) compared to other sectors [2]. U.S. government relief measures have, so far, been dominated by larger chains due to location-based eligibility requirements. A survey of over 20,000 small businesses suggested only 8% have received a loan to date from various programs [3]. The Paycheck Protection Program and Health Care Enhancement Act offers more funding for independent businesses. Restaurant chains are likely to do better than independent shops that will struggle with reduced capacity, while takeout will not be enough to make up for in-person dining losses.

Mining (75% to 85%): The timeline for ramping up mining production will likely vary from province to province and state to state depending on several factors, including the importance of mining in overall economic activity/employment, the location of mines and refining facilities (remote with self-contained camp, or close to population centres with commuting workers), and the financial health of the companies involved. However, even if most restrictions are lifted in the next few months, lingering logistical bottlenecks and low market prices for metals will weigh on production even a year out. The collapse in demand in 2020 H1 has created or augmented oversupply issues in many markets, and some producers will opt to place mines on prolonged care and maintenance and curtail expansion plans until prices improve. A weaker Canadian dollar could provide some relief for Canada-based operations.

Oil and gas extraction (75% to 85%): Though expected to improve over time, still very low oil and natural gas prices, along with a slow recovery in transportation and travel activity, will restrain energy output. U.S. shale oil, in particular, is likely to experience the sharpest contraction as companies are forced to shut in production or are bankrupted by the pandemic.

Durable manufacturing (80% to 90%): As parts of the global economy reopen and business investment improves, manufacturers will need to stand ready to meet the recovery in demand. Due to extensive automation, many factories should be able to operate with proper distancing measures in place to protect workers. The recovery, though, will be very industry specific. Producers of airplanes, automobiles, appliances and business machinery will take longer to bounce back, compared with makers of household non-durable items.

Pipelines (85% to 95%): Weaker transportation and travel activity will directly impact the volume of energy consumed, particularly for crude oil and petroleum-based products. In contrast, pipelines dedicated to transporting natural gas will hold up better than crude oil. The volume of Canadian-based pipelines should also hold up slightly better than in the U.S. as the oil sector is already constrained by a lack of pipeline capacity.

Transit and other ground transportation (85% to 95%): Even with the use of protective gear, public transportation such as taxies, buses and subways will be slower to return to normal levels as long as people are worried about infections. A possible shift toward remote working will also permanently reduce commuting.

Motor vehicle and parts dealers (85% to 95%): Auto sales will benefit from the release of pent-up demand. Changes in consumer behaviour may also support sales, as people will be reluctant to take crowded public transit without a vaccine, and may instead opt to make more trips in personal vehicles. If vehicle sales in China are a guide, then there is some optimism on the horizon. They plummeted 80% y/y in February and 40% in March, but are expected to return to 2019 levels by the end of April. Still, North American sales will be restrained by high jobless rates a year from now.

General merchandise stores / Other retailers (85% to 95%): As retail shops reopen in coming months, consumers will cautiously return to the malls if proper protective measures are in place. Still, many people will buy less than before the pandemic, due to job concerns, and shop online to avoid the hassle of protective measures. It’s also clear that many retail stores will not survive the pandemic. Even as new stores replace old ones, the physical retail footprint will likely be smaller than before the virus.

Truck transportation / Other transportation (90% to 100%): With the pandemic accelerating the shift toward online commerce, the demand for parcel delivery will only increase. However, with the economy unlikely to fully regain its footing a year out, there will likely be fewer trucks on the road than before the pandemic. In other areas, cruise ship activity is unlikely to recover anytime soon.

Management of companies and enterprises (90% to 100%): Business managers will be required to shepherd companies through both the downturn and upturn of this historic economic event. Coordinating back-to-work logistics and enhancing productivity will be at the top of the to-do list.

Agriculture (90% to 100%): Although people will always need to eat and farming is a relatively solitary business, processor-level disruptions are weighing heavily on farm prices and income. Meatpacking facilities have proven vulnerable to outbreaks of COVID-19 and the closure of numerous large plants has left key livestock prices at or below decade-lows. In the dairy space, processors have struggled to quickly retool toward retail-friendly packaging amid the closure of the food services industry, which has created a glut of raw milk. And crop producers are struggling with a sharp drop in ethanol production and challenges related to the availability of migrant labour. Without understating the gravity of current challenges, industry strain should ease significantly over the next year as food processors adopt more stringent social distancing measures and repurpose toward retail products. Travel restrictions should also be relaxed over time, which will improve the availability of migrant labour.

Utilities (90% to 100%): Demand for utilities has taken a big hit from the closure of offices, factories and businesses, with U.S. electricity demand down 5.7% in the week ended April 4 from a year ago to 16-year lows [4]. Electricity demand was also down in Ontario by nearly 10% as of April 8, but both of these outcomes are far better off than Italy, where demand was off by over 25% in March [5]. Utility usage should gradually improve as the lockdowns are relaxed and businesses turn on the lights.

Administrative and support, waste management and remediation services / Other non-government services (90% to 100%): The lack of a full recovery in the economy will weigh on this broad sector.

Nondurable manufacturing (90% to 100%): Though likely to outperform durable goods, the demand for household non-durable items, except perhaps for food products and essential household items, will likely remain below pre-virus levels as per general consumer spending. An incomplete economic recovery will also weigh on the demand for petroleum products.

Construction (90% to 100%): Though parts of the construction industry have shut down, the sector should gain pace when non-essential business restrictions are lifted. If there’s one thing everyone needs, it’s a roof over their heads. If construction is seriously delayed, housing shortages will mount, sending prices and rents higher, though demand may take some time to recover given high jobless rates. Industrial construction could get a lift from government infrastructure spending to hasten the recovery. Demand for office space, however, will be restrained as more companies shift towards teleworking. In some cases, however, the size of office and retail space could increase to accommodate physical distancing practices.

Educational services (90% to 100%): School’s out for the season (not forever). While the pandemic has accelerated online shopping it has also given virtual education a boost. Post-secondary establishments without a robust online platform could lag behind their peers, as students may want greater choice between the two methods of delivering instruction. In addition, university enrollment could take years to return to former levels if travel restrictions reduce the number of international students. They accounted for 14.1% of Canadian post-secondary enrollments and an even greater share of revenue in 2018 [6].

Wholesale trade (90% to 100%): Wholesalers do not have direct contact with consumers, and therefore will be less impacted than retailers. Still, those serving certain industries, such as petroleum, autos, and machinery, will feel the effects even a year out.

Finance and insurance (90% to 100%): The financial industry will benefit from increased demand for lower-cost online and mobile transactions, as well as increased underwriting of government debt securities. However, an increase in nonperforming loans during the pandemic and weaker levels of economic activity after the initial recovery could restrain personal and business lending for some time.

Professional, scientific and technical services (90% to 100%): Professional services, such as legal and accounting, which do not require close physical contact and can be delivered through digital technology, should recover relatively quickly when demand improves. High-tech companies are leading the automation and e-commerce revolutions, and will thrive as demand for advanced technology will only gain pace with the ongoing need to maintain some distancing. To boot, most high-tech workers can readily telecommute.

Real estate, and rental and leasing (90% to 100%): Home buyers will be wary of making the biggest financial decision of their lives until jobless rates have fallen sharply and concern about a possible second wave of the virus has dissipated. But that may not be until the back half of 2021. So, while home sales are likely to rebound in the fall and winter, the level of demand will fall short of pre-virus norms, despite low mortgage rates. In addition, immigration, notably of nonpermanent residents, could decline if travel restrictions are extended. (In a 2018 survey, 60% of international students planned to apply for permanent residence in Canada [7].) By spurring the fastest population growth in three decades, immigration was a key driver of Canada’s housing market before the crisis. In the U.S., a temporary 60-day immigration suspension could be extended if the jobless rate stays high. Given the weakest population growth since the Spanish flu (1918), American realtors might feel under the weather long after the current pandemic has passed.

Warehousing and storage (95% to 105%): The increased need to store online goods for fast last-mile delivery should lead to greater warehousing needs, even if consumer and business spending remain below pre-virus levels.

Information and cultural industries (telecom) (95% to 105%): The pandemic-related boost from telecommuting and streaming is unlikely to fade. Telecom will likely thrive after the pandemic, as the U.S. Congress is considering an expansion of broadband, high-speed Internet service to more remote regions. Only 73% of adult Americans currently have broadband connection in their homes, and this ratio falls to 63% in rural areas [8]. While film production may still be restricted a year from now, television and radio broadcasting are likely to be closer to normal levels of activity.

Health care and social assistance (95% to 105%): Until a vaccine emerges, the health care system will need to remain on guard for possible new waves of COVID-19 infections, resulting in increased capacity. A large backlog of delayed surgeries and elective procedures will also need to be cleared. As a partial offset, many physicians and health professionals have seen a sharp drop in billings due to patients’ fear of getting infected, even as some providers offer online or phone consultations. Patients may continue to shy away from regular check-ups, only visiting medical clinics for the most severe illnesses.

Food and beverage stores (100% to 110%): Grocery stores have thrived amid restaurant closings, and should continue to perform well as fewer people will be eating out even a year from now. Besides, many wannabe chefs have had time to brush up on their culinary skills. Others have been won over by the convenience of online grocery delivery. A wider product offering, beyond just groceries, is another attraction of some food stores amid continued physical distancing (one-stop shopping saves even more time).

Public administration (100% to 110%): While governments, especially local, have been forced to lay-off staff due to the closure of public facilities and a sharp drop in tax revenue, the sector will likely play a bigger role in supporting the economic recovery until a vaccine is found. Sub-national governments face more funding constraints than their federal counterparts, so the onus will be on the latter. Longer term, however, the need to rein in large budget deficits and limit future tax increases will constrain program spending.

Given the above operating rates for the 31 sectors of the economy, we can calculate an average rate for the entire economy (weighting the individual ranges by each sectors’ GDP share). This results in an 88.7% to 98.7% average range (93.7% midpoint) among U.S. businesses and an 88.2% to 98.2% average range (93.2% midpoint) among Canadian businesses. We judge U.S. businesses will recover more of their pre-pandemic sales volumes than Canadian businesses in the year ahead. This reflects, for example, America’s heftier share of faster-recovering information technology and Canada’s larger share of slower-recovering oil and gas. For both economies, we judge the sectors with the greatest chances of meeting or beating their pre-pandemic levels of activity are government, grocery stores, health care and IT. Those facing the strongest recovery headwinds include airlines, arts and entertainment, hotels and restaurants.

Endnotes:

[1] We separate the economy into its 20 major industrial sectors (2-digit NAICS) and further separate some of these industries into their major subsectors (e.g., manufacturing into durables and nondurables) to generate 31 individual sectors. We adjusted the U.S. figures to account for the fact that state and local education services are part of public administration and not educational services. In Canada, publicly-provided education services are already included in educational services. The sectors are ranked, first, according to their operating range (lowest to highest), and, second, according to their average economic share (lowest to highest). [^]

[2] https://prod.nber.org/papers/w26989 [^]

[3] https://www.covidloantracker.com [^]

[4] https://www.weforum.org/agenda/2020/04/united-states-eneregy-electricity-power-coronavirus-covid19 [^]

[5] https://www.policyschool.ca/wp-content/uploads/2020/04/EE-policy-trends-power-and-covid.pdf [^]

[6] https://www150.statcan.gc.ca/n1/daily-quotidien/200219/dq200219b-eng.htm [^]

[7] https://cbie.ca/infographic [^]

[8] https://www.wsj.com/articles/pandemic-builds-momentum-for-broadband-infrastructure-upgrade-11587461400 [^]