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COVID-19 Infecting Economic Supply and Demand

April 27, 2020

There’s an obvious, yet profound, concept that explains why the economy is in danger. It is this – one person’s spending is another person’s income.

 

This relationship is the essence of the $87 trillion global economy. The interplay between spending, income, consumption, and production is the core of capitalist economics.

 

Government industry sector tables make the sizes of the sectors about to enter shutdowns clear. The U.S. and much of the world are likely headed for major shrinkages in consumption spending, which hurts us since 70 percent of our gross domestic product comes from consumer spending.

 

Consider these affected sectors and how much Americans spent in 2019:

  • Transportation – $478 billion

  • Recreation – $586 billion

  • Food and Accommodations – $1.02 trillion

Some clarification is necessary. Transportation is air and train travel, not personal vehicle purchases. The Recreation industry includes casinos, sporting events, and the like. Lastly, Food and Accommodations means restaurants and hotels, not grocery purchases.

 

All told, that’s almost $2.1 trillion per year (14 percent of all consumption spending). And it’s likely to dry up.

 

How does this affect income?

 

That spending is revenue for other companies. It pays employees and suppliers. It pays taxes, which finance our schools and public safety infrastructures. It’s rent for property owners and profits that accrue for investors.

 

Each of these cash flows is in danger as consumption spending ceases. The industries experiencing the most immediate collapse in demand include:

  • Air transportation

  • Performing arts and sports

  • Gambling, other recreation

  • Hotels and lodging

  • Restaurants and bars

There may be offsetting effects, like increased grocery spending. But the economy can’t adjust instantly. Longer hours for some (doctors, clerks, etc.) won’t make up for the vast income dips of many.

 

What happens if bankruptcies cause losses and tightening in the banking sector? Companies with sound cash flow could be crushed as their reserves dwindle. Right now, supply and demand are under siege.

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This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation.

Andrew Wood, Dan Simon and Alison Slezak are Investment Advisor Representatives. Advisory services are offered through CoreCap Advisors, LLC., a Registered Investment Advisor. CoreCap Advisors, LLC and Daniel A. White & Associates, LLC are separate & unaffiliated entities. 

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