by Patrick Hill
Executive – Employee Catch-22 Jeopardizes The Recovery
“A catch-22 is a paradoxical situation from which an individual cannot escape because of contradictory rules or limitations. The term was coined by Joseph Heller in his 1961 novel Catch – 22”Wikipedia
The Catch-22 is this: executives will not hire until they see sustainable sales growth and employees will not spend until they feel confident about their job future.
The challenge for executives and employees is sustainable employment. They both look for the other to take the first step to achieve sustainable employment. The recovery will not gain momentum until executives gain confidence in future sales. Employees will not buy as much as the executives prefer until the threat of layoffs abates and hiring resumes.
Executives need to see customers actively buying goods and services for at least a quarter or two to gain baseline confidence in sustainable sales. Then, management may begin hiring. If sales fall or become weak executives freeze hiring, end contractor work and permanently lay off employees.
As such,, employees are worried about losing their jobs. A Gallup survey found more than 25% percent of all employees are concerned about future layoffs. If the present slow decline in economic activity accelerates it will cause executives to freeze hiring and consumers to further curtail spending.
We examine the standoff from both the executive and employee perspective by discussing these points:
- Executives Look for Solid Sales Growth Before Hiring
- Small Business Owners Cut Hiring
- All Employees Express Concern About Layoffs
- Executive – Employee Catch 22 Likely To Resolve To Downside
Executives Look For Solid Sales Growth Before Hiring
S & P 100 corporations achieve about 65% of their sales and 70 – 75% of their profits from international sales. World trade fell before the pandemic. The pandemic magnifies the decline in sales and will likely delay a worldwide sales recovery. The following chart shows world trade fell 12.5% in the 2nd Quarter of 2020, though trade activity is recovering. Thus, most managers cannot look to weak international sales to offset weak domestic sales.
Source: CPB World Trade Monitor – 8/25/20
The next chart shows sales for corporations who rely on international sales revenue fell by 15.3%. For all corporations, sales fell by 9.8% in the 2nd Quarter. The weakness in sales for internationally based businesses confirms the weak trade outlook. The outlook for domestic sales is uncertain without a new relief package from Congress. Thus, managers will hesitate to make any firm hiring commitments.
Source: Factset – 8/2020
For all S &P 500 corporations earnings results for the 2nd Quarter were even worse than revenues down by 33.8% . Executives were caught off guard by the pandemic in mid – March. Most executives were expecting the pandemic to be controlled by the summer so they maintained staffing levels. Management furloughed some employees, paid overhead costs for empty offices, and held inventories as sales dropped. Managers try to keep costs in line with revenues. So, when earning fell 3 times revenues they will look to cut costs. There is extreme pressure on management to cuts costs with staff at 70% of all costs, so more layoffs are likely.
Source: Factset – 8/2020
Management Places Hold On Hiring
The following chart shows new orders versus employment in manufacturing companies. The August ISM Manufacturing Survey shows increases in new orders, yet employment stalls at contraction levels. The fact that management holds off on hiring confirms their concern about sustainable sales.
Sources: Pantheon Macroeconomics, The Daily Shot – 9/2/20
This chart from the Track The Recovery Project indicates a significant decline in new job postings by 35%. We think management will continue to cut back. The decline in new job postings is another indicator of executive lack of confidence in future sales growth.
Sources: tracktherecovery.org, Quill Intelligence – 8/24/20
Permanent Layoffs Increase
The following graph shows temporary worker layoffs versus permanent worker layoffs. Temporary worker layoffs surged at the beginning of the pandemic as management thought the virus would soon be controlled. However, as virus infections increased and lockdowns stayed in place longer than expected temporary layoffs decreased while permanent layoffs increased. The increase in permanent layoffs means out-of-work adults will reduce spending until employment prospects turn positive.
Source: Bloomberg – 9/4/20
Consumer Spending Growth Not Seen
Executives are looking for solid consumer spending before resuming hiring. In highly uncertain economic conditions managers will invest in new equipment, automation, or cost cutting programs before hiring. As a last resort, if they absolutely need new staff managers, they hire temporary workers before hiring full time employees. Managers view hiring of any new employee with a combination of confidence and risk. Supervisors hire the new worker with confidence that they will be successful in their new role. But, often it is not clear the new hire will be successful in the job for 6 – 12 months. Plus, hiring a new employee costs 25 – 40% of their salary in overhead costs. If an executive makes a hiring mistake it is not only costly to the worker but could hurt productivity, reduce sales, or delay product development. Besides the individual candidate executives assess the general economic climate.
Today’s deteriorating economic trends are a major concern for hiring managers. Economic headwinds include: surging pandemic infections, falling international and domestic sales, rising trade tensions with China and allies, tightening regulations by a possibly new Congress and President, and the delaying of a fiscal stimulus package.
Small Business Owners Cut Hiring
The small business sector is the jobs engine of the U.S. economy. In 2019, small businesses created 1.5M jobs for 64% of total business new hires. Plus, small businesses provided 50% of all economic output and 60M jobs accounting for 47% of the labor force. Profitability is a major challenge as 40% of small businesses are profitable. The other 60% break even or losing money. Most small business owners have only 30 days of free cash flow, thus limiting their ability to handle a long term financial crisis. The following Small Business Pulse Survey found millions of small businesses struggling 47% of small businesses do not expect to return to normal operations for at least 6 months, and only 25% have done so.
Sources: Census Pulses Survey, Bloomberg – 9/4/20
The Homebase activity chart below shows small business employment at 25% below pre pandemic levels. Business hours are reduced as well. Owners are forced to lay off more workers when business hours are reduced. Activity and mobility surveys confirm that small business sales are 40 – 50% down from pre pandemic levels in core cities and 20 – 30% below in other regions.
Source: Homebase, The Daily Shot – 9/2/20
Exodus From Cities Triggers Small Business Sales Decline
Many services businesses and restaurants in core cities face a continuing loss of customers due to a permanent shift to working from home. Densely populated cities have seen as much as a 30% reduction in activity as professionals leave cities and purchase homes in the suburbs or lower cost rural areas. A recent survey showed 15% of workers have permanently left San Francisco for housing elsewhere. In addition, thousands of professionals have left Manhattan with the city experiencing only a 30% return of employees to offices.
Small businesses are experiencing losses in the suburbs as well. In the suburbs of San Francisco, Google has cut catering by 80% and Facebook by 70%.
Small Business Landlords Face Looming $35 billion In Rent Due
Independent apartment building owners manage half the units rented in the U.S. Independent landlords worry about missed rent payments. Federal CDC and state moratoriums provide rent payment forbearance until January 1st. Yet, eight million independent multiple unit owners still must make mortgage payments each month. Thirty-three percent of renters did not make their August payment. If these independent owners do not receive rent payments soon landlords will default on mortgage loans. Plus, they may be forced to sell their units in a weak multi-unit real estate market. In January it will become evident how significant a problem landlord defaults will become when renters must begin paying back $35 billion due. The looming issue is that if thousands of landlords default it could impact the $11 trillion mortgage industry and property tax income to local cities and schools.
Agile Entrepreneurs Create New Businesses
Enterprising services providers shift yoga classes, and personal fitness sessions to Zoom online. Restaurants use online delivery services to customers wary of coming to their location. One restaurant offers dinner parties via Zoom, where participants receive ingredients in advance and cook with a chef. Other entrepreneurs create businesses focused on work from home consumer needs like remote learning and child care for pods of students.
Small Businesses Face Major Economic Headwinds
The challenge is that most small businesses are not funded to handle a long term sales decline for years as well as major corporations are funded to handle. In a September a Goldman Sachs survey of 860 small businesses shows that 88% of owners reported they had run out of the their Payroll Protection Plan (PPP) funds. Only 65% reported they thought they would survive through the pandemic. About 30% of owners note they will run out of cash by yearend without the renewal of PPP loans. While most owners report operating full hours, sales are down between 20 – 50% from pre pandemic levels. On the positive side there was a surge of 5 % to 14% who said they were managing the transformation of their business well.
All Employees Are Concerned About Layoffs
All types of employees are concerned about future layoffs. As a recent Gallup survey shows 27% of workers are worried with 29M workers on unemployment and job prospects dimming.
Source: Gallup – 9/2/20
Many employees express job security concerns beyond income because their employer provides health insurance. If workers lose their job, they lose their health insurance. Jobless workers find private insurance too expensive. Holding a job with a sustainable income stream with health benefits is crucial to building consumer confidence. Possible layoffs create anxiety over income and health care such that consumers spend even less. Job security must increase with the pandemic under control before consumer spending can grow.
Two Distinct Employee Groups – One Secure, Other Insecure
In our post, A Tale of Two Economies we identified two groups of employees, professionals and workers. Professionals are college graduates who work from home and have job security. During the pandemic professionals are spending on cars, homes, and home improvement products. The worker group of high school graduates are required to work at offices, stores, factories and farms. Millions of these non-work from home employees were laid off temporarily in March. Managers hoped to rehire workers quickly after the pandemic was controlled. The pandemic is not under control so millions of workers have been permanently laid off.
Worker job confidence is being undermined by headlines of major layoffs at companies in major sectors like hospitality, consumer beverage, entertainment, media, auto and even high tech. Most workers are being squeezed between mounting bills and lost income. Many working class families do not have enough money even for food so they are going to food banks. The majority of 29M adults on unemployment assistance are in the workers group.
Professional and Worker Comparison
The following chart highlights the stark contrast in job, income and health situation for each group:
| Indicators | Professional | Worker |
| Education | B.A. Degree | High School Diploma |
| Work Location | WFH 63% | Not WFH 67% |
| Employment Growth – January to June | + 2% | – 5% to – 20% |
| Unemployment Rate | 8.4% | 17.3% |
| Rainy Days Savings – 3 months | 75% | 23% |
| Housing | Own | Rent |
| No or Slight Confidence Housing Payment | 16% | 34% |
| Health Insurance | 64% | 31% |
| Virus Vulnerability | 1 Nominal | 4 times |
Starting with the contrast in ability to work from home versus factory, the two groups have been at opposite financial positions during the crisis. Professionals believe they can handle the crisis. High tech employees at information services companies like Apple, Google, Facebook and Netflix feel secure as sales increase, though these high growth sales may not continue.
For professional knowledge workers across multiple sectors there actually was an increase in employment. Higher income workers had three times the number of households with ‘rainy day’ funds, two times the health insurance coverage, and are much less vulnerable to catch the coronavirus.
Yet, home owners across both employment groups are financially pinched as mortgage delinquencies surged to 8.2% in August from previous month’s 6.1%. Worker group adults face high rates of eviction, are more anxious about making house payments and have limited health insurance options. Plus, 56% of small business are owned by high school graduates. So, many owners will not be able to switch careers by taking a professional job at a major corporation.
Professionals Who WFH Permanently Face Possible Salary Cuts
Some professionals working remotely enjoy the same high salary and benefits packages as when they worked in their company core office location. Yet, other WFH professionals saw their salaries cut. Twitter and VMware announced salary cuts ranging from 8 – 18% for workers who take a permanent WFH option outside the Bay Area. We expect that as companies realize that the internet provides a way to hire other less expensive employees they will reduce salaries of remote workers. The new reality of permanent remote work will cause pay for remote professionals to decline over time. Executives will always be looking for ways to cut costs while maintaining high levels of quality and productivity. Besides, managers will promote work from home as an alternative to office work to reduce office space costs.
Total Consumer Spending Declines by 7.3%
The following chart shows spending in all income categories is falling after a peak in early August. The spending declines range from – 4.0% for low income consumers to -10.6% for those with high incomes. Total spending slid by 7.3% by August 30th compared to the January baseline. The recovery in spending reached a peak in mid-August and continues to decline ever since.
Sources: Opportunity Insight, Quill Intelligence – 9/14/20
The following chart of consumer spending versus income shows how spending stalled after a recovery. A conundrum is emerging about the actual spending of consumers, compared to their income. The April CARES Act temporally boosted incomes. All consumers received $1,200 checks, and people on unemployment received a boost of $600 per week. Yet, when income is compared to spending adults are holding onto their cash as bank account and savings balances are surging.
Sources: Oxford Economics/Haver Analytics, The Daily Shot – 8/31/20
Consumers are still concerned with the reduction of unemployment to $300 per week in most states running out by the end of September. Workers reporting they cannot pay for household basics from unemployment assistance rose to 50% in August compared to 27% in July. The stall in consumer spending is confirmed by a recent leveling off of consumer expectations in the University of Michigan Consumer Expectations Index.
Source: The University of Michigan, The Daily Shot – 8/28/20
Advertisers See Possible Drop In Consumer Spending
Since last March, broadcast network advertising sales slide but held steady for digital streaming services and the social media outlets. Advertising managers run ad budgets as a percentage of consumer sales. For existing product lines when sales drop ad spending will be reduced to reflect the sales decline. This fall advertising contracts are being negotiated with unusual provisions to allow advertisers to drop or reschedule up to 50% of their buys. The fact advertisers requested a 50% cut provision with no penalties shows they are concerned about a possible sharp drop in consumer spending. Google and Facebook have 60 % of total U.S. ad spending with 71% of their revenue from advertising. A sustained advertising sales decline is likely to result in layoffs of both administrative and professional staff in these high tech giants.
Executive – Employee Catch 22 Likely To Resolve To The Downside
Economic trends favor major corporations continuing to increase market share at the expense of smaller businesses. Professionals will retain their jobs and continue to spend, though at modest levels. Executives will freeze hiring based on concerns about a virus second wave, world trade sales declines and possible new government regulation from a new administration. Workers in the 80% income segment working onsite will continue to face COVID-19 infection uncertainty, continuing layoffs and mounting rental debts. Headlines announcing thousands of layoffs from major companies will undermine consumer confidence. There have been 1.84M permanent corporate jobs cuts since January, the highest number since a similar period in 2001 according to Challenger, Gray and Christmas.
Corporations With Cash May Invest
Mitigating the coming nexus events is possible spending by cash rich firms. About 40% of S & P companies still planning on stock buybacks in 2020. Executives seeing a declining economy may opt to invest in retaining their workers to build new products and increase sales. Announced stock buybacks of $400 billion would be better invested in productivity improvements, new product development, increased market, employee retention, sick leave and child care benefits, and paying off debt. However, it remains to be seen if executives will in fact invest in their business.
Consumer Spending May Sharply Decline in 1st Quarter 2021
The federal rent moratorium policy and a similar moratorium in California will end on December 31st. Renters are still required to pay 25% of their total rent due by yearend and then workout a payback program with their landlord for the balance due beginning in January Independent landlords are looking for $35 billion in rent overdue rent payments to begin in January. A nexus is building of evictions, rent and mortgage debt balances due, small business closures, permanent layoffs, the end of the $300 boost in unemployment benefits and no or a small stimulus spending package by yearend. This cascade of financial events is likely to trigger a sharp drop in consumer spending in the 1st Quarter 2021.
Consumer Confidence Returns When They Are ‘Not Worrying’
If world trade was more robust then executives in major corporations would feel more confident in their hiring plans even if domestic markets were stalled. But,, the U.S. consumer provides 25% of world consumption. So, major corporate executives are still looking for U.S. consumers to drive growth even of their offshore operations.
The stalemate will resolve depending on how each side perceives the moves of the other. For consumers it is how secure they feel when they look at the hiring moves of executives. For executives they want to see sustainable spending by consumers. Without major government intervention for relief, long term investment and virus containment the outlook is highly uncertain. So, it is likely that the standoff will resolve to the downside until major economic interventions occur for both virus control and boosting consumer finances. In the end, our government needs to recognize how overwhelmed most people are today. People are worried about multiple crises coming at them from losing their job to virus infections, violence, wildfires, hurricanes and flooding. When consumers stop worrying and feel calm spending will return.
“I miss not worrying.” September 3, 2020
Susan, commented from her car after being
evacuated from fires in the Santa Cruz Mountains
and not going into a Red Cross shelter because of worries
about becoming infected by the coronavirus
Patrick Hill is the Editor of The Progressive Ensign, theprogressiveensign.com/ writes from the heart of Silicon Valley, leveraging 20 years of experience as an executive at firms like HP, Genentech, Verigy, Informatica, and Okta to provide investment and economic insights. Twitter: @PatrickHill1677, email: patrickhill@theprogressiveensign.com