Coronavirus has kicked off a ‘massive’ economic shift and no one knows where it’s going

The coronavirus has devastated business for Valerie Safran and Marcie Turney, who own five restaurants around South 13th Street that were catalysts in the revival of Midtown Center City. Not all will survive.

Safran Turney Hospitality laid off its entire 275-person workforce, built up over two decades of success. The partners tapped out their accounts to refund more than $75,000 in deposits for canceled private events at Barbuzzo restaurant.

They’ve brought back 30 people to prepare takeout dinners and cocktails, but that produces only a trickle of revenue. They’re now planning to reopen some restaurants with reduced seating for social distancing, and will convert the private event space to accommodate dine-in customers.

“We have small, busy restaurants, but when you’re cutting your capacity in half, the numbers just don’t work,” Safran said. In addition to Barbuzzo, she and Turney operate Lolita, Bud & Marilyn’s, Little Nonna’s, and Jamonera, along with several retail shops. Some businesses will not reopen, she said.

In a best-case scenario, Safran thinks half of their pre-pandemic workforce will be back by early next year. “We would be lucky if we have 50%,” she said.

And where will the permanently unemployed workers land?

“Amazon?" she said. "I wish I had that answer.”

She’s not alone. Experts say a massive economic shift is underway, but it’s unclear yet where all this is going. Will there be a vaccine? Will the virus surge in the fall? Will wary consumers hold on to their money? Will white-collar workers continue to telecommute, shifting their spending habits homeward?

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Economic upheaval is typically followed by a reallocation of resources and labor, as when the American automotive industry and manufacturing retooled after the oil crisis in the 1970s. But economists say the “creation response” often lags behind the economic destruction, much the way green things take some time to sprout from the ashes after a forest fire.

New hires are taking place — Amazon, Walmart, and food delivery services are desperately seeking workers. But businesses are hiring only three new workers for every 10 layoffs, according to the authors of a recent report published by the University of Chicago, which estimates that 42% of coronavirus-induced layoffs will be permanent.

“Even in the optimistic scenario where the pandemic recedes quickly, there’s no second wave, and we get things under control, the evidence suggests there will be a considerable reallocation across industries, within industries and within metropolitan areas,” said one of the report’s authors, Steven J. Davis, a professor of international business and economics at the University of Chicago Booth School of Business.

The U.S. economy could take almost a decade to fully recover from the pandemic and related shutdowns, the nonpartisan Congressional Budget Office said last week. It projected the unemployment rate would be about 9.5% by the end of 2021, and about six million fewer people would be in the labor force.

“There are going to be some significant structural changes,” said Mark Zandi, chief economist of Moody’s Analytics in West Chester. “Big parts of the job market are gone, and if not gone for good, they’re gone for a long time.”

The coronavirus has accelerated trends that were already in motion, such as the shift in business and communications to the internet, as well as the consolidation of sectors behind businesses with strong positions and deep pockets.

Small retail businesses, already under pressure from online competition, are getting hammered. “They’re evaporating," Zandi said. "That’s where a lot of the business failures are going to be during this pandemic. So those jobs, they’re gone. They’re not coming back.”

Large general merchandise stores are emerging as winners, but will not replace all the jobs lost. “There’s a massive consolidation going on in many industries, but most obviously in retail," Zandi said. "So Target, Costco, and Walmart, they’re getting a lot bigger.”

The travel and tourism industry will not rebound quickly, especially business travel, which generates the greatest profits for airlines and high-end restaurants and hotels. Resorts and convention centers will suffer as businesses shift to video conferences for networking.

“Tourism will come back more quickly, but will still take some time," Zandi said. "And so a lot of people who work in leisure and hospitality are going to have to figure out where they’re going to get their next job.”

About 5.5% of work was done from home before the pandemic, and business executives expect telecommuting to triple to 16.5% of hours worked in a post-COVID world, according to the Survey of Business Uncertainty, a measure of firms’ expectations by the Federal Reserve Bank of Atlanta. But the work-at-home growth rate will be double for white-collar office employees, said Davis, the University of Chicago professor who helped create the survey.

“The shift is quite massive,” he said. Don’t expect everyone to work from home every day. “The main pattern is more like ... rarely working at home to now working one or two days a week at home in the post-pandemic world," he said.

But that means 20% fewer hours worked in offices, often in urban centers. “That means a lot less worker spending during the day and after work in the city, at restaurants, bars, entertainment, and so on,” Davis said. “That’s a spatial reallocation of spending and jobs within metropolitan areas.”

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As the economy recovers, companies will step up investments in technology, including robotics and online retailing and distributions systems, said Subodha Kumar, a professor of supply chain management at Temple University’s Fox School of Business. The new investment will not happen immediately, he said, because businesses are cash-poor, and there is too much uncertainty about a clear path forward.

“The companies I’m talking to understand the need for change, but don’t have the resources right now,” he said.

New hiring will favor those with technological skills, Kumar said. Low-income workers will likely suffer the most, as gaps in pay scales grow wider unless policymakers intervene and make it easier for workers to obtain digital skills training.

“More jobs over time will be automated,” Kumar said. “There will be lot of new jobs created to develop this technology and the people who are able to make the switch will do much better. But in the process, some people will be worse off.”

If the reallocation of labor and investment is inevitable, Davis argued that policies designed to maintain existing jobs are not the most efficient use of public resources. Congressional proposals to extend $600-per-week supplemental unemployment benefits to the end of the year — they’re set to expire at the end of July — would be “a gross policy blunder” that would greatly slow re-employment, particularly of lower-wage workers, he said.

“There are potentially large benefits of policies and policy reforms that facilitate a speedy reallocation of jobs, workers, and capital to newly productive uses in the wake of the pandemic,” he said.

The pandemic-inspired rapid growth of online retailing is expected to continue unabated.

For a traditional merchant like Boscov’s, the Reading-based retailer that calls itself America’s largest family-owned department store, the coronavirus has forced it to rapidly embrace e-commerce. The company is filling orders and shipping them from its existing 50 retail outlets, which began opening in the Philadelphia area on June 7 and will reopen on Monday in New Jersey. In the long term, it’s unclear how its online operations will evolve.

“Even now as we are reopening our stores, we’re seeing that more and more people have gotten comfortable shopping online,” said Jim Boscov, the chief executive of the retail chain. “But we also know that it doesn’t replace that in-store experience.”

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Since its stores began reopening, shoppers are skewing younger, Boscov said. Older customers could be less eager to leave their houses, but Boscov isn’t sure. Some features that distinguish in-store shopping are temporarily suspended: “We closed dressing rooms and we will figure out a way to get around that,” he said.

Boscov’s, like all brick-and-mortar retailers, is facing huge costs to manage the coronavirus disruption — greater expenses for cleaning and for equipment to keep its employees and customers safe. Some employees have been reassigned to constantly disinfect high-touch surfaces, like handrails. Still, the workforce will be smaller. “We have to be appropriately staffed,” Boscov said.

The chief executive said he was personally involved in negotiating an order for half a million masks for employees and customers — patrons who need one will be asked to make a $1 contribution to first responders. “We’ve got a crew of people who are busy buying disinfectant and hand sanitizer and masks and gloves and everything else," Boscov said. "It’s important. We’re not going to skimp on that.”

At the end of the year, sales will likely be off by about 40%, but Boscov believes his stores will recover. “I think this is going to be a terrible year for every retailer," he said, "but we will survive and next year you will get back to the kind of business that we were doing before.”

The department-store chain has it good compared with other high-contact businesses in the Philadelphia area that remain shut down, such as gyms, casinos, and theaters.

Penn Ketchum, the owner of Penn Cinema, was forced to shut down three multiplex theaters in Huntingdon Valley, Lititz in Lancaster County, and Wilmington, laying off almost all of his 134 employees. It’s unclear when health authorities will allow him to restart the projectors, but he already put in place plans to enforce social distancing by reducing seating capacity.

While he waits for word from health authorities, Ketchum spent $50,000 to buy an outdoor movie screen and cinema-quality digital projector to create a drive-in theater outside his flagship multiplex in Lititz. The soundtrack is delivered to car radios on an FM transmitter. Penn Cinema can accommodate about 100 cars that pay $35 each to watch classic summer movies, like Jaws, and since it opened last month, it has sold out most nights.

“We thought it would be something to bridge us to when we get open, to generate a little bit of revenue to help pay some of the bills,” Ketchum said. “We did not realize the incredible extent to which people are excited to see this happen.”

Ketchum dismisses concerns that movie theaters will be reduced to rubble in the aftermath of the coronavirus, as movie studios and customers turn more toward streaming shows on ever-larger home televisions. He has heard theaters pronounced dead so many times — after the advent of videotapes, HBO, Blockbuster movie rentals, DVDs, streaming — but he believes that nothing can replace the experience of watching a film in a movie house.

“Streaming is no threat to us whatsoever because we are an experience,” he said. “It’s not just about watching a film, but it’s about watching a film with other people and getting out of the house.”

Ketchum reckons it will not be a difficult for his theaters to accommodate post-pandemic rules. He had already converted Penn Cinemas to more spacious recliner seats a few years ago, sacrificing about half the seating capacity for more comfort. During the redesign, Penn Cinema also moved to online reserved booking, which was recently adapted to automatically block out two empty seats between groups to maintain social distancing (customers in the same group can choose to sit next to each other).

The reduction in capacity will hurt ticket sales for big opening weekends of blockbuster movies, and at popular holiday showings. But it should not impair attendance on most other nights, when the theaters are typically well below capacity, he said.

But Ketchum may have stumbled onto something unexpected with the pop-up drive-in. Audiences applaud at the end of the movies, even though they’re in their vehicles. “It’s a shared experience,” he said.

The drive-in may become a permanent fixture in the parking lot — he won’t need so much space to park cars if the multiplex is going to take in fewer customers. “This is something that we will continue to operate,” he said, “at least on occasion, even after the rest of the building returns to normal.”