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The core of the US economic outlook for the next one to two years is the impact on consumption categories affected by social distancing. What goods and services will consumers continue to pay for, and what will they decide they can live without? Some of the catastrophic economic and labor market statistics from recent weeks are actually not that important. It is obvious that when businesses are shut down and people are ordered to stay home, there will be a lot of unemployment. The bigger question is what happens when the economy opens. The most likely scenario is that within a few weeks, many of the orders to shut down nonessential businesses and stay at home will be lifted. While businesses will reopen and millions will return to work, recovery is unlikely to be complete for quite a while. Below we discuss which consumption categories will see the biggest drop in business during the (slow) recovery. One to two years will pass between initial containment of the virus spread and full vaccination, with gradual improvement in testing for and treating COVID-19. During this period, there will be varied degrees of social distancing, i.e., restrictions on behavior and businesses. Some industries will not go back to normal during that period, as societies try to balance two goals: a healthy population and a healthy economy. Actions will depend on transmission rate. How severe must restrictions be to keep the rate low enough for the virus to die down? The answer will vary by season, location, and age. More severe social distancing will probably be needed in the cold seasons, in dense areas that rely on public transportation (New York City is the prime example), and for older people. Economic activity during that period will depend on what governments decide—and on consumer fear. For example, governments may keep airlines open, but many consumers may fear flying. Which consumption groups would be most affected during this period? It depends on three factors: How much infection risk they pose, how discretionary they are, and to what degree they can be replaced from home. The risk of being infected through consumption of a product category will depend on factors such as: In many consumption categories that are especially sensitive to social distancing, older households are responsible for a large share of spending. Other factors being equal, these categories—such as cruises, home remodeling and full-service restaurants, will experience a larger drop in spending because older Americans are experiencing a more extreme and protracted period of social distancing. In the table below, we subjectively ranked 26 consumption categories by two dimensions: The infection risk they pose (using the criteria above), how discretionary they are, and to what degree they can be replaced from home. The consumption categories that will be most affected are the ones at the upper right of the table: mostly entertainment. These categories can easily be replaced at home (television) or avoided. Additionally, they pose significant infection risk. (Click the chart for an enlargement) A few observations from this table: Hopefully, this framework will help you think about the outlook related to the consumption category your business cares most about.
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