COVID-19: 11. Economic Impact on Vermont

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In April, the unemployment rate in Vermont went from 3.1% to 16.5%. Nothing like this has happened since the Great Depression.

This article will discuss the impact that the COVID-19 shutdown has had on Vermont’s economy including the labor market and key industries within the state.

Background Information

To get sense for the magnitude of the COVID-19 recession, a quick review of what was normal will be very helpful.

Vermont had a civilian labor force of 349,761 people as of April 2020. This is comprised of two general components.  “Non-Farm Payroll”, which represents employees of both private sector and governmental entities, accounts for 310,571.  The remaining 39,190 are made up a self-employed people.  Non-Farm Payroll employees are covered by Unemployment Insurance.  Prior to the COVID-19 crisis, self-employed people were not.

The largest sources of employment in Vermont include health and social care, education,  governments (federal, state & local), food preparation and service, sales and retail, manufacturing and transportation.  Tourism, including restaurants, lodging, ski areas, outdoor recreation and all related sales and services is a key Vermont sector.

Shut-Down

 On March 24, Governor Scott effectively shut down all non-essential businesses in Vermont and put in place stay-at-home and work-from home orders.  The impact this had on Vermont’s labor market was both massive and rapid, as outlined in the charts below.

On May 14, the Vermont Department of Labor reported that it had received 90,213 unemployment claims.  Conventional Unemployment Insurance claims accounted for 64,443 claims and the newly instituted Pandemic Unemployment Assistance program accounted for 25,361 claims.  This latter program was put in place by the federal government to provide unemployment benefits to self-employed people who lost their livings owing to the COVID-19 pandemic.

The chart below shows the progression of conventional Unemployment Insurance claims through the shut down.

Vermont Unemployment Insurance Claims (Excludes Pandemic Unemployment Assistance Claims)

Date Weekly Unemployment Insurance Claims Continuing Unemployment Insurance Claims
March 14 659 4,810
March 21 3,784 13,797
March 28 14,663 21,955
April 4 16,474 31,204
April 11 9,662 64,313
April 18 6,598 76,457
April 25 5,117 60,535
May 2 3,875 57,040
May 9 2,913 55,103
May 16 2,199 50,285
May 23 1,552 46,313
May 30 1,564 45,207
June 6 1,650 43,333
June 13 1,859 42,618
June 20 1,389 42,420
June 27 2,163 39,089
July 4 1,876 38,335

Source:  Federal Reserve Bank of St. Louis, Weekly Unemployment Claims in Vermont and Continuing Claims (Insured Unemployment) in Vermont

As outlined above, weekly or initial claims for Unemployment Insurance peaked at 16,474 the week ended April 4, up from a normal level of about 650. The total number of claimants receiving Unemployment Insurance benefits peaked at 76,457 the week ended April 18.   That represents a staggering 24.6% of total non-farm payrolls in Vermont.

Both new initial claims and continuing claims are now in decline, with continuing claims down almost 50% by the end of June..  As the economy has been allowed to reopen, people are going back to work.  However, both Initial Claims and Continuing Claims remain stubbornly high.

The chart below shows where all these job losses occurred on a year-over-year basis.

                    Change in Employment:  April 2019 vs. April 2020

Sector Job Losses
Total Non-Farm Payroll -67,900
Leisure & Hospitality -23,400
Manufacturing -13,100
Retail Trade -10,100
Education and Health Services -10,000
All Other -11,300

Source:  Vermont Department of Labor, Current Employment Statistics, April 2020

With only one exception, every sector of Vermont’s labor force declined in April 2020.  The exception was federal government jobs, which increased by 200.

Remember, all of the tables above exclude self-employed Vermonters, many of whom would have been severely affected by the COVID-19 pandemic. Another 25,362 Vermonters qualified for the federal government’s Pandemic Unemployment Assistance program as of May 14.  So, peak COVID-19 unemployment appears to have been in the 100,000 range!

Business Pain

In a government mandated shut down, the affected businesses loose all or most of their revenues.  With no cash coming in, businesses will attempt to cut their costs as much and as fast as possible.  The rapid rise in unemployment outlined above is the result of businesses cutting their labor costs to the bone.  All other variable costs will also be cut to the maximum.  Restaurants won’t buy food, bars won’t buy beer, hotels won’t launder sheets and towels and manufacturers won’t buy new raw materials unless required to under contract. The bad news spreads from one business to the next rapidly.

Unfortunately, most businesses also have fixed costs that are difficult or impossible to get rid of.  Rent and mortgage expenses fall in this category.  Most utility bills have fixed charge components even if consumption goes to zero. With no revenues coming in to offset these types of costs, a business needs to use cash reserves to meet these obligations.  The kind of cash reserves that most small businesses have in these circumstances is measured in weeks or months, but certainly not in years.

So, what started as a big problem for businesses that were shut down rapidly became a problem for businesses that were not.  As cash reserves dwindle, rent doesn’t get paid to landlords or mortgage payments to banks are missed.  Credit card debts go in arrears.  Banks start to take reserves for loan losses and cut their dividends.  The recession spreads fast!

How Does Vermont Compare to the USA

If you were to rank state’s COVID-19 responses on a grid ranging from very focused on health to very focused on the economy, Vermont would lie on the health side of the equation.  So, has Vermont’s COVID-19 response hurt its economy more than average?

Using Continuing Unemployment Insurance Claims as a proxy for economic health paints an interesting picture.  From March 14 to its peak on May 9, Continuing Unemployment Insurance Claims increased 14x in the USA as a whole.  In Vermont, the maximum Continuing Unemployment Insurance Claims were reached on April 18 and were 16x the March 14 level.  So, Vermont had both a larger and faster rise in unemployment than the USA as a whole. You would expect to see this in strong lockdown states like Vermont.

Since peaking on May 9, the USA has seen Continuing Unemployment Insurance Claims fall by 27% as of June 27.  In Vermont, these Claims are down by 49% from the peak. While the initial impact on unemployment was worse in Vermont, the recovery of employment is much stronger.  The perception that COVID is under control in Vermont may be benefitting the economic recovery.

The Unemployment Rate of the USA and Vermont paint a similar picture, as outlined in the chart below:

                               USA and Vermont Unemployment Rates 2020

Month USA Vermont Vermont Better or Worse
March 4.4% 3.1% Better
April 14.7% 16.5% Worse
May 13.3% 12.7% Better
June 11.1% 9.4% Better

Source:  Federal Reserve Bank of St. Louis Economic Data

Mitigating Factors

In previous Informed Vermonter articles, the many government programs put in place as a result of the COVID-19 pandemic have been reviewed in some detail and won’t be repeated here.  In summary, the federal government made a rapid and massive response that greatly mitigated the impact of the coronavirus shutdown on both individuals and businesses.

Most individual taxpayers received economic stimulus checks and unemployed individuals also received unemployment benefits that were increased by $600/week by the federal government.

Over 10,000 small businesses in Vermont took Payroll Protection Loans and businesses large and small are benefiting from a variety of temporary tax code changes.

In total, The Informed Vermonter estimates that some $3.8 billion is additional federal money flowed into Vermont under a variety of new programs.

Summary

When the entire “non-essential” private sector is ordered to shut its doors, the economic impact is going to be devastating.  Our government officials knew this would be the case.

There is no doubt that all the incremental government support made a terrible situation bearable for many affected Vermonters. There is also little doubt that there were both individuals and businesses that fell between the cracks and suffered greatly as a result of the coronavirus shutdown.

The underlying assumption in both Washington and Montpelier supporting the COVID-19 response is that the crisis will end soon and things will return to normal.  All the new government programs are designed to be short-term solutions to what is hopefully a short-term problem.  So far that appears to be the case in Vermont, but there remains a high level of uncertainty.

In other parts of the country, where the initial shutdowns were lenient and short-lived, the coronavirus is still spreading out of control.  Vermont’s focus on fixing the health issue may well prove to have been best for the economy as well.  The data thus far supports this view.

If the short-term problem becomes a long-term problem, things could become quite challenging. Short or long, one thing is certain:  COVID-19 has created a fiscal imbalance of historic proportions.  The next two articles in The Informed Vermonter will take a look at this.

 

 

 

 

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