The Economic Ripples of COVID-19

Family Skipping Rocks

If you’ve spent much time around a lake or river in the summer, you’ve surely noticed the ripples that occur when you throw a rock into the water. These ripples have similarities to the current pandemic and its economic effects. The rock is an uncontrollable disturbance to the surface of the water, but the ripples are somewhat predictable. The rock is like the virus to economists—unknown and unpredictable. The economic ripples, however, are a little more predictable. Using this analogy, we can evaluate the effect that COVID-19 is having on the economy and markets without needing to predict the outcome of the virus.

There are three “ripples” to watch as this pandemic continues:

  1. Consumer Spending – We are a consumer-led economy. According to the Bureau of Economic Analysis, almost 67 percent of nominal gross domestic product (GDP) is personal consumption. If consumers do not feel comfortable enough to shop or eat at restaurants, there is a direct effect on GDP growth.
  2. Corporate Earnings – As consumers spend less, company revenue decreases. This effect forces companies to lower expenses to preserve positive earnings. They lower capital spending, reduce expansion plans, and decrease the number of workers.
  3. Employment – As consumers slow spending, fewer workers are needed to serve customers, which leads to higher unemployment. High unemployment has many negative consequences on the overall economy, including higher loan and mortgage delinquencies and reduced discretionary income.

The good news is these ripples work in two directions. If the spread of the pandemic is contained, we would expect economic activity to recover, leading to increases in consumer spending, corporate profits, and employment. There are also actions you can take to protect yourself and your family:

  1. Build up an emergency fund for the worst-case scenario of another shutdown and reduction in procedures.
  2. Determine how much you should be saving in good times to allow you to reach a point of financial independence. This will give you flexibility in your career choices in the future.
  3. Working in health care, you are more susceptible to being exposed to COVID-19. Ensure that you have your estate planning documents up to date to take care of your family in the case of incapacity or death.

The work you are doing is important. The news tends to focus on the data and overlooks that each data point is a person. As a medical professional seeing each patient, you are on the front lines of this crisis. That is not an easy task and can be a heavy burden. Thank you for all the work you are doing to help keep our communities safe.

If you have questions, please contact your BKD Trusted Advisor™ or submit the Contact Us form below.

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