How COVID-19 Has Reshaped the Economy

Bryan Kirkland takes extra time to clean between clients at The Barbershop and Shaving Parlor in Bozeman. (AP Photo, Ryan Berry)
Bryan Kirkland takes extra time to clean between clients at The Barbershop and Shaving Parlor in Bozeman. (AP Photo, Ryan Berry)

Cities will still exist next year. So will universities, mass transit, rock concerts and football games. But that’s not to say that the premise of their very existence hasn’t been rocked by the COVID-19 pandemic. Because the one thing that all of those have in common – bringing people together in close proximity – has been switched from being something good, to being something potentially deadly over most of 2020.

As we are all aware, the need to distance ourselves imposed on us by a communicable virus has altered our individual and collective behavior to a degree that was once unthinkable. The changes in the economy, both in Montana and elsewhere, have been profound. Sports stadiums, skyscrapers and even university classrooms stand largely empty while spare bedrooms and basements are full of people tapping keyboards.

With each passing month, the particular character of this recession becomes clearer. As the fear and disruption of the initial outbreak of the pandemic eased, the downturn has settled in as being felt the most in consumer spending and in services that involve physical proximity. As of this writing, there is hope that the recently approved vaccine will begin to repair that damage.

Every recession brings on changes that are more lasting. Trying to sort out which changes will stick and which will be forgotten is a challenge, but it’s interesting to try. Here is our list:

High Savings Rates
In the month of April, Americans saved an astounding 33.7% of their income, as businesses closed and shut-in orders were almost universal. Even in the more recent data, savings rates remain elevated, with October rates of 13.6% – roughly twice as high as rates that prevailed pre-COVID. The trend is reflected in bank deposits, which rose by $2.3 trillion when the pandemic started and have remained elevated since.

Such behavior has never occurred in a recession. But many consumption opportunities have been prevented by the pandemic, while at the same time, the largess of the CARES Act has showered households with extra income. We look for rates to come down to historical levels, around 7%, when travel, restaurants and other consumption categories recover.

Strong Demand for Durable Goods
It is unusual in a recession to see consumer spending on durables rise, and yet that is exactly what is happening. After plunging by more than 20% compared to the previous year in April when the economic storm was fiercest, spending on cars, furniture, computers and a whole host of other durable goods items snapped back quickly, with total spending now 15% higher than year-ago levels.

While it is tempting to conclude that this surge in spending today comes at a cost of lower future spending as consumers move their spending plans forward in time, that might not be entirely the case. Especially if part of the spending reflects shifts in housing demand toward larger, less urban homes that may be a longer lasting legacy of the pandemic.

Eating at Home
Restaurants have suffered greatly in this pandemic – spending on restaurants and hotels in Montana was down by a staggering 46.1% through December, according to credit card records compiled by the website At the same, grocery store spending has been up by almost 10% nationally. That sudden shift caught supply chains off balance, with shortages on store shelves and surpluses in restaurant grade products.

Ten months into the pandemic, these patterns are largely intact, but given the strength in income growth during the recession, can be expected to revert to something closer to normal as public health conditions improve. The variety and availability of restaurants may take more time to recover, however, as many are not expected to survive the downturn.

Reshoring or Nearshoring Supply Chains
Has the evolution of global supply chains for everything from toys to pharmaceuticals been halted? If so, it would halt a nearly 30-year span during which an increasingly sophisticated system of production that has brought great benefits to consumers, but has been exposed as vulnerable to disruption. An insurance policy against future disruptions could bring more redundancy and closer geographic sourcing for key products and components to head off some of the worst aspects of future events.

Promises of bringing production back home run up against the higher costs and lower capacity such changes would inevitably entail. Absent explicit government actions to produce these results, we expect global ties to resume as before in a short span of time.

Out-Migration From Urban Areas
A force that was unleashed with surprising fury was the push of real estate money out of urbanized areas toward states like Montana. The story was told, supported by many anecdotes, that the surge in online work combined with the downsides of urban life in times of pandemic and unrest made places like Montana feasible and attractive to out-of-state buyers. The higher-priced end of the markets in places like Bozeman, Kalispell and Missoula saw high demand this summer, and median prices of homes sold rose significantly.

Certainly this trend bears watching. There is no question that the surge in people working from home has increased demand for residential space, and that markets in Montana can offer the lower density and higher space that many are looking for. But the trend in migration away from the nation’s most urbanized counties predates the pandemic, and until now has been directed at the exurbs of those regions and not to a state with a winter climate that is several time zones away.

Adoption of Technology
Zoom conferences, grocery delivery, restaurant meals ordered with your phone and streaming just released movies in your home – all of these things have been possible for several years. Yet most of us drove to work, walked the aisles of stores and traveled to movie theaters. The adoption rate for these and other technologies took a quantum leap during the pandemic, and that promises to be even a bigger challenge for the traditional settings that these virtual tools replaced, even as public health concerns ebb.

Of particular note is the penetration of e-commerce. Warehousing and transportation accounted for 145,000 of the 245,000 jobs created in the U.S. economy in November, and most of those jobs were the ones that package, ship and deliver packages to consumers. Clothing, food, cars and even houses are being bought online, with most surveys finding that consumers will continue to use at least some of these options when the pandemic runs its course.

Office Space and Commercial Real Estate
Medium-sized cities in Montana have not felt the exodus of office workers from city centers that larger commercial centers have experienced. Nationally, rents are expected to decline by as much as 13% in 2020, although it has been the ultra-high rent markets like San Francisco that have had the heaviest influence on this outcome. It is unclear whether the resumption of ordinary personal contact will still result in workers staying home for a least part of the time, with consequences for the demand for space.

Rising Federal Government Debt
There is one aspect of the pandemic where changes are guaranteed to stick, and that is in the debt of the federal government. The deficit financed spending of the CARES Act came at a time when deficits were already running close to $1 trillion per year, and has pushed the deficit in calendar year 2020 to $3.1 trillion. While those actions have been effective, the reality is that federal government debt held by the public as a percentage of GDP is at levels not seen since World War II.

How COVID-19 Has Reshaped the Economy
Recessions are surprises in their timing and severity, but familiar in their impacts. In every downturn, the economy goes into reverse, but in the recoveries some cuts become permanent. It is too soon to know which of the many impacts of the COVID-19 recession will be more lasting, but the upheaval caused by the pandemic and it impact on our behavior will carry though into the future, for better or for worse.