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I remain a skeptic about how fast a re-opening of the economy in all 50 states will actually produce economic growth that’s something like a return to normal.

I realize, as the S&P cruises back toward the February high above 3,000, that my opinion is somewhat of a minority one. But let me explain why I’m thinking that the economic re-opening will disappoint. (When? I’d guess we’ll get the first tinges of disappointment in July when we have some numbers.)

Three reasons.

How many people will come? I think the optimists about economic growth in the re-opening economy are over-estimating the “If you open it, they will come” factor. Take a look at Las Vegas. Plans now call for a June 4 re-opening of the city’s casinos and resorts with big changes due to the coronavirus. At the craps table, for example, players will need to stand 6 feet apart. (Think that might have some effect on the fun of the experience?) At the blackjack table, players will no longer be able to touch the cards. (Good luck, dealers, in enforcing that one.) All-you-can-eat buffets? Gone. Nightclubs? Still closed. Social distancing rules come at an awkward time for the city and its tourism industry. Las Vegas has been on a building spree. There’s the new 65,000-seat Allegiant Stadium set to by the new home for the NFL’s Raiders. There’s the 17,000-seat MGM Sphere at The Venetian and the mega-resort project Resorts World Las Vegas. Circa Resort and Casino, a two-story casino being built downtown, features temperature-controlled rooftop pools large enough for 4,000 people. Even in the best of times, these projects would be a lot of new capacity to fill. These aren’t the best of times and I think it’s safe to wonder if enough tourists will come to pay the tab for these new projects? Or take Walt Disney World in Florida, which normally draws 93 million people a year. The parts will open on either July 11 or July 15 with reducing guest capacity, temperature checks at entrances, and mandatory face masks for all visitors and employees. Parades, fireworks displays, and character meet and greets will be suspended. A family visit to Disney isn’t cheap. The new rules say that ticket holders might be denied entrance if they have a previously undetected fever. How many people so need a Disney-experience now that they won’t wait until next year?

How profitable will capacity limited re-openings be? Forget about restaurants. There’s no sit-down restaurant in the United States that can cover its costs with capacity limited to 25% or even 50%. Many restaurants survive only because of the occasional 80% occupancy (or better) night. Or consider hotels. Yes, it is incredibly encouraging the hotel bookings have rebounded from their lows of 12% of 2019 levels in May, according to the World Hotel Index. An occupancy rates across the United States have climbed for five straight weeks. But the bar was so low. The occupancy rate for the week ended May 16 was 32.4%, (up from 21% for the week ended April 11.)  But it’s still way below the 61.8% rate at the beginning of March before the surge in coronavirus cases. Revenue per available room, a key hotel-performance metric, was $25.12, up slightly from the prior week though down nearly 74% from the same period last year. Real-estate firm CBRE Group doesn’t expect hotel revenue per available room to return to pre-coronavirus levels until 2023. The recovery will be particularly slow for high end hotels with their huge space devoted to ball rooms, meeting rooms, and dining rooms. Occupancy at economy hotels reached 44.2% for the week ended May 16, compared with 18.8% for luxury hotels. I don’t think that the market has priced in odds that some companies in the hardest hit sectors don’t have the cash and credit to survive until the economy reaches something like the pre-pandemic normal. McDonald’s (MCD), for example does. The company has said that it has put aside $40 million to help franchisees through the crisis. The company has also said, bless it’s heart, that some franchisees will have to sell in order to meet their obligations to McDonald’s. That’s not a whole lot of help to a franchisee, but it’s more than most independent restaurants can find. (Recent government small business grants/loans have to go to paying employees under current rules. That leaves an independent restaurant looking for money to pay rent, equipment leases, and suppliers. For many businesses, perversely, re-opening at a low volume of business may actually be more expensive than staying completely closed.

The wave of job cuts for city and state governments will hit just as the economy looks to be staggering to its feet. Unlike the federal government, which can just print money, states have to balance their budgets. And the coronavirus recession has hammered state and city finances. Ohio, for example, has gone from running about $200 head of revenue estimators in February to looking at running three-quarters of a billion behind in April. Michigan s looking at  $2.6 billion shortfall this year and $1 billion next year. Arizona protest a $1.1 billion shortfall. Pennsylvania has lost nearly $5 billion in lost revenue. Republican Senate leader Mitch McConnell has said “No money for states. Over my dead body” or something of in that vein. Even if Republicans in the Senate eventually come to their senses, there’s almost no way for Washington to act quickly enough to get money to the states before they have to balance their budgets. And how do you balance your budget if you run Michigan or Arizona or California or McConnell’s home state of Kentucky? You commit optical suicide by raising taxes or you cut budgets and layoff state and city workers. In Ohio, for example, the governor has proposed $775 million in cuts the would fall heavily on teachers, police, firefighters, and hospital workers. Other than the pain being visit on these people, the cuts would remove lots of jobs and lots of spending from an economy already in recession. Cutting jobs during a recession isn’t a recommended solution in any economics text book I know.
And those three reasons are why I remain skeptical that the re-opening of the economy will produce the growth that the stock market seems to take for granted right now.