Before the COVID crisis hit, the U.S. economy was in the longest expansion in its history. Housing and housing prices were peaking, consumption was steady, inflation was relatively in check and we were in our 128th month of growth. “Things were rocking along,” said AmericanHort Chief Economist Charlie Hall. “I wouldn’t say we were blowing the top off, but we were rocking along.”
Other good signs were increasing (but plateauing) job growth and a generally steady stock market. In his January outlook, Hall had even reduced the probability of a recession from 50% to 40%. “Of course, I didn’t know that COVID was coming down the pike,” Hall said. “Otherwise I would have said 100%.”
At his State of the Industry presentation during Cultivate’20 Virtual, Hall pointed out that so far, the total economic effect of the pandemic has been a 5% drop in U.S. first quarter GDP. “Now that may not sound like a lot, but remember, we’ve got a $22 trillion economy annually,” Hall said.
Unlike the Great Recession, which saw a decrease in spending on durable goods like cars, houses, appliances and clothing, the coronavirus has pushed the U.S. economy into a spending crisis, mostly in the service sector, particularly in-person services, Hall said. According to the Census Bureau Center, in-person services have accounted for 67% of the decline in spending.
“This is the first recession in which we’ve seen a cutback on services because even during the Great Recession, we actually had an increase in services spending (3%),” Hall said. “That’s not so during COVID. We’ve cut back on durables; we’ve cut back on non-durables, but we’ve REALLY cut back on services.”
The recovery curve and the COVID curve
Hall stressed that shape of the recovery curve is directly related to the shape of the COVID curve, predicting a 35% decrease in GDP in the second fiscal quarter.
“This is unprecedented,” he said. “This will be the largest single decrease in quarterly GDP that our country has ever seen. It’s going to blow the top out of any records before.”
However, in the third quarter, he predicts a bounceback — but not back to pre-COVID numbers. A full recovery will depend on how the country handles the virus including “how soon we get a vaccine, how long it takes for cases to go back down. We’ve got California, Florida and Texas skyrocketing right now — that all shapes the recovery curve.”
The recovery also depends on pent-up demand, the number of business failures and the policies put in place, but it all hinges on lowering the rate of infection, he said.
As state and local economies re-opened across the U.S., we have not seen a major difference in spending between states that have re-opened versus those that did not.
“Spending decreased before closing ever went into effect,” Hall said. “You see spending did not jump up to where it used to be. It stayed low. So, the effect of reopening has been mixed because people don’t want to get this coronavirus.”
And as stimulus payments hit mailboxes and bank accounts, lower-income households upped their spending back to about 5% under normal rates, while top income earners increased at a much lower level.
The payroll protection program, on the other hand, brought higher income earners back into the workforce at a much higher rate than lower income workers. And company earners have not yet picked up.
“The policy tools we have in effect have been mitigated in terms of the impact,” Hall said. As Congress plans to spend another $1 trillion on relief, “We need to look very carefully at the policy tools because what we’ve put into place so far has been partially effective.”
Going into 2020, the industry was positioned for five-year increases and in late May, about two-thirds of growers were reporting increased sales year-to-date, according to Hall’s Your MarketMetrics numbers. Much of that depending on whether growers were located in areas where they were deemed essential businesses.
“On the retail side, despite Armageddon in the first part of spring, year-to-date are up 12.1% in terms of their overall sales,” Hall said, citing numbers from Ian Baldwin’s Your MarketMetrics. “The average sale was up 17.5%.”
The Garden Center Group reported IGC YTD sales were up 28.8% this year, with average sales up 14.3% and transaction numbers up 14.9%. “You can see that these are positive data,” Hall said. “But is this going to continue?”
Hall said the real question is: What does post-COVID-19 look like? In previous recessions, industry sales have generally increased during the first year. The Great Recession was so bad that the industry didn’t see the bump it normally does, but in this recession, did see that increase.
The green industry typically takes a hit after that, during the recovery.
“When the recovery usually starts in previous recessions, people start turning loose their disposable income dollars and buying more cars and more refrigerators and dishwashers, more durable goods and cut back spending on flowers, shrubs and trees,” he said. “That’s what we’ve seen historically in all the recessions we’ve seen since 1948. We see a bump in the first year of the recession and then right when recovery starts, that’s when we take our hit as an industry. “
Where we go from here
Hall said 2021 could be great for the industry, but again, it depends on how the coronavirus is managed as well as durable goods spending. Durable goods spending has declined this year, but not at the rate it did during the Great Recession.
It depends on Congress as well. If the federal government passes policies that bolster local governments, there’s the potential for a good spring next year. “But there’s no guarantee of that because there’s so much uncertainty in terms of COVID,” Hall said. “So that’s why I can’t tell you with 100% certainty because I can’t tell you with 100% certainty how we’re going to handle COVID for the rest of the year.”
This year, some growers made the difficult choice to draw back on planting and seeding, and experienced shortages in demand. “That’s why some people were down this year,” Hall said. “They didn’t have the product.”
Is that a wise choice for next year? “That depends on your risk preference curve,” Hall said. “Again, there’s a great deal of uncertainty and yet the opportunity is there because we are making headways.”
One of the best things to do now is continue to emphasize the essentiality of the green industry, Hall said. In the midst of a health crisis, there are many opportunities to promote the benefits of plants for human health and psychology.
“Do not let the media shape your strategic vision,” Hall said. “Know enough to know the difference. Do your homework and right now we have an opportunity. Let’s make hay while the hay is out there.”
For resources and articles on ways to promote the benefits of plants, visit Hall’s website: https://ellisonchair.tamu.edu/benefitsofplants/