A Long Time Until the Economic New Normal
Source: MIT Sloan Management Review
Date: April 10, 2020
 
A full economic recovery from the COVID-19 pandemic is unlikely, and the new version of normal for work and organizations is further off than we think.
We are in the middle of a historic rupture in the economic fabric of our society. The COVID-19 pandemic has already had a pervasive impact on the United States, and economic and financial market experts are hotly debating how quickly the economy will recover once we get “on the other side” of the contagion and the enormous pressures it has placed on our health care system. Although it is too early to estimate the exact economic impact, it is likely that full recovery of economic activity, including GDP growth, jobs, and unemployment, will take at least a year, and likely much longer.
One group of economic commentators, including the president, argue that once we get to the point of health care stabilization, the economy will take off very rapidly, and we will be able to quickly recover the lost economic activity and growth rates.
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COVID-19 is going to cause an economic recession. The only question is how deep and how long it will be — and which industries will have a hard time recovering to their previous levels of economic activity without major disruptions and which businesses will survive and thrive.
The total cessation of activity in industries across the economy as a result of COVID-19 is similar to the impact of a major earthquake or snowstorm, where the vast majority of economic activity comes to a complete and unexpected halt. The difference with COVID-19 is that the standstill is not localized to one part of the country — natural disasters, while often devastating, typically have only small impacts on the national economy.
With COVID-19, as people have been forced to work from home, avoid travel, refrain from shopping in retail stores, and stop eating at restaurants, huge swaths of the economy have ceased to be financially viable. The disruptions from coronavirus are on track to continue for months. For many people who have been furloughed or laid off, this will mean not regaining their jobs. Many businesses that have temporarily closed will experience business model failure. The high levels of financial debt in the economy, especially in the business community, will ensure that marginally viable business models will be destroyed even quicker than would have happened otherwise. Eventually, the economy will recover as the new and growing business models take on greater shares of investment capital and people. But the adjustment process will slow the recovery of consumer demand and overall economic growth.
Face-to-Face Work Disrupted
As I write this, the number of people working under “stay at home” orders in the U.S. and across the globe continues to climb at a rapid pace. Companies in all industries are implementing new virtual work models, heeding the advice of leading medical professionals to practice social distancing. The sudden shift to distributed, remote work has enabled business continuity while creating huge challenges and inefficiencies in how business is conducted. And for some industries and jobs, moving from a face-to-face model to a virtual model is not an option or would create an enormous opportunity loss.
Most people’s workdays are filled with face-to-face interactions that are essential for effective communication and collaboration. Meetings are much more effective when conducted in person because you can read people’s body language, do more-effective brainstorming, and come to the right decisions quicker. Getting together with coworkers, customers, and suppliers over food and drinks outside of work builds camaraderie and trust: Meeting people in person often is the best way to get them to follow through on their commitments. Suddenly moving all those face-to-face interactions to virtual environments creates enormous friction in how the work is conducted.
That friction is not going to suddenly disappear if the stay-at-home orders are all lifted within the next few months. Because of the risk of repeat waves of infection, which are likely to hit in the second half of 2020 and beyond as we wait on a vaccine for COVID-19, businesses are already doing contingency planning. This includes potentially canceling large group meetings, conferences, and other in-person events through the end of the year. With each new wave of infection that threatens, businesses will proactively pull back on meetings and onsite work to avoid the bigger disruptions to ongoing operations that will occur when people get exposed to the virus and must self-quarantine.
This will happen even if there are no more government-imposed stay-at-home orders. Business leaders’ fears of larger disruptions to operations will lead them to be conservative in planning for a return to “business as usual” for face-to-face work arrangements. And that will significantly dampen economic productivity and growth through the end of 2020 and beyond.
Building Resilience Ahead of the Next Pandemic
Over time, companies have learned how to deal with unexpected adversity. Each recession is unique, presenting its own challenges that are difficult to forecast and overcome. And corporate scenario planning is full of examples of past events — such as the Johnson & Johnson Tylenol product-tampering event of the 1980s and the 9/11 terrorist attacks in the U.S. — that introduced substantial unexpected risks to companies’ business models. Companies had not anticipated these types of business disruption, so they were caught unawares and unprepared.
At first blush, it might seem like incorporating scenario planning for pandemics should fit into already well-defined frameworks for strategy formulation and capability building. The unfortunate truth is that the COVID-19 pandemic has caught virtually all industries and companies by surprise. The stresses on entire industries, nations, and the global economy extend way beyond the boundaries of standard corporate scenario planning, which is why so many segments of the economy are at risk of long-term retrenchment. As a consequence, we face many years of companies reevaluating and reorienting their operations and investments to be prepared for the next pandemic. Doing so will increase their resiliency, but at the cost of reduced sales and margins. As with an insurance policy, the ROI from shifting spending and resources will only be reflected in the bottom line when the next pandemic hits.
The recent growth in trade wars and escalating tariffs already had many corporate leaders rethinking the wisdom of highly interdependent global supply chains. The COVID-19 outbreak has emphasized these risks and brought them into sharper focus. Moving forward, true corporate resiliency will require businesses to consider challenges such as building redundant capacity in physical operations and human capital.
The specifics will vary across industries and business processes but are likely to include building the capacity to deal with sudden spikes in demand. For example, following the 2002-03 SARS epidemic, 3M began to prepare for the next surge in demand for N95 masks. It started cross-training workers to step in for colleagues absent due to illness and reconfiguring operations and supply chains with more manufacturing sites, approved vendors, distribution channels, and sales offices so operations could be shifted nimbly when one area couldn’t deliver its part of the business plan.
The steps needed to identify the most viable options, test them, and then build the capacity across end-to-end business processes are highly complex, and it will take years before a new equilibrium is reached. The process is certain to feature many battles between corporate leaders who want to look out for the interest of long-term investors, and the short-term-focused investors who will claim that the incremental investments are wasteful. The impending duel will not be pleasant to watch.
The New Economic Normal Is a Long Way Off
It takes time for business and society to settle into a new normal following a large-scale economic disruption. Even if the health care challenges from COVID-19 are solved before the end of this year, which seems highly unlikely, businesses will face many more months, and likely years, beyond the anticipated adjustment periods budgeted in their scenario planning and operations.
The shifts in consumer demand will require expansion in some industries and contraction in others. Future growth in consumer spending is likely to be slower than it has been for many years. Increased government regulation of gig and other nonregular work will require adaptation and changes in work practices. The disruptions in face-to-face work will be a drag on economic efficiency, leading to slower growth in revenues, lower profit margins, and reduced cash flow. And reconfiguring business models for greater resiliency will require significant investments of working capital into operations in ways that will not show any ROI until the next pandemic hits.
We will get to the new normal eventually. The corporate leaders who recognize these new challenges now and move quickly to adapt to them will put their companies in the best position to thrive throughout the 2020s.
ABOUT THE AUTHOR
Alec Levenson (@alec_levenson) is senior research scientist at the USC Marshall Center for Effective Organizations. His research and consulting work optimizes organizational performance through work design, analytics, and strategic talent management.