Question marks hang over Delmarva economy

This chart from Opportunity Insights Economic Tracker (https://tracktherecovery.org) shows the drop in spending in Delaware and its three counties. Sussex County has seen the slowest recovery. The data is drawn from private companies – from credit card processors to payroll firms – to provide a real-time picture of consumer spending.

DOVER — After three-and-a-half months, it is readily evident that the pandemic has hurt local businesses in a big way.

But, according to a Delmarva economy expert from Salisbury University, it is too early to assess their fates.

“There are so many unknowns that are holding question marks over us, in terms of which businesses are going to be harmed in what ways,” said Memo Diriker.

“What we do know is that a certain percentage — a significant percentage of businesses — are going to find it very difficult to be in business this time next year.”

Consumers were starting to spend a little more freely once restrictions eased, but will that curtail greatly again as cases and concerns about COVID-19 rise?

Can businesses pivot to a model that better relates to contactless service?

Can businesses hold on with the help of government stimuli, such as the Paycheck Protection Program?

What if a second wave of the coronavirus arrives with flu season?

“What we’re seeing, really, is that this is the weirdest ‘dominos falling’ scenario,” said Dr. Diriker. “Some of the things will happen almost in slow motion.

“There have been some businesses that were operating at the edge of profitability, or at the edge of sustainability, and those are the ones that are currently most vulnerable — PPP or not.”

Consumer spending

Dr. Diriker is director of the Business, Economic, and Community Outreach Network (BEACON) at the Franklin P. Perdue School of Business at Salisbury University.

One of his immediate gauges of Delmarva’s economy is actual sales.

“The most important thing is consumer spending power,” said Dr. Diriker. “In the state of Maryland, sales tax revenues are dipping compared to the previous year of the same period.

“That’s a warning sign.”

Maryland sales tax revenues are down 17.5% compared to last year at this time.

Delaware does not have a sales tax, but a measure can be found in the gross receipts tax.

The tax is levied on the seller, rather than the consumer.

Delaware gross receipts tax revenue was projected to be down 3.2% for May 2020, compared to last May. It was down 9.4%.

“But what you’re seeing in Maryland, you’re going to see in Delaware, by and large,” he said. “When you see the number of tourists coming declining, that’s another sign.”

The website tracktherecovery.org shows the trends in consumer spending, and you certainly can see the tourism drop off in Sussex County.

Looking at June 24 data, for example, spending in Sussex is down 20% from January numbers.

Affinity Solutions provides the data, based on consumer credit and debit card use.

Delaware hit its worst period in late March, with spending down 39% from January, Affinity’s data shows.

At that time, it was down 38% in Kent County and 45% in Sussex.

Through April and May, spending has improved in fits and starts. You can see upticks when people started getting government stimulus checks and when restrictions were loosened.

Looking at Maryland sales, Dr. Diriker noticed a similar trend.

“Interestingly, as some of the restrictions were lifted, some people started coming back out and buying at higher levels than they used to before,” he said. “And we think that’s a function of being pent-up.”

Kent County’s best day on the chart was June 19, when spending showed it was down just 1.6% compared to January. But, indicative of the tourism economy, Sussex was down 19.6% that same day.

Since June 15, Delaware has been in Phase 2 of its economic recovery plan.

Locations that had been operating at 30% of fire occupancy requirements were able to move to 60%. Many personal care services, such as salons, however, remain at 30% occupancy.

A looming question

On a national level, U.S. consumers increased spending by a record 8.2% in May.

That was on the heels of the 6.6% drop in March and 12.6% drop in April, when unemployment skyrocketed.

At that time, the federal government added $600 a week in unemployment benefits, pumping more money into the economy.

Dr. Diriker said the federal government’s stimuli, to date, may not go far enough.

He said our Western allies are spending a greater percentage in a different direction.

“Look at Germany, for example,” he said. “Germany’s spending a lot more than we are as a percentage of GDP (gross domestic product), and they are absolutely determined to keep the consumer alive, so that consumer goes out and spends,” he said.

Just like the Paycheck Protection Program, that’s another debate brewing in the nation’s capital.

Another reason to worry, Dr. Diriker said, is the upcoming presidential election.

Funland, a longtime family attraction on the Rehoboth Beach boardwalk, is one of the beach-area businesses that recently reopened for the summer vacation season. Special to the Delaware State News/Chuck Snyder

“It is very clear to me that, as somebody who has been watching the economy now for 30-plus years, is that the two parties in the United States are looking at the pandemic and economic aftermath very differently,” he said.

As for the possible second surge, he added, “We’re not in a good place.”

The Senate, House and White House will need to be in agreement, he said.

“The worst time to have a pandemic is when you have a pandemic,” Dr. Diriker said. “But to have a pandemic in an election year is insult to injury.”

Paycheck Protection

As of June 27, the Small Business Administration reported that 12,288 Paycheck Protection loans were awarded in Delaware. The total value: $1.48 billion.

The payroll loans, which began in early April, allowed many businesses to remain open and keep people employed with benefits intact. If certain conditions are met, the loans are forgiven.

“The demand, certainly initially, was absolutely through the roof,” said SBA Mid-Atlantic acting administrator Steve Bulger. “After about two weeks, $350 billion was out the door.”

Congress made a second round of $310 billion. Of that, about $130 billion remained.

Loan applications ended June 30, but Congress has sent a bill to extend it to Aug. 8 to President Donald Trump. It awaits his signature.

“After seven or eight days into Round 2, we started noticing a fall-off in the number of applications,” said Mr. Bulger. “What we’re hearing is that the overwhelming number of companies that wanted a PPP loan got it.”

Mr. Bulger said federal rules on PPP, tweaked for greater business flexibility since the initial outline, mean that companies have 24 weeks to properly spend the money. At least 60% has to be used toward payroll and benefits.

Mr. Bulger said many more shore businesses applied for Paycheck Protection loans in the second wave of funding.

“We definitely saw an uptick from the hospitality industry — restaurants, small hotels, tourism-related businesses,” he said. “A lot of restaurants that held off because they didn’t know if they could spend it all in eight weeks. But now that they have 24 weeks, they’re hopeful summer season will allow them to be at least partially open.”

Congress also made some adjustment to soften requirements if businesses were forced to adjust their models because of the pandemic.

“My own personal feeling is that once the data starts coming out and we see the impact that it’s had,” said Mr. Bulger of the paycheck program, “it’s going to go down as one of the greatest public-private partnerships in American history — to get that much money out the door, working with our lenders, to so many small businesses to get them through the roughest stretch of this shutdown.”

In Washington, D.C., lawmakers and the administration have been debating another version of the paycheck program that could help these businesses a second time.

“A lot of businesses went through that money in April and May — and even (June),” he said. “And it’s really helped. Now, the money’s gone and some of these companies are still struggling and the revenue is still off.”

Pivot

Locally, we have seen what restrictions have done to small businesses and restaurants.

Ordering ahead, curbside service and e-commerce are necessary.

For Gary Knox, owner of Forney’s Too in downtown Dover, that has been the case.

“We missed Easter, which is kind of a big deal, but really, the big hit was Mother’s Day and graduation,” said Mr. Knox. “We’ll never get that back.

“Having said that, once we went to curbside, it was good, appointments got even better, and then once we opened up fully about a month ago, we had some very good days, even higher than normal.

“I cannot afford to miss the fourth quarter,” said Mr. Knox. “Most of my sales are in December, obviously, being a gift shop, so I’m hoping we get a handle on this thing and tamp it down, so we can be open during the fall. That’s a must.”

The pandemic, said Dr. Diriker, especially brought into focus and expedited what we all have seen coming.

The fact is that Americans are moving away from shopping malls — unless they see additional experiential value, such as socialization or learning.

“We’ve seen this in the smaller mom-and-pop businesses, and we’ve seen this in the large businesses that were already having their way of life being challenged — malls for example,” Dr. Diriker said.

The way we shop has changed. With a few clicks and a credit card, you can regularly see deliveries at your door. And, not only that, companies have made it easy for us to set up regular orders, or subscriptions, to basic needs.

The convenience now, he said, belongs to the customer.

And, during the long shutdown, people started to learn they did not need to visit a store to get what they wanted.

Dr. Diriker mentioned “m-commerce,” a term you don’t often hear. It is the ability to break out the mobile phone and place a quick order.

“For many of us to survive three months of e-commerce and m-commerce, we’re saying, ‘Whoa, this works.’

“All this evolution in retail suddenly had to become that of revolution, because of COVID,” said Dr. Diriker. “You have to look at the silver lining and everything. They are now going to find that innovative way of defining themselves much faster, and that will make the recovery equally fast.”

Heat of summer

For Delmarva, another huge concern is the tourism economy.

“Seasonal businesses that rely on tourism are clearly at risk, and the jury’s out whether this season is going to be rescued or not, especially if the tail of the first surge comes back,” said Dr. Diriker. “I’m just saying that word carefully because this is not a second surge at all.”

He said our experience should tell us that the recent large flare-ups in the Sun Belt could occur here.

“In the United States, we travel a lot, we move around a lot, compared to other nations, so if there’s something happening in the Southwest,” he said, “sooner or later, it’s going to have its impact here, just the way it came down from New York. It could come from the south and come east from the west.”

Consider that agricultural production plants remain vulnerable.

“They have done marvelously in terms of fixing the workspace to make it a lot less dangerous,” Dr. Diriker said. “But the workers don’t spend 24 hours at the plant. Where they live and play is where they might get the disease and that means they cannot come to work for 15 days.”

He said the second surge that experts say will come in the fall, along with flu season, could lead to a powerful blow to the economy — consumer confidence.

“It will scare consumers, and 75% of our economy is consumers,” he said. “And when consumers get scared, they’re not going to go out to the businesses and do business in the old-fashioned way.

“So, businesses that cannot pivot to dealing with the customer in a contactless manner are going to be at risk.”

Dr. Diriker summed all of the questions up: “I can put it in a very technical and economic jargon way — we ain’t seen nothing yet.”


Helpful Coronavirus links

Delaware Division of Health Coronavirus Page
CDC: About the Coronavirus Disease 2019
CDC: What to do if You Are Sick
Johns Hopkins Coronavirus Resource Center
AP News Coronavirus Coverage
Reopening Delaware: Resources for Businesses
Delaware Phase 2 guidance

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