Dr. Angelos Angelou (AngelouEconomics) joined Russ Norwood of Venturi Private Wealth and discussed the post-COVOD19 economy. This blog is a modified transcription of the virtual event that was hosted on June 12, 2020 and the opinions stated in the blog are those of Dr. Angelos Angelou.
How do you see COVID-19 playing out in Texas and Oklahoma?
When we look at Austin, Texas, and Oklahoma we’ve looked at several scenarios and we’ve only looked at the leisure and hospitality and retail sectors in Austin. At 40% unemployment layoffs in these sectors, we basically have close to $3 billion in wages taken out of the Austin economy. At 60% unemployment it was close to $4.5B, and at 80% unemployment it was roughly at $6 billion. I based our forecast on the 40% scenario, because I felt the other two were extremely high. Although initially people thought that it was going to be at least 12 months or more until the PPP was announced, some brief hirings have occurred. And now with the opening of the economy, I believe it’s what we expect to happen. So it’s not going to be a big recovery. Last year, the average number of jobs in these sectors was roughly about 245,000. The low point was reached in March at 147,000 (leisure hospitality, and retail sectors).
But it’s not to say that the job losses have been limited to those two sectors; there’ve been job losses everywhere in the economy. But this gives you a pretty good picture because three quarters of our economy is consumer based, so consumer spending. We’re expecting recovery at a 5% average rate per month. So maybe by the end of the year, we’ll have about 190,000 jobs as opposed to 245,000 we had before COVID. We’re still going to be short and again, it all depends on the confidence that consumers have and whether or not they are going out and spending money. Most of them prefer to stay home and save money because of the uncertainty of the times we live in.
The unemployment insurance claims in Austin average about 150,000 people so far (initial claims is a two week lag). Some of these folks have been re-hired. So I think that we’re going to recover a lot of these jobs during the third and fourth quarters of 2020.
It’s not the most accurate number because any unemployment that is under two federal supported programs are not counted in this initial unemployment. So you may add at least another 3-4 million people in unemployment nationally. That’s why people say, when you count initial unemployment filings at 39 million, some people say the actual number is around 45 million. The worst thing that’s going to happen is that those who receive state and federal unemployment become spoiled and they don’t want to go back to work.
For Austin, I’m forecasting 45,000 people to lose jobs in 2020. So altogether, along with the other 40,000, which is kind of a normal rate of unemployment for Austin, we’re going to be close to 10% unemployment. When we look at Texas with a 40% unemployment in those 3 sectors, we lost close to $30 billion in personal spending and wages. And none of this is having a huge impact. Texas and Oklahoma have been double hit because of the lower oil prices, and from some accounts, the Houston area is going to lose close to 200,000 jobs lost just in the oil and gas sector. Much of fracking requires a $40 or more average price and a lot of those businesses are going out of business; 50% less companies exist in that sector now.
Prices should recover somewhat, but it doesn’t mean that there’s going to be a significant increase in activity there, and throughout last year, pre-pandemic, we had 2.7 million jobs in that sector. We expect to recover at the end of the year to about 2.1 million. So it’s still quite a few jobs to make up in 2021, as well as 2022. Leisure and hospitality in Texas is about 21% of employment and about 10% of wages. But again, more than two thirds of the US economy is dependent on spending on retail and hospitality and food.
One area that has been very hard hit is the health care sector. People thought because of COVID-19 this area would be booming. We’re going to see that sector being impacted the most seriously because a lot of doctors and nurses and technicians are being laid off. For instance, in the Austin area, we had over 2,000 hospital beds and only 160 were occupied. I’ve heard this from friends in the medical field that have run very successful medical practices, who basically could not go into the hospitals, particularly inside South Texas, where they had a very, very light infection rate.
If you would consider a positive thing out of this, it is that the behavior of businesses is going to change forever. A lot more business is going to be conducted online… a lot more digital meetings. The travel industry is also going to be in some trouble because I don’t think corporations are going to go back to normal travel for their employees anytime soon. Everything that they’ve done before can be accomplished through digital meetings.
I was with some guys who are local business leaders and they were talking about the positive impact of shutdown on their company’s bottom line that they didn’t anticipate. And one of them was the cost savings of travel and how that flows through. They talked about the positive surprise that working remotely wasn’t nearly as bad as they thought, and they were able to cut some costs that needed to be cut anyway. So a lot of people say don’t ever pass up a good crisis, right? So they took action and cut costs. But then in addition to that, they had the added savings of reduced variable expense for travel for the company.
So when you look at it from a business perspective, in another couple of months, businesses are going to have to align their revenue with costs. On the cost side, limited travel, room and board, less real estate, less office utilities and supplies, etc. So the cost is automatically being cut off significantly. And they’re going to get greater productivity, in my opinion. The good news is productivity in the US has not done much in the last five years. It’s going to skyrocket in the future as soon as we see a little bit of stabilization. Now, what concerns me a little bit is the demand side. What is the revenue going to be like for our companies? And that is really consumer behavior. Consumers need a little more assurance that this thing is stabilizing. So the cost side is under control and it will remain low for some time.
When we look at Texas, initial claims were 2.5 million so far, with substantial numbers in May. The bright spot is venture capital. Austin gets 65% of all the venture capital in Texas, and Dallas and Houston get the rest of it. We forecast that in Texas, we’re going to see a job loss of 1.2 million. Not all of this is related to COVID, a lot of it is related to the oil and gas industry, which I would say is almost 35% of the job loss.
The Texas population has been growing by 450,000, and I think it’s going to slow down a little bit, but then again, it’s going to grow substantially because Texas will be probably the best place to find a job once people are able to move out of where they are now and look for jobs. Unemployment insurance benefits initial claims in Oklahoma is about 570,000. And they’ve increased in May. If you look at Austin and Texas and the US, the numbers are declining. In Oklahoma, they’ve gone up in May. So I suspect this is mostly due to the oil and gas sector.
When we look at leisure and hospitality, as well as the oil and gas extraction industry, we have 23% of the jobs and roughly about 18% of the wages. So higher wages, obviously being the oil and gas sector, given 6% of the total wages, as opposed to the 3% employment that sector has in Oklahoma. But nevertheless, the impact is pretty substantial. We probably have 197,000 marginal wells. Marginal wells is less than a hundred barrels per day. Texas is roughly close to 615,000, with the overall US at about 2.4 million. So we (Texas) account for more than nearly one third of all the oil wells in the United States. Anecdotal information is that at least 50% of these businesses have been shut down already during the negative oil prices that we’ve had about a month or two ago. Now prices have stabilized, but I don’t think it’s going to do anything to bring back those businesses, nor are banks going to finance new fracking companies. So it’s a sore spot in the US economy. And particularly the not performing loans, this sector is going to be a problem that is going to have to be dealt with. And hopefully the stimulus money will go here as well.
There’s a normal supply of gas and oil in the world. The electric car industry is taking off; the shutdown also reduced demand significantly. So it’s not about production, it’s also demand and long-term oil and gas is going to be in a depressed state, particularly because there’s so much associated gas in the US but it doesn’t cost anything. We just burned most of it right now. We’ve allowed licenses to export to overseas LNG gas, and we’ve got some pretty good work there in Western Europe in certain countries and Greece actually is importing US LNG. But the competition with Russia and Qatar is pretty heavy. Still LNG costs of transporting it into Europe is higher than what people can buy gas from Russia. LNG is strictly pipe gas. It’s more of a geopolitical thing than an economic issue and the question is how much cut in production we’re going to have by Russia, by OPEC and eventually also the United States. The demand for oil and gas is going to be significantly reduced in the future.