How Does Social Distancing Affect the Economy?

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Social distancing helps reduce the effects of a pandemic, but at a cost to the economy. How will it affect your financial position?

When the COVID-19 outbreak hit the world in early 2020, the specter of a global pandemic caused all sorts of organizations to rethink their strategies. Businesses and governments slowed things down, closed operations, and reprioritized to limit the spread and consequences of the virus.

In the United States, health authorities promoted a practice called social distancing. Rather than quarantine everyone in place—and lacking enough tests and diagnostic ability to identify everyone infected with the virus—people are expected to limit their exposure to others by:

  • Avoiding large crowds
  • Limiting work, travel, and public exposure outside of immediate living circumstances
  • Maintaining a safe distance of at least 2 - 3.5 meters (6 - 10 feet) from other people

While many people can work from home, many people can't. While essential businesses such as grocery stores and fuel stations are open, optional businesses such as jewelry stores, video game retailers, and boutique clothing shops may close, furloughing or laying off employees.

As you might expect, there are substantial financial implications for social distancing. What does this mean for your personal financial position?

You May Lose Your Job, Benefits, or Hours

Some people will lose their jobs. Some people have. If their local governments have set things up well, many will be able to take unemployment benefits. This will help, but it is still an uncertain and unfortunate situation.

Even if you keep your job, will you work fewer hours? Will you take a pay cut? Will you give up some benefits, like a paid gym membership or lunch reimbursement?

Hopefully these measures will be temporary, but it's unclear how long social distancing will be in effect for any emergency or pandemic. Could you go without a paycheck for two weeks? Six months? More?

People Will Defer or Delay Purchases

People who lose income will defer or delay purchases. They may cancel recurring subscriptions like cable television or music services. They may spend less going out. They may postpone large purchases such as appliances or vacations.

Think about anyone's expenses in three categories:

  • Essential expenses, such as food, medicine, toiletries, and housing
  • Deferrable expenses, such clothing, appliances, and home improvements
  • Non-essential expenses, such as international travel, fancy meals, and entertainment

Each category has different effects on the economy. Essential expenses need to be paid. Sure, you may skip the fancy cheese and wine, but you can't not eat. You can't skip out on prescription medicines. You might not get a massage or a pedicure.

This is easy to understand for individuals; save money you don't need to spend so you can afford to live your life. How does this affect the rest of the world?

How Deferred and Denied Purchases Affect the Economy

Grocery stores and large retailers such as Costco and Walmart will continue to do business. Even if they cut hours and run temporary shortages of mass goods such as toilet paper, they'll see their business continue. Any loss of revenue will be short-lived; people still need to eat.

Optional spending on small items such as personal entertainment will have to change or suffer worse losses. For example, live sports or concerts could shift to online-only models to reduce the risk of spreading a pandemic through crowds of 20,000 people. Movie theaters will suffer more, as people choose not to be cooped up with strangers in a confined space for hours at a time.

Big, optional purchases such as international travel, fancy hotels, and cruises will be hurt, as will suppliers (tourist destinations and amenities, labor and goods suppliers, airlines, booking agencies). Even if a nice spring break trip to the Riviera sounds like just what you need to beat the stress of a global pandemic, do you want to risk your health just to get away? (Some people will. Many won't.)

That leaves deferrable purchases. Maybe that new couch can wait a couple of months. You're still going to get it, but it can wait until the summer. Your car still has a couple of thousand miles before it really needs its transmission flushed. You've been thinking about growing your hair out.

In short, any business which relies on getting a large number of people through its doors but doesn't provide an essential service is going to suffer.

Any business which provides things people need right now and continue to need may still suffer (people will spend less and will buy fewer optional non-necessities), but it'll continue to do business.

Any business which provides things people need but can wait on will suffer, but if it can hold on until the world returns to a state of normalcy, it will see that pent-up demand satisfied. (You'll eventually need to replace your dishwasher, and don't you deserve a new pair of shoes?)

That covers the demand side of the economy; for more details on the supply side, see What Does COVID-19 Mean for Stocks?

What Will Social Distancing Do To the Market?

No one knows how long the pandemic will last, how bad it will be, how long any preventative or containment measures will last, or if we'll have to go through the same thing again. Predictions can't be specific, but they can highlight a few things.

The Economy Will Suffer in the Short Term

Business outlook for Q1 2020 isn't as rosy as it was a few months ago. The outlook for Q2 is even worse. Who knows what Q3 will bring?

It's obvious some industries will suffer. Some have already suffered; you can see how Boeing's stock price dropped precipitously in the wake of the 737 scandal and travel slowdowns. You can also see hotel and casino and cruise stocks lose a lot of value; those companies won't earn as much money this year.

Unemployment Will Go Up. Maybe a Lot

With businesses closing—hopefully temporarily—their workers need to go on unemployment to get paid. These numbers won't be good; this could be millions of new unemployment claims in March 2020 alone. That's scary, and that jobs report could prompt another wave of selloffs in the market.

State and Local Governments Will Suffer

Because state and local governments, at least in the United States, can't issue their own currency and may have constitutional requirements to run balanced budgets, they'll have to cut spending at a time when they should spend more. Teachers may go on furlough if they haven't already. Emergency services will need more workers, but where will that money come from? Hospitals may run over capacity.

As these organizations cut back on hours and spending, you'll see the effect ripple through the economy. The teacher in your neighborhood who's no longer working feels the economic crunch and will spend less money. That means fewer dollars circulating and fewer hours for people stocking shelves, cutting hair, making sandwiches, visiting escape rooms, and whatever else goes on in your local economy.

This also means less repair for things like bridges, roads, and water pipes. It may mean fewer inspections in restaurants. It could mean less oversight of senior housing facilities or one less ventilator in your local hospital.

It probably means a shorter school year for your kids next year.

The Federal Government will (Eventually) Act

While the US Congress debates any fiscal stimulus to US residents (such as helicopter money, tax deferrals, or industry-specific bailouts), don't count on them doing anything more than blunting some of the shock to the economy. Dollars in the hands of people who've lost wages will help, definitely, but shutting down all but the essential economy shuts down a huge amount of the economy. Nothing can change that.

Don't be surprised if there's another round of quantitative easing. Don't be surprised if the Federal Reserve acts even more aggressively to ensure that businesses can get cheap loans to cover operating expenses such as payroll.

Unfortunately, the Fed has only a few tools left; interest rates have dropped to near zero as they were for a long time, and that was in an economy without a crisis dragging down consumption.

Expect the unexpected; see how people react to the new unemployment numbers.

Things Will Get Worse Before They Get Better

If the world is fortunate and COVID-19 (the coronavirus) passes without doing much more damage—if more and more countries can avoid overloading their healthcare systems and containing infection by the time we get a working vaccine—the economy will come back.

Essential purchases will continue. Delayed purchases will continue. You'll eventually get your trip to Nice. It might take a while.

There will be damage. Hopefully the world will avoid repeating the mistakes of the 2007 financial crisis; hopefully world leaders will be able to avoid costly mortgage collapses and bankruptcies.

Revenues will come back. Profits will come back. Good businesses will continue to be good businesses.

No one knows when the bottom of the bear market will hit, nor when the bulls return—but values will continue to exist in the market, if you're patient and cautious.

The world will continue to change, and as of this writing in late March 2020, it will be a bumpy ride for a while. Take care of yourself and look for bargains and this will someday be a memory.

What Does COVID-19 Mean for Stocks? | The Buy and Hold Philosophy