October 19, 2020

COVID-19 and Your Finances

COVID-19 and Your Finances

“As Wayne Gretzky always said, ‘I don’t go to where the puck is, I go to where the puck is going to be.’ That’s what businesses need to think about. How is a business going to be different even when this is all over? How do I re-engineer my business to get to where I think the puck is going to be?

Steve Casper, PhD ’10, associate professor of finance 

Disrupted supply chains. Reduced consumer spending. Decreased salaries. Furloughs and layoffs. COVID-19 has shaken the world, from global institutions to individuals, forcing business executives and heads of households to make difficult discussions to protect their financial futures. 

While the future may be hard to predict, there are steps that both corporations and individuals can take to prepare for the long road to economic recovery. Steve Casper, PhD ’10 and associate professor of finance, and Dennis Martin, DBA ’18 and CFO of a division of the U.S. Department of Agriculture, shed light on all parts of the complicated financial situation. 

In this episode of Catalyst, the podcast from Temple University’s Fox School of Business, Casper and Martin use their experience in global corporate and personal finance to explain what the future might hold for our wallets. 

We start with a big picture of the global economy, from the federal government’s economic response and the stability of financial institutions. Then we bring the story closer to home to understand how business owners and the average consumer can protect themselves against financial uncertainty. 

Finally, the experts put on their prognosticator hats and share how they think the pandemic will affect the future of doing business. What lessons can we learn and what can we do to prepare for when the unpredictable happens again? 

Key links

Catalyst is a podcast from Temple University’s Fox School of Business about the pivotal moments that shape business and the global economy. We interview experts and dig deep into today’s most pressing issues. Season two will answer questions like: How will COVID-19 impact my financial future? Why hasn’t the #MeToo movement reached the professional sports industry? And what makes a leader credible? We explore these questions so you can spark change in your work. Episodes are timely, provocative and designed to help you solve today’s biggest challenges. Subscribe today.

Podcast Transcript 

Welcome to Catalyst, the podcast of Temple University’s Fox School of Business, I’m your host, Tiffany Sumner. This year, the COVID-19 pandemic has challenged everyone. We’ve all experienced changes in our lives from how we wash our hands to how we conduct business. Today we’ll dive into the pandemic’s financial impact on the global economy from big companies to individual households. 

I’m joined by Steve Casper, associate professor of finance, and Dennis Martin, a graduate of the Fox School’s Executive Doctorate in Business Administration program. Steve and Dennis [00:01:00] have years of experience in global corporate and personal finance. I spoke with Steve and Dennis about the current economic situation, what business executives can do to weather the storm and how individuals can make the best decisions for their households. In this episode, we discuss what COVID has already changed and asked the experts about what the future might hold for our wallets. Here’s what they had to say. 

Hi guys, how are you? How are you on this kind of cool Friday morning? 

Steve: Very well, Tiffany, thank you. 

Dennis: Good Morning, glad to be here. 

Host: Good. So Steve, let’s start by taking the 10,000-foot view. Today is September 18th, and the U.S. has been living in a COVID world for most of 2020. Can you describe the U.S.’s current financial state?

Steve: Well, challenging would probably be understated, Tiffany [00:02:00]. Given what’s happened to the economy due to COVID and the shutdown, the economy declined 5% in the first quarter of the year. Even though COVID-19 was with us a short time then yet, 5% is a pretty significant reduction in our GDP. However, in the second quarter ending June 30, the economy declined by 31.7%, a historic decline. As a result of that, we have the situation we’re in. Fortunately, the federal government has really come to our aid and helped mitigate the decline for a lot of people and a lot of businesses. They’ve actually held up reasonably well. And then if you look at some of our major financial institutions like JP Morgan, their earnings are down, maybe down 51%, but they’re still profitable. Bank of America’s earnings in the second quarter actually went up in 2020 vs. 2019, their stock certainly have taken a hit. [00:03:00] JP Morgan was down 45% at one point, now down 30%. Bank of America was down 50% and has rebounded now to be down 29%.  

And it takes a while for this to ripple through the economy before it will hit the financial institutions. For example, if you have landlords and they’re not receiving rent or not receiving as much rent, they can hold on for a little while they have some cash reserves, maybe they have some lines of credit they can tap into. So, we’re six months into this and maybe now we’re just going to start to see the time where the banks are going to get stressed because more of their customers are not necessarily able to repay them. 

But so far, it’s been somewhat mitigated which also helped that is the massive spending of the federal government right. Over 3 trillion dollars with things like, for example, the Paycheck Protection Program which was extremely beneficial to small business, basically gave small business two and a half times their average payroll and they’ve been able to use that money for a host of different things which has really helped him get through a lot of the shutdown. [00:04:00] They also have economic injury disaster loans which were helpful to any business that couldn’t get the PPP loan; the stimulus checks are going out to individuals which helped, which was in April. 

And in fact, if you look at the income consumers have received, that it’s actually been pretty flat, even though a lot of people have been laid off and that’s part of the stimulus checks, part due to the enhanced unemployment. So, the federal government really mitigated a lot of this; it really depends on how long this continues. We’ve ridden it out fairly well, but if it goes on much longer, I’m not sure we’ll be able to ride it out as well.

Host: How about large businesses? How have they been fairing?

Steve: It’s really almost like a tale of two cities. Some of them have done very well, right. If you look at the Walmarts, the Targets, the grocery stores,  [00:05:00] everyone online now buying from Amazon and other online retailers, they’ve done extremely well. Then you look at our big retailers where we’ve had a record number of bankruptcies: Neiman Marcus, JCPenney, Pier One, Brooks Brothers. So many of our big retailers are going bankrupt. 

Also, other areas of the economy have been devastated. Leisure and travel industries—if anyone wants to go into the hotel business, you’ll probably be able to get some great deals pretty soon on acquiring a hotel. Certainly, the airline industry—and it goes further than that. What about all the suppliers to the airline industry? Take a company like Boeing. Stock declined over 70% because of the country’s sole major airplane manufacturer. Second-quarter revenue is down 45%. They’re highly profitable, but they had a $2.4 billion loss in the second quarter and there’s probably more of that to come. Who’s buying airplanes right now? [00:06:00] So, how’s Boeing getting through this? They borrowed $42 billion in the second quarter, right, and they’ve got a good amount of cash, they have $32 billion in cash right now, but they’re really bleeding cash. How long is this going to go on?

Host: Wow, those numbers put things in context because who’s traveling right now? Not even just who’s buying planes, who’s flying? So how has the unemployment rate varied during the pandemic? 

Steve: But it had been really at a record low, at 3.5% the beginning of this year. We all thought we were flying high. And then immediately spiked up to almost 15% in April. Since that it’s come down, dropped steadily to where, in August, it’s down to 8.4%. And a lot of economists have been surprised it dropped that quickly. But once the economy started to open up, it’s amazing how the U.S. economy is resilient and can rebound. [00:07:00] 

One thing that probably helps keep the unemployment rate high for a while was the enhanced unemployment compensation that individuals receive. They received state compensation the federal government had with, I think one senator termed “unemployment on steroids,” which was an extra $600 a week of unemployment. Wonderful for individuals, difficult for businesses to get their employees to come back to work. And I’ll just give you one example. If someone earns $15 an hour normally, on unemployment they get about $9 or $10 an hour. Well, with the enhanced unemployment, they were making about $25 an hour. Hard to get people to come back to work for $15 an hour when not working they can make $25. 

Host: Wow, what are global companies’ biggest financial concerns right now?

Steve: I really think it’s, how long is this going to go on? Right? Where we’re seeing some shifts that are probably going to be permanent like moving away from a lot of the brick-and-mortar retail to online. People are finding out how easy it is to shop online, right; how quick it is to shop online. So, I think we’re going to see those kinds of shifts, and they’ll continue even after this is over but the biggest concern is when is this going to end? We can ride this out for a certain period of time, but the major companies only have so much cash. They can’t ride it out forever. 

Host: What can executives do to keep their organizations financially stable?

Steve: Well, you heard some organization’s CEO say now it’s just all about the cash and cash flow. [00:08:00]  They’re preserving cash via not initially investing in new projects, which certainly is bad for the economy long-term. Trying to be very careful about which employees they bring back even when this is over. I don’t think we’re going to see a 3.5% unemployment rate again. Companies are fighting. We can do things a little more efficiently. We don’t need to bring everybody back, right? And so their number one objective right now is to preserve their cash, so they can survive this for as long as possible. 

Host: What about the opposite? What companies have been able to find financial success despite the pandemic and what have they done well and how have they positioned themselves to stay afloat or even prosper?

Steve: Some companies have almost been lucky, I think, that they’re in the right spot at the right time. Who would dream that we give up dining in restaurants across the United States? [00:09:00] We still need the food and now we’re sourcing that through different vehicles. So, the grocery stores have done well. That’s why the Walmarts and Targets have done well, kind of being in the right place at the right time. 

Other companies are kind of reinventing themselves to see the new way. American Airlines is sanitizing the planes, that looks very impressive. Hopefully, that might help bring some air travel back, which certainly has been decimated. 

But there are a host of individual things that are taking place and we’re seeing the shift in business, and some things you wouldn’t even think about, some small businesses are doing well-moving things outside, others are not. For example, dry cleaners—we have dry cleaners everywhere in the United States. Who’s getting dressed up now to go out to work or for anything else and needs to go to the dry cleaner? They’re just struggling en mase and then laying off everybody around the country, and are they going to come back like they used to be? [00:10:00] It’s an open question but maybe not. 

Host: I’m totally still dry cleaning my clothes. But it’s fascinating and I will say that someone who’s never — I am someone who never really had groceries delivered before and now it’s weird buying groceries being delivered via Instacart or another service. 

So Dennis, what was the catalyst for your research? 

Dennis: For the catalyst for my research on financial decision-making, I focus on assisting underserved communities and the common person to improve their financial status through financial literacy. So, it’s all about educating and trying to improve not only underserved but just a common person through financial literacy. 

Host: You have experience from the point of view of the institution and the individual, in your role as CFO at the U.S. Department of Agriculture and the author of a book on financial decision-making for individuals. [00:11:00] How does a financial institution’s behavior or decisions affect the average person?

Dennis: I think the average person, when they look at financial institutions, they look at it as a vehicle to make sure they have funding that is safe and looking at loans. From the financial institution perspective, they’ll look at every product, whether it is a credit card or loan or a payday program, to assist members. 

So I think if you go to the average bank or credit union, they may have four different checking accounts, three different credit cards and three different saving accounts. They are focused on a particular market for each one of those products. So it’s a strategy that financial institutions use to say, well, “A person who may be just starting out and need this product. A person who has a little more income may need more products, to have more options.” [00:12:00] And I think sometimes, our regular day consumers and underserved communities don’t really understand all the options that they may have at financial institutions. It’s a strategy that they use to market all of those products when looking at improving their bottom line. 

Host: What would you say are some of the biggest challenges that the average person is facing during COVID?

Dennis: We hear a lot in the news about financial and health disparities, but I think, like Steve mentioned, it’s about prioritizing. Big companies are looking at reserving cash, and I think the biggest challenge is understanding that the federal government did have a lot of programs out there, understanding what is available. Even for students for student loan forbearance; with a housing market, housing market in forbearance. But it’s understanding that you still will have to pay the interest and in the long-term, it’s just a pause. [00:13:00] It’s not an actual relief, but it’s just a pause and understanding that you still would need all of your medical benefits, you need your food, your necessities. 

The biggest challenge is making sure they are having necessities, a reserve, making sure they have a budget, and making sure they save, too. Cash is king right now. Financial institutions, because of the Paycheck Protection Program and the CARES Act, they have a bundle of cash. A lot of people didn’t know what to do with some of the funding, or understand that what they did was or wasn’t working. So, I think the biggest challenge is understanding your options, prioritizing their spending and making sure that they are taking care of their necessities upfront.

Host: In the pandemic, so much is outside of our control. What steps can a person take to try and prevent their household from experiencing financial strain?

Dennis: When you’re looking at trying to prevent your household from the financial strain, [00:14:00] you’ve definitely got to start with some type of budgeting and saving mechanism. You got to look at what money you have coming in, the inflows, cash flows and what money is going out, outflows. And understanding when that funding is coming in and when those particular mandatory bills are due. Realize, just like in a regular business, there are some risks. Some things you may not be able to continue to do, understanding that you got to know how to contact your lenders and let them know your situation, so they can provide support for you. There’s a lot of programs out there, and I think in this pandemic, making sure we educate our communities more than ever about what options are available. Kind of like the subtitle of my book, “understanding my options” is so relevant for this time to understand what tools are available and so you can budget even in these terrible times. [00:15:00] 

Steve: And this is where the federal government has really been helpful with the stimulus checks to individuals, the enhanced unemployment and that’s why their personal income has been relatively flat over the six months. Versus, it would have been way down so that’s really helped individuals. 

Dennis: And I think the CARES Act was a big advocate for that, with student loans and mortgage and rental payment of protection. And also I have received a lot of questions about 401K, people wanted to move their 401K. The SEC got a hardship withdrawal. But understanding the options, understanding the risk when you do that or you do take funding out of one of your retirement funds, there is some risk that comes with that but they have made it a whole lot easier with a lot less paperwork. 

Host: If you were to give individuals advice, what advice would you like to give them?

Dennis: I think the first advice is, try to first establish a budget. It’s hard to save if you don’t have a budget, if you don’t know your priorities are, what you must have. [00:16:00] Once you have established that budget, include savings. You need to be able to save some cash. And the financial institutions, this may sound cliché, but they are there to support and try to help you. Understand the options of your credit union or your financial institution before you go to that payday loan lender or one of those check cashing places. So budgeting, savings and working with your financial institutions and lenders. 

Steve: And the answer is really very similar to the corporate side and the budget. You need to do a detailed financial plan and I would give executives a target. Assume this is going to continue for another nine months, to June 30th of next year. Hopefully we’ll have a vaccine in place by then, but we don’t know that. Budget your cash, check whether you can borrow more, whether you can reserve certain areas so that you can get to June 30th of next year, and then hopefully by then at the latest things will be much improved. [00:17:00]

Host: So, Steve, Dennis where do we go from here? How do you see financial institutions and individuals recovering?

Dennis: I think looking at recovery and some of the markets have already recovered when you look at the stock market, Steve mentioned Boeing, the federal government has reached their arms out and provided a lot of support and have done a pretty good job. But I think it really is eye-opening for the average consumer or corporate America to realize their customers’ needs and wants and necessities. I think it’s more focused on what you really must have to survive. And if you are looking at reducing entertainment expenses or even in corporate America, look at retaining property because people can work at home. I really focus on what is necessary. So, I think everyone is really looking at a new strategy of how you can survive in a COVID pandemic environment. [00:18:00]

Steve: Well said, Dennis. Executives need to rethink their business. And as Wayne Gretzky always said, “I don’t go to where the puck is, I go to where the puck is going to be.” Right? And that’s what businesses need to think about. How is a business going to be different even when this is all over? How do I re-engineer my business to get to where I think the puck is going to be?

Host: What about global companies? How are global companies positioned going forward or how should they position themselves going forward?

Dennis: In the federal government, we worked with a lot of overseas partners, when we’re marketing our farmers ranchers’ products overseas, looking at tariffs and taxes on our products. You really got to have great relationships and continue great relationships and look at the logistic systems and partnership. I mean, it’s got to be a partnership. Something that happened in Europe or China, it hurts the U.S. also. So I think it’s the partnerships, these strategies have got to be even closer and tighter as we look forward in this new environment. [00:19:00] 

Steve: And I would add in the global supply chains. Everybody’s been working towards a global supply chain, optimizing your business, going to low-cost countries—that becomes a real problem at a time like this. And I don’t think many of us realize that the majority, for example, of pharmaceuticals are manufactured overseas. That might be something we want a little closer to home, given the current situation. 

So, I think these companies are really looking at how they do business around the world, supply chains around the world and they’re rethinking those right now. It’s going to be interesting to see the innovations that come out because one thing about business, it’s incredibly innovative and they’ll find out new ways to do things.

Host: What can institutions do to help the American people recover?

Dennis: I think I’ve noticed a lot of financial institutions are really marketing lower-scale products [00:20:00] to the consumers and really trying to educate them more. Because no uneducated consumer really benefits the whole community. I think that outreach is relevant to this time and I think that’s one of the things I know that I must do is education, trying to inform as much as possible.

Steve: An additional thing financial institutions are doing, and this is really because of the interest rate set by the Federal Reserve, but if you have to borrow, it’s a great time to do this. Mortgage rates are historic lows right. Even if you had a house without a mortgage if you can get a 3% mortgage fixed for 30 years, maybe that’s a good source of funds to use for other things. So, they’re really being helpful I think as they can be to help finance individuals’ businesses, etc. A lot of that, of course, is because of where the Federal Reserve is set interest rates but it comes to our financial institutions.

Dennis: I’d just like to add that one thing. Financial institutions, and I’ve seen a lot of during this pandemic especially now, are really educating everyone on fraud. [00:21:00] There are a lot of fraud scams going on with COVID-19 and the CARES Act, people trying to pull their retirement funds out to invest in riskier products, so fraud is on an uptick and also, they can terrorize a business or individual.

Host: Wow, that’s terrifying and unfortunate. So if you can put your forecasting hats, what’s your outlook on the future of the global economy? How will it be the same or different? 

Steve: I think it’s going to be very different. I think it’s going to take a longer time to recover. You’ve heard V-shaped recovery, that means it goes down and comes right back up. The reason I think it’s going to take a little longer is, we’re burning through a lot of cash right now, and it has to come from somewhere. If the economies are not generating it and basically it’s coming from individuals’ cash reserves, business cash reserves and massive borrowing from the federal government. We’re over $25 trillion in debt right now. Right, that’s over $80,000 in debt for every person in the United States.  [00:22:00] 

Dennis: And something I would add is, you mentioned it earlier about innovation. Companies got to be more innovative, you can’t have all these global meetings and global conferences and global think tanks. Everything is going to have to be a lot more online, using the internet more. So innovation is going to be key to getting the economy back, getting people to spend more cash or even with a recruiting and hiring. So, I think that’s a key to the success for the future economy.

Host: So, in closing can you leave us with some silver lining as to what the future might hold?

Dennis: I think I’ll leave off and say the future will be promising. We will get through this. Just remember to try to budget and try to save and really manage your finances for times like this. [00:23:00] There will be another pandemic or another storm or something that will happen eventually, unfortunately. But we got a plan for it and just think of innovative ways to be as successful as possible.

Steve: And this is one of the ways that everybody gets more efficient—businesses, companies and individuals—with where you allocate your resources, right? That’s what happens in a recession. You have to scale back but when you add back, maybe you add the resources and investments to more effective places. 

And so, I think we’ll see that here while we’ve had significant challenges with this pandemic, to say the least, right, the government, the federal governments really helped us to get through this where we’re not too bad of shape right now. And if we can get some relief with vaccines in the first half of 2021, I think the future is very bright. It will take us a little while to recover but with the way we innovate, I think we’ll be stronger than ever in a few years. [00:24:00] 

Host: Thank you, Steve and Dennis. for joining me and sharing your expertise on the big and small financial implications of COVID-19. Business executives and individuals need to take the same approach when dealing with financial uncertainty: have a clear budget, allocate your resources wisely and try to save for the future. We don’t know when the pandemic will end but we should prepare for a future the best that we can. 

When the economy bounces back, businesses will likely invest more efficiently, rethink global supply chains, and adjust long-term strategies. And as individuals, we should try to prepare for the next storm by understanding where our money goes today. Hopefully, when this storm passes, we’ll all have a bright and more prepared future ahead. 

Catalyst is a podcast from Temple University’s Fox School of Business. Visit us on the web at fox.temple.edu/catalyst. We are produced by Milk Street Marketing, Megan Alt, Anna Batt, Stephen Orbanek and Karen Naylor. I hope you’ll join us next time. Until then, I’m Tiffany Sumner and this is Catalyst.