Newsom reopens California business a crack. Digging out of a deep recession will take much more
Gov. Gavin Newsom has inched California toward reopening its economy by allowing thousands of retail stores across California to open for curbside pickup starting Friday and loosening restrictions on some manufacturers.
But anyone expecting a revival of the world’s fifth-largest economy will have to wait.
His decision covers just a tiny corner in the public square of an economy that produces $3 trillion in goods and services annually. The governor so far isn’t letting shopping malls open. That would sideline one of the main engines of American retailing, although at least one Sacramento area mall, Arden Fair, said it could offer curbside service without violating the rules.
“It’s about the smallest step forward you can imagine,” Jeff Michael, an economist at the University of the Pacific, said about the opening of curbside services.
The partial reopening of the retail sector illustrates the daunting task Newsom faces in trying to dig out from under an economic avalanche that’s likely to be far worse than the last recession of a decade ago. Few sectors of the economy have escaped damage from COVID-19 and the stay-at-home order Newsom issued in mid-March.
The state’s tourism industry has been cut in half, representing a loss of $72 billion and tens of thousands of empty hotel rooms. The entertainment industry has almost completely shut down, from movie theaters to the state’s $8 billion-a-year Indian casinos.
The $50 billion-a-year farm economy hasn’t been immune, either; 57 percent of growers told a California Farm Bureau survey that they’ve lost business because of reduced restaurant demand, transportation bottlenecks and other problems.
Even if Newsom permitted every mall to reopen today, it’s doubtful hordes of shoppers would rush in. The pandemic has thrown millions out of work and left many nervous about going out to the store. In one of the most visible signs of the long-lasting damage being done to the economy, the owner of Arden Fair said Thursday that the Nordstrom department store is permanently closing.
“Opening up the economy is going to be a process, not an event,” said Sung Won Sohn, a business economist at Loyola Marymount University. “People are going to be cautious, nervous about the possibility of another wave of coronavirus.
“Demand won’t be there,” Sohn said. “Restaurants, you’re not going to need as many employees. Airlines and airports, you don’t need as many employees.”
Still, he said it’s important to get retailing going again, even a little. Consumer spending typically accounts for about two-thirds of all economic output.
“What the governor is doing is a step in the positive direction; we’ve got to start somewhere,” said Sohn, a former vice chairman of mall-based clothing chain Forever 21.
“But I wouldn’t expect much economic impact.”
Millions now jobless
Being a government town gives Sacramento a certain amount of stability during a downturn; the state largely avoided layoffs during the Great Recession despite budget deficits in the tens of billions of dollars. The state accounts for about 8 percent of the region’s workforce.
But the reliance on government jobs can also make it harder for the area economy to snap back quickly. The coronavirus pandemic will plunge the state deeply into the red for the next few years, and the Department of Finance is already advising state agencies to “use discretion when filling vacancies.”
On Thursday, Newsom’s staff released a memo predicting 18 percent unemployment statewide and a $53.4 billion budget deficit.
How long will the slowdown last? In the Great Recession, when California’s unemployment rate peaked at 12.3 percent, it took nearly seven years to recover the 1.3 million jobs that were lost.
This time, California starts in a much deeper hole: 4.1 million residents have filed for unemployment since mid-March, and millions more have filed around the country.
“This is Depression-era numbers in terms of unemployment,” Newsom said Wednesday, acknowledging that recovery won’t be swift: “The next few years, we’re going to have to work through these challenges.”
Congress has responded more forcefully to this downturn, with Congress appropriating $2.5 billion worth of relief - about three times as much as it doled out to fight the Great Recession.
But some experts say more help is needed. California businesses have obtained more than $66 billion in loans from the Small Business Administration’s new Paycheck Protection Program, but the popular program is being quickly depleted.
Bank of America, for example, said this week it had secured loans for 4,203 companies in greater Sacramento, totaling $378 million - but had 1,200 companies still waiting for assistance.
Dependence on online shopping
Retailers face another big problem as they try to recover: Amazon and other e-commerce merchants.
Online shopping already accounted for nearly 12 percent of all retail sales before the pandemic struck, matching the total for department stores, supercenters and warehouse clubs. With most brick-and-mortar stores closed since mid-March, e-commerce has made further inroads. Amazon’s sales grew 27 percent in the first three months of 2020, a figure that captured just the early weeks of the lockdown.
As their sales have plummeted, two major retailers have filed for Chapter 11 bankruptcy in the past four days: J. Crew, a mall-based clothing chain, and luxury department store Neiman Marcus. They won’t be the last.
“We’re going to see a significant increase in retail bankruptcies,” said Jared Ellias, a bankruptcy law specialist at UC Hastings College of Law in San Francisco. “This has been a long time coming .... The (retail) sector was deeply troubled before COVID-19, was struggling to adjust to Amazon and online shopping.”
Newsom’s cautious reopening of the retail sector creates other complications.
Consumers who order online are used to having it delivered. It will take time for them to grow accustomed to picking up their purchases at a retailer’s doorstep, and sales are likely to be slow at first.
Plenty of restaurants have struggled with the concept; one of Sacramento’s most famous restaurants, Biba, is closing for good because it couldn’t draw enough takeout business.
Karen Holmes, owner of Karen’s Bakery in Folsom, has witnessed the phenomenon first hand.
Customers are finally getting the hang of picking up food from her restaurant — the crowd was so thick last weekend, the lack of social distancing made her nervous. But it took weeks to reach that point, and Holmes, president of the Folsom Historic District business association, said shoppers probably won’t flock right away to the jewelry stores, gift shops and other merchants that form the heart of the old downtown.
“It’s a shopping experience they’ve never had before,” Holmes said. “I think it will be slow coming. I don’t think anything’s going to happen in droves overnight.”
Sacramento mall eyes reopening
Newsom and his Health and Human Services Agency secretary, Mark Ghaly, said the reopening of retail Friday wouldn’t include shopping malls.
But executives at Arden Fair told its tenants to prepare for a Friday opening, with goods delivered to customers in their cars.
Nathan Spradlin, the mall’s senior marketing manager, said Arden Fair based its decision on guidance it received from Sacramento County officials about Newsom’s order. “There is no difference between our retailers delivering a curbside purchase to a vehicle in a parking lot and a non-mall retailer conducting commerce in the same way,” Spradlin said.
There’s no denying the economic importance of shopping malls; Arden Fair in 2018 generated about $480 million in annual sales, according to an analysis of city sales tax data, although that figure included revenue from Nordstrom.
In any event, the governor is making no apologies for his go-slow approach.
He said California has to guard against a second wave of coronavirus infections that would force him to clamp down on businesses all over again. He scolded Yuba and Sutter counties for reopening many businesses, including hair salons, that he believes should stay closed for the time being.
On Tuesday, the governor made an appearance at Display California, a retailer in Sacramento’s Oak Park neighborhood that specializes in California-themed gifts. Accompanied by Mayor Darrell Steinberg, the governor expressed “deep admiration for these entrepreneurs who’ve put everything on the line.”
Display California has been selling merchandise online since the shutdown began in March but furloughed all nine of its employees.
“With the store being able to open, we’re able to bring some of them back, and that’s exciting,” said Roshaun Davis, who owns Display California with his wife Maritza.
Yet Davis had realistic expectations about his reopening.
“I don’t expect it to be … lines around the corner,” he said. “It’s a start.”
This story was originally published May 7, 2020 at 5:00 AM with the headline "Newsom reopens California business a crack. Digging out of a deep recession will take much more."