PHILADELPHIA – The head of the Federal Reserve Bank of Philadelphia told Delaware business leaders Tuesday morning that he expects the state’s banking and finance sectors to weather the coronavirus pandemic while manufacturing will “bounce back” as it subsides. But he also said traffic at the Port of Wilmington and the state’s tourism-dependent beaches may be in for a tough year.
Patrick T. Harker, president and CEO of the Federal Reserve Bank of Philadelphia and the former president of the University of Delaware, outlined an uneven economic recovery for the First State, where New Castle County will likely endure better than Kent and Sussex counties.
Delaware’s travel and hospitality sector – an area where the southern counties are particularly dependent — may face “a longer and more painful contraction,” Harker said in a conference call with the Delaware State Chamber of Commerce. That would be spurred by businesses reducing corporate travel amid the increasing use of teleconferencing software, like Zoom or Skype, and the hesitance of many families to visit crowded places such as Delaware’s public beaches.
“There will be demand. People will still, understandably, have cabin fever and they’ll want to get out on some sort of vacation, but they may take small steps before getting on an airplane or trying to go long distances,” he said.
One brighter note for the southern counties is that Harker expects manufacturing to “come back quickly.” He noted that regional manufacturers were not reporting a lack of orders, but only a delay in restarting operations.
New Castle County predictions
In New Castle County, and Wilmington in particular, Harker said that he expects banking and finance jobs to continue holding up well – a stark contrast to the last recession – although banks were at some risk. Heavily exposed to sectors like commercial real estate, Harker urged banks to “retain capital as we prepare to enter a tough period.”
“In my personal opinion, they probably shouldn’t be issuing large dividends at the moment,” he said.
While commercial real estate may be in for a rough year, as employers grow more comfortable with work-from-home scenarios, Harker said it is also possible to see growth in the industry as employers spread out their office footprints amid social distancing guidelines. If that happens, Wilmington may be well-positioned to capitalize.
“I think that those kinds of ‘second cities,’ like Wilmington, as opposed to that the large hub cities, could potentially benefit from this,” he said of more affordable smaller cities with amenities that could lure employers.
Perhaps the largest downside of New Castle County’s economic outlook is the impact of worldwide trade at the Port of Wilmington, Harker said. The port has been exposed to the impact of the pandemic worldwide, with the state’s total exports falling to $335.5 million in March from $711.8 million in March 2019.
“A pickup in export values is dependent on economies in Europe, Asia, and elsewhere once again showing growth. But that too depends on how those countries manage the coronavirus and its economic fallout,” he said.
Possible good news for higher education, hospitals
Harker also said the Federal Reserve is considering lending directly to colleges, universities, and nonprofit medical institutions to bolster them amid falling revenues. He noted that aiding those entities was even more important in Delaware, where education or health care account for 17.4% of the state’s workforce.
The University of Delaware, which Harker led from 2007 to 2015, has reported a deficit of $52 million for this fiscal year, and estimated an additional $40 million loss in revenue next fiscal year. The crisis comes at a time when universities are also facing demographic shifts of fewer college-age students and a decline in international students coming to America, Harker said.
“The challenge is going to be to help them get through this period, and then also deal with these longer-term demographic shifts,” he added.
Meanwhile hospitals are facing significant financial issues spurred by the state-mandated prohibition on elective, or non-urgent, procedures combined with the increasing cost of meeting the pandemic’s demands, Harker said. He said the Fed was keenly aware on the pressures on the health care system prior to the pandemic, especially in rural communities.
Future outlook
Several times in his call with the chamber, Harker stressed that the economic recession was not purely the result of government-mandated shutdowns. Data shows that consumers were curtailing their travel and spending before such actions were taken by states, he said.
“Consumers were voting with their feet — or at least with their wallets,” he said. “Until the virus itself is under control, even as more states gradually open up, we can expect the economy to underperform relative to where it was just a couple of months ago.”
Harker stressed the need for an “intelligent” reopening of the economy, and offered two possible outcomes for 2020, one more optimistic than the other.
If the economy largely opens in June, technology is in place to contain the virus’s spread, and there is no second wave in the fall, Harker said that he expects a significant economic rebound in the second half of 2020. That recovery would fall short of offsetting losses in the first half of 2020, but 2021 would show better growth, Harker opined.
In the less optimistic scenario, where the economy is opened too quickly and a significant second wave of the virus occurs, Harker projected a flat second half of 2020 and a “painful economic contraction of [gross domestic product] in 2021 as shutdowns are reintroduced.”
“Not only would this be a health catastrophe, but it would reverse the recovery as well,” he said.
By Jacob Owens
