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Highlights from the Week of July 6, 2020

Mergers galore, Payment Protection Program misuse, TikTok's hot water and Wirecard's fraud. Plus, a look at small business recovery and Covid-19's latest impact.
Postmates
"Postmates Pan" (CC BY-NC 2.0) by Garen M.
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July 10, 2020 – Hope it was a great week Centizens! Here are some tidbits to chew over the weekend.

Highlights for the Week

If You Can’t Beat Them, Join Them: It was a big week for mergers. After whiffing on Grubhub, Uber announced it was buying Postmates for $2.6 billion, ushering in further consolidation in the food delivery space. Allstate dropped $4 billion on rival National General in a bid to up its market share. And Sunrun, the U.S.’s largest residential solar company, reached a $3.2 billion deal to join forces with Vivant Solar to form one of the world’s largest solar providers.

Actions Speak Louder Than Words: Contrary to its intended purpose of providing relief for small businesses, the Paycheck Protection Program has issued more than half-a-trillion dollars to “well-heeled and politically connected firms across the economy.” Loans ranged as high as between $5 million and $10 million and would be paid back by taxpayers if the companies met specific criteria. Some of the notable companies to appear on the list included Kanye West’s Yeezy LLC, P.F. Chang’s, Five Guys Enterprise LLC hamburgers, Shake Shack Inc., Ruth’s Chris Steak House and more.

“This was supposed to be a small-business program. They should have never made loans of that size.”

Rebel Cole, a finance professor at Florida Atlantic University, told The Wall Street Journal.

The Party Might Stop: TikTok found itself in all kinds of hot water this week. India banned the app in response to a border skirmish with China. After the Chinese government passed a new “draconian” national security law for Hong Kong, the app pulled out of the territory. As the Trump Administration threatens to ban the app in the U.S. due to national security concerns, Tik Tok is doubling, or even tripling down on its efforts to distance itself from its Chinese roots. Though the efforts still may not be enough to ease concerns from the Trump Administration. State and Justice Department employees are not allowed to download TikTok on government-issued devices. The Wall Street Journal reported Friday that Amazon required employees to delete the app from devices.

Fear of Missing Out: It’s hard to say how deep Wirecard AG’s fraud extends. But after The Wall Street Journal reported the firm’s link to another scandal — a “$100 million bank-fraud conspiracy connected to an online marijuana marketplace” – it’s scary to consider how many skeletons the digital payment firm might have in its closet. This all, of course, comes after Wirecard admitted a missing $2 billion on its balance sheet “likely didn’t exist,” and the firm allegedly conspired to inflate revenues and mislead auditors. What a time for this to come out, too, as payment processing has experienced a boom during the pandemic.

Institutional Research Roundup

Thanks to massive fiscal support, consumer spending through May has modestly outperformed expectations. This does present some upside risk to Q2 and second half forecasts.

  • Concerning virus growth rates in about three-quarters of U.S. states and reopening rollbacks cast uncertainty on the outlook for H2.

A key thing to watch is how Congress revises the expiring pandemic unemployment benefits. The $600-a-week is set to expire at the end of July, and while further stimulus is expected, it’s hard to say what exactly it will look like as the parties remain far apart.

Expectations are still that real PCE will contract 9.4 percent in 2020, followed by a 4.2 percent rebound in 2021. The virus will likely trigger rolling disruption in the coming quarters.

Covid-19 Impact Tracker

Over the last few months, studies have shed more light on how to suppress virus growth. But it’s likely too advanced in the U.S. to build out an effective contact tracing system. Getting the first wave under control and protecting against a second one now depends on how likely the public is to adhere to social distancing guidelines and other mitigation strategies. It’s unclear whether that will come from government mandates or consumer behavior shifts, but recovery will likely have to be curtailed to make a dent against the virus.

There’s cautious optimism on the timeline for a Covid-19 vaccine. Scientific evidence has pointed to a likelihood that an effective vaccine is possible. The concurrent development of so many candidates and government backing are both contributing to a favorable situation. But there are still plenty of hurdles to cross. It’s unclear whether Phase 3 trials will be successful and whether enough subjects will be available to determine efficacy accurately. The vaccine could also dance the line between approved and “authorized,” the latter being a tradeoff between benefits and risks. There’s also the question of whether the public will be receptive to a vaccine, as well as if distribution efforts can meet demand.

Around 20 percent of small businesses have been lost in the pandemic, but it may have expedited the inevitable outcomes for a contingent of shrinking operations. For the businesses remaining, this is an opportunity to double down on keeping them viable and incentivizing new business creation. Policy goals could reflect that.

How Covid is impacting surviving businesses across different sectors is a different story. Retail businesses are adapting relatively well, operating at or above pre-pandemic levels. On the other hand, restaurants and bars are challenged to survive in an environment with more persistent social distancing. Food and drink hours worked are almost one-third below pre-virus levels.

Any return to normalcy hinges on developing a confident approach to containing the virus’ spread. Data showed that consumer and small business decisions were vital drivers of the collapse in small business activity than government regulations. Until the virus is firmly under control or there’s a widespread vaccine, U.S. economic recovery is likely to remain very uneven.

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Thanks for reading!

— Justin Birnbaum

Image:Postmates Pan” (CC BY-NC 2.0) by Garen M.

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