At the neat white clapboard restaurant two blocks from White Lake, business is down about 20 percent. If the situation doesn’t improve, Dillivan worries he may be forced to abandon year-round operations and put Pekadill’s into hibernation this winter.
Sales have fallen because the town’s biggest employer, Howmet Aerospace, recently laid off nearly one-quarter of its 2,800 employees. Howmet’s commercial aerospace business is a casualty of the coronavirus pandemic that has grounded thousands of airplanes and cast into doubt air carriers’ hopes of quickly resuming normal operations.
Even as the White House celebrates tentative signs of a labor market rebound, the ripples from Howmet’s decision show that the pandemic’s imprint upon the U.S. economy is hardening into a scar. What began in China five months ago as a distant threat to U.S. factories’ supply chains has evolved into a mammoth shortfall in consumer and business spending that could hobble the economy for years.
“We’re just down the street from two of the biggest plants. Their business has been what keeps this place going on a year-round basis,” Dillivan said. “We’ve already felt an impact. The days of bringing in lunch have really come to a stop. Corporate catering has all but dried up.”
The plight of this cozy sandwich shop suggests that the economy’s recovery from the fastest, deepest recession in U.S. history is likely to be a long, grinding affair.
Unemployment in Muskegon County is a staggering 29 percent — and the statewide figure for Michigan is only slightly better at a depression-caliber 22.7 percent. As states gradually reopen for business, many economists expect a swift but only partial healing that will leave millions of Americans jobless.
More than $6.5 trillion in household wealth vanished during the first three months of this year as the pandemic tightened its hold on the global economy, the Federal Reserve said this week. That’s roughly equivalent to the economies of the United Kingdom and France combined.
“This is the biggest economic shock in the U.S. and in the world, really, in living memory,” Fed Chair Jerome H. Powell said Wednesday. “We went from the lowest level of unemployment in 50 years to the highest level in close to 90 years, and we did it in two months.”
Almost 90 percent of the 20 million workers who lost their jobs in April said they had been laid off temporarily and expected to return to their jobs, a possible sign the economy might quickly return to normal.
When employers unexpectedly reported adding 2.5 million jobs in May, President Trump touted the labor market rebound as the start of a “rocket ship” recovery. In recent public appearances, the president has proclaimed a “transition to greatness” that will soon produce “spectacular” results.
Yet economists are far less sanguine. Roughly 9 million workers who believe they have been laid off temporarily will end up losing their jobs permanently, according to Oxford Economics.
After a quick initial bounce this year, the economy “will go largely sideways” until a coronavirus vaccine is developed, according to economist Mark Zandi of Moody’s Analytics. Without an additional $1 trillion in federal rescue efforts, the economy later this year will relapse into a double-dip recession, he added.
Some of the damage that the pandemic has done to the economy will be lasting as business bankruptcies rise and the economy’s long-run potential growth rate shrinks, according to Goldman Sachs.
“The bounceback isn’t as quick as the downdraft,” said Vincent Reinhart, chief economist at BNY Mellon.
The coronavirus recession has emerged as a distinctive blend of problems with both production and consumption. Initially, the outbreak of the disease in Wuhan, China, resulted in the closure of countless Chinese factories and interrupted international travel, threatening the ability of multinational companies to operate.
That break in the global economy’s ability to supply products soon evolved into an unprecedented fall in demand, as shutdowns spread to companies that had not been directly affected at first, depressing total output and employment, according to a new paper by economists at the University of Chicago, Northwestern University, the Massachusetts Institute of Technology and Harvard University.
“The pandemic shock is different from other shocks,” said Veronica Guerrieri, an economist at the University of Chicago Booth School of Business, and one of the authors.
The pandemic punched a hole in the U.S. economy that will measure nearly $800 billion in the second quarter alone, according to the Congressional Budget Office. The shortfall is reflected in tens of millions of newly unemployed workers cutting back on purchases while companies such as Howmet reduce spending on plants and equipment.
Howmet is a major engine of the local economy in Whitehall, supporting eateries like Pekadill’s, car dealers, hotels, and a number of tool and die shops.
Howmet employees are regular customers at Pekadill’s, sitting at the wooden booths inside the building that dates to 1873 or in the well-tended garden out back. The company also was a steady source of catering orders for sales meetings and special functions, which sometimes meant more than 1,000 lunch orders.
For Dillivan, the first domino tumbled at the end of January when United Airlines announced it was halting flights from the United States to China, after the coronavirus caused demand for tickets to evaporate.
The next domino fell within weeks, as United — its revenue cratering — deferred orders for dozens of new Boeing aircrafts and said it would be in no rush to buy the additional planes it once planned. Fewer new aircraft means fewer new jet engines, including those containing turbine frames and airfoils manufactured by Howmet.
That sent the final domino crashing into Whitehall — and Pekadill’s — when Howmet this month announced its layoffs.
In a June 1 letter to the city, Amy Heisser, Howmet’s human resources director, blamed “business circumstances the company could not reasonably foresee in the form of a sudden and recent reduction in customer orders related to the Covid-19 pandemic.”
Indeed, Howmet has experienced an abrupt reversal in fortune since late February when it told investors it would benefit from steady growth in air travel over the coming decade. Airlines would add 17,000 new jets, driving demand for the company’s engine parts and spares, company officials said in a February 25 briefing.
Instead, in a matter of weeks, air travel collapsed as the pandemic spread from China to Europe, the Middle East and finally the United States. Airlines canceled new aircraft orders in droves and parked in the desert thousands of planes they already owned.
Major carriers now expect to take delivery of fewer than 1,000 new planes this year, 40 percent fewer than planned, according to the International Air Transport Association, an industry group.
“We felt the impacts from certain customer shutdowns and suspensions and disruptions within certain shifts within our plants during the last three weeks of the quarter,” John Plant, Howmet’s co-chief executive, said on a May 5 earnings call.
That day, Howmet reported first-quarter earnings of $3.2 billion, down 9 percent from the same period one year earlier, blaming the pandemic and fallout from Boeing’s troubled 737 MAX program.
Howmet, headquartered in Pittsburgh, said it would temporarily stop paying dividends and cut annual overhead costs by $100 million. Executives are also trimming capital expenditures by an additional $100 million, which could hit planned projects in Whitehall.
Just last year the company spent $100 million on a new engine parts factory down the road from Pekadill’s, a move Plant called “a little bit unfortunate” in light of the shrinking market.
On April 3, Howmet began laying off 306 workers. An additional 319 union workers exercised their rights to temporarily accept a voluntary layoff, the company said in the June 1 letter, which was required under Michigan’s Worker Adjustment and Retraining Notification (WARN) Act. Those union workers may now become permanent layoffs as well, the company said.
The company’s shares are down more than 60 percent from the mid-February peak. Howmet declined an interview request.
In Whitehall, a city of about 2,800 residents, officials are bracing for aftershocks. The company is one of the largest local taxpayers, accounting for 15 percent of Whitehall’s revenue and 57 percent of water and sewer funds, according to Scott Huebler, the city manager.
“As far as taxes, that would be a huge hit,” he said. “They’re a huge presence physically and economically in the community.”
At Pekadill’s, meanwhile, Dillivan feels fortunate his takeout business allowed him to navigate the pandemic restrictions better than some other establishments. But he frets about the months ahead.
Boaters have been slow to return to the local marina, and an annual electric music festival held in nearby Rothbury was canceled because of lingering coronavirus concerns.
During the 2008 financial crisis, Dillivan began driving a local school bus to earn extra money and obtain health insurance. A dozen years later, there are no easy answers if times get worse.
“I think we need to prepare for the worst-case scenario and be ready,” he said. “This is definitely going to be the roughest patch.”