As more states call for a complete cessation of non-essential activities, the Bureau of Labor Statistics (BLS) Leisure and Hospitality (LH) sector has essentially shut down.  This category includes all arts, entertainment and recreation as well as accommodation and food service businesses. Spectator sports, museums, gambling, amusement parks are included as are hotels, casinos and all forms of restaurants and bars.  We expect municipal bonds that were issued to support these facilities will be on the front line of liquidity stress and worst case, bankruptcy.  Not far behind are massive amounts of unemployment insurance claims that are a fiscal stressor for states as well as the U.S. Treasury.

Demand for LH services has a barbell demographic in our view.  For those in high-paying professions with extra spending money gained from a booming stock market, eating out, attending live sporting events and engaging in frequent travel experiences propel demand.  At another end of the income scale, young workers with some extra cash in their pockets, but too much student debt to be able to save for a house or condo, have also been enjoying experience spending in restaurants, bars and travel destinations.

In the years after the recession, “food services and drinking establishments” was one of the fastest growing job categories.  Cities with active restaurant, sport, music and bar scenes coupled with lower-cost housing became magnets for young workers.  Think Austin, Kansas City, Pittsburgh to name a wee few.

In contrast, a post-recession acceleration of the trend away from U.S. domestic manufacturing, or “goods producing” labor and into providing services has shifted the composition of the U.S. labor market.  Goods production encompasses natural resources and mining as well as construction and manufacturing.

Many of those who staffed LH receive lower wages, perform hourly work, and have fewer benefits than those in goods producing full-time jobs.

These assertions are not new to readers, the trends have been widely discussed.  But fast forward to the effects of the coronavirus pandemic and these activities have come to a dead stop.  Unemployment claims are likely to spike dramatically this week and continue growing for some time.   Morgan Stanley economist Ellen Zentner suggested that unemployment could reach as high as 12.8% in Q2 while Federal Reserve Bank of St. Louis President James Bullard “predicted the unemployment rate may hit 30% in the second quarter because of shutdowns..” according to Bloomerg.

Thinking ahead, as we come out of this period, we expect spending on social food and travel to be limited for some time – partly as high earners may have lost much of their excess spending capacity and will likely reduce discretionary activities.  Young workers too, will have to re-allocate their dwindling discretionary pay for rent, utilities and basic necessities (not to mention student loan payments) until jobs growth returns.

To highlight concentrations of LH employment, we looked at the BLS establishment data by state and the percent of the state non-farm employment in “Leisure and Hospitality” and “Goods Producing”.  This might offer some insight into the pain points by state for unemployment.

(A word about the data.  These are from the BLS State and Area Employment, SAE, series, non-seasonally adjusted, from January 2007 to January 2020.  We prefer to use non-adjusted figures since “seasonally adjusted” people don’t file unemployment claims or shop for groceries which may give a closer view of the real economy.)

The Leisure and Hospitality category showed 15.8 million employees across the U.S in the preliminary January employment data in the SAE.  (The aggregate national data, from Current Employment Statistics, or CES shows a slightly higher 16 million people in this category.)  This is roughly 11% of total non-farm employment.  Looking back, in January 2007, peak pre-recession, roughly 9% of employees were in LH sectors.

In contrast, the goods producing sector represented about 16% of total non-farm in January 2007 stabilizing at about 14% today.  The downward turning point nationally and for most states was in the August/September of 2008 time frame when the financial crisis was at its most intense.  Goods production employment fell to about 13% in the fall of 2008, but has returned to a steady 14% of non-farm (pre-coronavirus).

States with more than 1 million employees in the leisure and hospitality industries in January were California (2 million), Florida (1.3 million) and Texas (1.4 million), followed by New York at 900,000.

In terms of the percentage of employees in LH establishments, no state showed less than 9% of its total non-farm employment in the LH category in January 2020.  Not surprisingly, Nevada has the highest proportion of its workers in the category, at 25% (or about 350,000) followed by Hawaii at 20% (about 128,000), Virgin Islands at 15% (5,700) and Florida at 14% (1.3 million as mentioned above).  Even in states where non-essential activities have not yet been formally curtailed or shut down, amusement parks, sports stadiums, gambling casinos and tourist attractions will likely reduce staff.

(As we were writing this, we saw that the Pew Trusts “Stateline” group published a study focusing on the economic impact of tourism on states.  You can find that study here.)