The virus is only hurting the economy a little, fear is the real problem. Two weeks ago we published a post outlining different scenarios we expect for the economy in coming months. In that, we noted highlighted that consumer decision making will be driven in large part by fear, rather than official pronouncements. As we said then:

Sure, everyone will be excited to go see a movie or dine out, but there is enough fear (and common sense) out there that they are unlikely to make a habit of this until we have a much higher degree of confidence in our ability to deal with the virus.

We now have an academic paper to back that up. Professors Austan Goolsbee and Chad Syverson of the University of Chicago examined three months of cell phone data to measure economic activity. In particular, they looked at consumer foot traffic to 2.5 million businesses across the US. They found that while economic activity fell 60%, only 7% of that fall can be attributed to legal restrictions. The rest of the fall-off is consumers making their own choices to avoid places.

Driving the validity of the paper is their ability to compare consumer traffic across geographies, to the county level. So they could measure places with different degrees of lockdown. They found that consumers were less affected by government restrictions than they were by the proximity of virus outbreaks. For instance, in March, only a few regions were entering some form of lockdowns, but foot traffic was falling already in far more areas.

We are clearly entering Scenario #3 we outlined in our previous post. While we believe the US will be able to once again flatten the curve and reduce cases, the recovery is going to take much longer. Consumers are going to make their own choices, and official encouragement of activity are already highly discounted. With the resurgence of the virus in recent weeks, consumers are going to be several times more cautious in returning to previous activities.

Now some might argue that US consumers have demonstrated their willingness to return to normal, which is why we are back at record high daily cases. That being said, absent a very dramatic, rapid reduction in cases (which is unlikely) we think the ultimate return to consumer activity is not going to happen this year. No one wants another round of lockdown, but that is almost certainly what we are going to get.

In our last piece we pointed out that a good indicator will be to ask parents of young children how they feel about sending their children to school in the Fall. Anecdotally, we see many signs that two weeks ago many people would have said yes, but now many will say no, or be highly cautious in doing so.

In a similar vein, we have noticed signs of a broader slowdown. Consumers are saving more money. Many managers and recruiters we have spoken to have indicated that the appetite for new projects and new hires has gone to zero. We think this will rebound as soon as the virus curve peaks, but there is clearly a growing wariness among business leaders.

Policy leaders and officials at all levels of government will now have to work that much harder to climb out of their credibility deficits. Despite all the stories we see in the press about people agitating for their ‘freedoms’ to go about their daily lives as normal, the reality is that most people are not doing that, and that they are very worried about the virus and the economy.

For companies in the technology space, anticipate further pain ahead. Fundraising will be harder, new projects and ventures will take longer to get customer buy-in. Consumers are spending less, expect this to ripple throughout the economy.

Also, wear a mask.