In WILTW October 10, 2019, we warned that the health of the U.S. consumer is far more precarious than most recognize. The situation was escalating even before the COVID-19 outbreak. In 4Q19, prime and subprime auto delinquencies that are 90 or more days past due surged by 15.5% to a record $66 billion. Meanwhile, the credit card delinquency rate at small banks — the roughly 4,500 banks that largely cater to lower-income households — hit 7.05%, the highest ever in data going back to 1980. As of the end of last year, total consumer debt had surpassed $14 trillion for the first time ever, according to the Federal Reserve Bank of New York.

Now, COVID-19 is set to expose America’s greatest economic vulnerability: inequality. From restaurant workers, caterers, and Uber drivers to office and hotel cleaning staff to event venue staff to people supplementing earnings with AirBnB revenue, income is cratering across the country for hourly and gig workers. And most have little to no financial cushion — the top 20% of households now account for nearly all savings in America:

In the decade since the Global Financial Crisis, the nature of work in America has transformed. Thirty-six percent of U.S. workers are now involved in the gig economy. Forty percent of U.S. workers generate 40% of their income with independent work. Forty-two percent of millennials freelance. Overall, freelancers contributed $1.28 trillion to the American economy in 2018.

From Microsoft and Disney to NBA player Kevin Love, companies and wealthy individuals have made headline-grabbing gestures of financial compassion for hourly and gig workers. It will prove far too little. Most gig and hourly workers are walking a financial tightrope. They will not be able to afford even a short-term hit to their earnings. It will mean a further spike in auto loan and credit-card delinquencies. It will mean a spike in healthcare-driven bankruptcies. It will mean unpaid rent. And it will mean consumer spending will plummet.

As economist Dave Rosenberg pointed out recently, roughly 40 million people in the U.S. — one-third of the private sector labor force — work in industries directly affected by coronavirus: retail, entertainment, events, sports, theme parks, conferences, travel, tourism, restaurants, and energy. Marriott recently announced furloughs that could affect tens of thousands of employees. The U.S. hotel industry is now losing $1.4 billion per week. A spike in layoffs is guaranteed.

However, it is the fortunes of the workers that may never show up in unemployment data that could prove most consequential. Gig-workforce unrest was already intensifying prior to COVID-19. Led by California, state governments are taking steps to crack down on corporate abuse of employment classification. A sudden shock to gig and hourly-worker earnings will have seismic implications for the economic and political future of the U.S.

Uber has acknowledged that rides in Seattle have declined by 40% to 50% since the area’s COVID-19 outbreak began. Declines of that magnitude or greater are likely happening in cities across the country now. Drivers have little financial wiggle room, as a 2018 survey of New York ridesharing drivers indicated. We quote Curbed: “An 85% majority struggle ‘to make their monthly payments like rent, utilities, car payments and other bills,’ and if unable to drive due to illness or car trouble, 70% would run out money within a month.”

Uber and Lyft have both said they will offer paid sick leave to all drivers that test positive for coronavirus. The offer’s inadequacy is a danger to everyone in America. Getting a test in the U.S. remains difficult. To ensure infected drivers stop picking up passengers, Uber and Lyft need to offer paid sick leave to all drivers that have symptoms or any reason to believe they’ve been exposed to COVID-19. There’s little chance Uber and Lyft will take that step. California’s gig economy law, A.B. 5, is an existential threat to their survival. Even in a time of crisis, taking employer-like responsibility for their workers will only strengthen California’s case that gig workers should be employees.

Yet, as bad as Uber and Lyft drivers are suffering, restaurant workers are likely suffering more. Twenty-six states have ordered bars and restaurants either close altogether or close to dine-in customers. Even before these measures, restaurant spending was plummeting:

More than 15.5 million Americans work in restaurants. Of those workers, roughly 3 million live in poverty. Most don’t have paid sick leave. According to New York Times estimates, that includes 517,000 McDonald’s workers, 180,000 Subway workers, 165,000 Burger King workers, 156,000 Pizza Hut workers, and 133,000 Wendy’s workers.

A housing crisis is coming as gig and hourly worker wages evaporate. Mortgage debt has declined since the GFC — the key reason household debt service as a percentage of disposable personal income was at a 30-year low prior to the COVID-19 outbreak. However, that should be cold comfort right now: fewer homeowners means far more renters. And in much of the country, many of those renters were already “cost burdened” or “severely cost-burdened”, meaning they pay anywhere from 30% to greater than 50% of their income on housing:

Source: Source: Harvard’s Joint Center for Housing Studies

Unpaid rent will eventually lead to landlord defaults. This is not just a threat to residential real estate. For one, WeWork’s entire business has been built on the gig economy. As freelance work dries up, freelancers will be unable to pay their WeWork rent. COVID-19 could prove the final nail in WeWork’s coffin (not to mention SoftBank, which has invested heavily in many unprofitable gig businesses).

As we’ve highlighted in these pages for years, the primary delusion of WeWork’s business is the fact that it signs long-term leases, while its clients sign short-term leases. If its clients can’t pay, WeWork will have to default on its commitments. The market is pricing in this threat: WeWork bonds have now dropped from roughly 90 cents on the dollar to 68 cents.

Alone, WeWork’s failure would be a significant blow to the U.S. and global economy. WeWork has more than $47 billion in rental commitments globally. In the U.S., 220 landlords are exposed to WeWork. Just last week, the company announced it will lay off 1,000 people, which comes after 2,400 layoffs in November.

Throughout the decade-long rise in gig and freelance work, startups and incumbent behemoths have argued it’s a boon for workers, giving them great flexibility and wage-negotiation power. The critic’s response: What happens when a crisis pulls the rug out from under these workers?

This is the first real crisis of the gig-economy era. The fallout will be wide reaching. The issue could decide the presidential race. Labor laws will change. Unions could be reinvigorated. The “neutral platform” argument that has shielded tech giants and startups from liability could die.

Yet, before change, there will be severe pain. Consumer spending now accounts for roughly 70% of the U.S. economy. Reportedly, government stimulus may not reach consumers until the end of April. Gig and hourly workers need help now. It is a systemic vulnerability all investors, business leaders, and politicians will be forced to confront.

The following article was originally published in “What I Learned This Week” on March 19, 2020. To learn more about 13D’s investment research, please visit our website.