34 BARRON’S March9,2020
THE ECONOMY
Service-sector jobs grew by 167,000 in February and
195,000 in January. They could be particularly
exposed to a coronavirus shock.
In Coronavirus, a Test
Of Sectors’ Resiliency
And Vulnerabilities
I
t’s understandable that inves-
tors blew off the February jobs
report Friday, given the data
was collected before the new
coronavirus began spreading
meaningfully within the U.S.
But the state of the economy
heading into the shock shouldn’t be
ignored, because of what it signals
about the ability of American busi-
nesses and consumers to absorb it.
First, to recap. The Labor Depart-
ment said employers added a much
bigger-than-expected 273,000 jobs last
month, matching January’s revised
increase. Unusually warm weather and
some temporary census hiring helped
lift the numbers, but they’re nonethe-
less impressive and represent the stron-
gest consecutive gains since May 2018.
Notable, in the context of how well
the economy might stand up to a coro-
navirus hit, has been the rise in service-
sector jobs over the past six months.
The sector, which accounts for about
80% of U.S. jobs and overall economic
input, is more vulnerable to the corona-
virus threat compared with the manu-
facturing sector. After all, a person
probably wouldn’t get two haircuts to
make up for a missed one but would
still replace a broken washing machine.
Service jobs grew by 167,000 in
February and 195,000 in January,
powered in part by leisure and hospi-
tality, including bars and restaurants.
That is welcome news because it will
help workers most vulnerable to lay-
offs tied to the outbreak, says Diane
Swonk, chief economist at Grant
Thornton. “The strong February num-
bers will be a cushion to blunt the
blow of the virus when it hits their
paychecks,” she says, should consum-
ers increasingly stay home. That is in
part because more people on payrolls
now means more will be eligible for
unemployment benefits should layoffs
come. At the same time, a tight labor
market may make companies more
reluctant to let go of workers unless
the situation significantly deteriorates.
The other industry driving service-
sector job gains is health care, and that
trend continued last month. “It looks
like employers in that industry will
have to ramp up hiring,” says Nick
Bunker, economist at the job website
Indeed, given demands on health-care
facilities as the virus spreads.
While the February jobs data
should give investors some solace that
the broad U.S. economy through at
least mid-February was faring well
enough to mostly withstand a coming
blow from the virus, we would be re-
miss not to acknowledge soft spots.
In the event of exogenous shocks,
weak links usually crack first, says
Nancy Lazar and Aneta Markowska,
economist at Cornerstone Macro. One
way of looking for those is by examin-
ing interest coverage ratios, a measure
of how easily a company can pay off
its debt based on its profit. When
companies start having a harder time
paying down debt, the ratio rises and
could portend layoffs and other prob-
lems like default.
The average ratio across U.S. com-
panies is currently above 4, so the cor-
porate sector seems to have a sizable
buffer for absorbing potential shocks,
Lazar and Markowska say. They define
weak links in the U.S. as companies
with coverage ratios below 3, or those
that are still very much solvent but
vulnerable to outsize revenue drops.
Once coverage ratios fall to around 3,
the pair says, corporate America tends
to come under restructuring pressures
that ultimately lead to recessions.
Using Cornerstone’s methodology
and data from Bloomberg,Barron’s
looked at the S&P 1500 for a sense of
how many companies are “weak
links” and which industries are in that
way most exposed to a shock from the
coronavirus or elsewhere. About 400
made the list of companies with inter-
est coverage ratios below 3.
Lazar and Markowska say that
comparing current coverage ratios
with the previous economic expan-
sion, the energy and health-care sec-
tors stand out as being particularly
vulnerable (though health care may
benefit from the virus as energy feels
supply-chain pain). Of the S&P 1500,
both sectors have about 50 companies
with coverage ratios below 3.Chev-
ron(CVX),Occidental Petroleum
(OXY), andHess(HES) are among
those energy companies, with ratios of
0.1, 0.4, and 1.5, respectively. Within
health care, hospital operatorTenet
Healthcare(THC), X-ray makerVa-
rex Imaging(VREX), and managed-
care providerMagellan Health
(MGLN) are some noteworthy names,
faring at 1.4, 2.2, and 2.7, respectively.
Should the virus keep people home,
a slowdown in consumer spending
would no doubt hurt the consumer-
discretionary sector, where service
operators and retailers are the weak-
est spots. Restaurant chainsJack in
the Box(JACK) andWendy’s(WEN)
have ratios of 2.4 and 1.8, respectively,
while retailersL Brands(LB) and
Office Depot(ODP) are at 0.7 and
2.1, respectively.
Areas demonstrating relative
strength on the basis of interest cover-
age ratios are consumer staples, a typi-
cal place of relative safety, and finan-
cials, which have been hammered by
the Federal Reserve’s emergency rate
cut. Just 13 consumer-staples compa-
nies make the list, includingMolson
Coors(TAP) at 2.6 andCampbell
Soup(CPB)—a beneficiary of outbreak
preparation—at 2.7. Meanwhile, only
four financials register below 3, includ-
ingCapstead Mortgage(CMO) at 1.2.
Could weak corporate links take
down the broader economy? Lazar
and Markowska say that depends on
the size of the shock, but they note
that vulnerable firms account for a
historically small share of sales, capi-
tal expenditures, employment, and
debt outstanding. What’s more, two of
the sectors most at risk of supply
chain disruptions—industrials and
technology—have relatively healthy
ratios and should be able to withstand
the impact.
The upshot: The state of the corpo-
rate sector cuts the odds of unchecked
contagion, giving investors reason to
believe the U.S. economy will survive
the coronavirus, even if data over the
next few months look bleak.B
By Lisa Beilfuss
A Picture of Health as a Viral Threat Looms
Solid hiring broadly and within the key services sector, as well as consistently low jobless claims, suggest
American businesses are operating from a solid base heading into the coronavirus threat.
*Monthly. Source: BloombergChange in Nonfarm Payrolls Change in Service Sector Payrolls Weekly Initial Jobless Claims
2010 ’12 ’14 ’16 ’18 ’20
-1.0
-0.5
0
0.5 Mil
Service Sector PayrollsLeisure & Hospitality Payrolls
Health-Care Payrolls
2015 ’16 ’17 ’18 ’19 ’20
-250
0
250
500%.
2015 ’16 ’17 ’18 ’19 ’20
200
250
300
350 thousand