More of Mass. is reopening with Phase 3, but its economy might soon have to retreat a bit

Business is beginning to come back as the state hits Phase 3. But the explosion of the virus in other states may undermine that.

Diners perused the menu at the Cheers at Faneuil Hall. Consumer spending is now on the rise in Massachusetts.Pat Greenhouse/Globe Staff

The Massachusetts economy is taking another step forward as casinos, gyms, and movie theaters prepare to open Monday, but some business leaders fear that the surge of coronavirus infections across the country could disrupt the state’s fragile recovery.

The reimposition of some restrictions in California, Texas, and elsewhere has executives and business owners from the Back Bay to the Berkshires on edge, despite Governor Charlie Baker’s assertion last week that it was safe to begin Phase 3 of his reopening plan. Will economic progress be thwarted as a second wave of the pandemic crashes over the state? Will we have to shut down again?

“You really have to be a Pollyanna to think we are going to remain on an island onto our own,” said Gabrielle Gould, executive director of the Amherst Business Improvement District, which represents about 140 businesses in the Western Massachusetts college town. She said the mood among the small-business people she speaks with has shifted from optimism in mid-May, when Phase 1 took effect, to a nagging fear that the reversals elsewhere portend trouble here if people let down their guard and stop taking the virus seriously.

“We’ve become more reserved,” Gould said. “When you look at the national headlines, the reality is that this is not going away.”

The state’s economy has been slowly recovering since mid-April as tough containment policies — requiring masks and social distancing, sharply limiting activities both inside and outdoors, ramping up testing and contact-tracing — flattened the curve of COVID-19 hospitalizations and deaths. That allowed Baker to reopen businesses in phases.

About 29,000 people filed for standard unemployment pay in the week ended June 27, the state reported Thursday, compared with an average of 143,000 during the first four weeks of the shutdown in March and April.

Job postings are 14 percent higher than they were at the start of the year, though they haven’t retaken the 2020 peak, reached in February, according to data collected by Opportunity Insights, a research organization based at Harvard University. Still, nearly 1 million people were receiving jobless benefits in mid-June.

The Massachusetts rebound has been less robust than in states that reopened earlier. But since the end of June, states with rising COVID-19 cases have seen a dip in economic activity, while Massachusetts continues to improve.

For example, consumer spending in Massachusetts is on the rise, while it has started to decline in Georgia and South Carolina, the Opportunity Insights data show. Small businesses here continue to reopen, while other states are seeing some new closings.

The setbacks in California — after an early and successful response — have the Massachusetts business community especially concerned that the state will see a relapse in Phase 3 as people mingle more at work and socially. Moreover, all-important consumer confidence could fade as the number of cases and deaths mounts nationally.

Mark Zandi, chief economist at Moody’s Analytics, expected infections to rise when states eased coronavirus rules, but he has been surprised by the high rates being reported.

“In June, we were in the camp that our path of infections would follow Europe. We would slowly go to zero and be able to contain it through tracing and testing,” Zandi said. “That is not what is happening. We are on a whole different trajectory.”

Forecasters at IHS Market expect the US economy, which tumbled into a recession in February, to snap back sharply in the third and fourth quarters before growth levels off in 2021. But in a report last week they warned that the country could suffer another downturn if a large number of states are forced to resume restrictions and consumers retreat to their homes.

In this scenario, gross domestic product could shrink at an 8 percent annual rate from October through December, and at 12 percent January through March, according to IHS.

Some businesses are already hitting the pause button.

Last week, McDonald’s said it had delayed the resumption of sit-down dining for three weeks. Dunkin’ is holding off setting a date on when it will reopen all of its locations for in-store eating. Like the Golden Arches, Canton-based Dunkin’ has been open for drive-through and carryout service throughout the pandemic.

“We are being extremely conscientious, and it won’t happen until we and our franchisees are ready,” Dunkin’ spokeswoman Michelle King said in a statement.

Baker — whose methodical, data-driven approach to the pandemic has won praise from scientists and CEOs alike — is pushing ahead even as his like-minded counterpart in New Jersey last week delayed some of its reopening plans, and New York City reinstated a ban on indoor restaurant service, in response to the widening outbreaks elsewhere.

The coronavirus hit the Northeast earlier and harder than most of the places now under siege. While states such as Texas and Florida that took a less-aggressive approach backslide, Massachusetts is prepared to move forward — as long we avoid the false sense of security that beset California, business leaders say.

“What I am seeing walking around, everyone is taking it very seriously,” Cindy Brown, chief executive of Boston Duck Tours, said of local businesses and their use of faces covers, temperature checks, and other safety protocols. “If we all do the right things, we should be able to proceed safely.”

John Regan, chief executive of Associated Industries of Massachusetts, said the trade group’s business confidence index for June, set to be released Tuesday, will show “dramatic improvement,” but it remains in negative territory.

Although the group’s members are cautiously optimistic, Regan said, “they are resigned to the fact that they will not be truly comfortable until there is a vaccine.”

Sandy Wycoff, who owns Chatham Clothing Bar, said the potential for another government shutdown “is always in the back of my mind.” Since reopening June 8, sales at her three Cape Cod locations have been stronger than expected, but still far off from a typical summer.

“We could be closed at any moment,” Wycoff said. “We try to get the most out of every day.”

The economy’s path, here and nationally, will hinge on two factors that need to be resolved within a few months, said Zandi, the Moody’s economist.

First, the country must quell the further spread of coronavirus and drive down infection rates. Otherwise, consumer spending, which fuels more than two-thirds of the economy, will dry up.

Second, Congress and the White House need to reach agreement on another trillion-dollar rescue package focused on jobless benefits, debt relief, and help for renters.

“The real test is coming,” Zandi said.