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Strategic Global Intelligence Brief for April 10, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

17 Million Unemployed
It should come as no shock to anyone that the unemployment rate has become staggering. That is what would have been anticipated when a lockdown order was issued that essentially closed one-third of the U.S. business community. What makes the shutdown that much more devastating is that the affected sectors have been high-employment sectors. Not only are there many people employed in the lockdown sectors, but these are overwhelmingly low-paid jobs. That means those affected have virtually no reserve to draw upon in times like these. It is estimated that people making $50,000 or less have no more than 72 hours of float if their income is interrupted. A minimum wage worker (even those making $15 an hour) makes a little more than $30,000 a year. That assumes they are working 40 hours a week and all 52 weeks. This population is in crisis already.

How Fast Will Jobs Return?
It is impossible to say when every job will come back to those that lost theirs. The reality is that some of them will not return at all. There are two factors that will promote a relatively swift recovery in the employment numbers when the lockdown is lifted. The first is that the most affected industries are all labor intensive. There is no robot or technological replacement for servers at a restaurant, maintenance staff at a hotel, clerks at a store or attendants at an event. These companies will need people immediately and will seek to hire their former staff. The second factor is there has not been time for many of these workers to find other alternatives, so they have been essentially waiting for the lockdown to end so they can get their old job back.

Key to Employment Surge Is the Consumer
There will be one of two reactions to the lockdown's end. The consumer will either respond with enthusiasm to the fact their lives may be returning to normal or they will distrust the "all-clear" signal and will remain wary of interactions. If they act to escape their "cabin fever," they will swiftly resume shopping and dining and traveling. That will stimulate immediate growth and hiring. If they remain suspicious and fearful, the resumption of normal business activity will be stalled, and perhaps for months to come.

Short Items of Interest—Global Economy

Anticipated Changes
The event that comes closest to the COVID-19 panic would be the 9-11 attack. That was another "black swan" and provoked deep changes. This was the event that introduced the TSA and an emphasis on global aviation security. What will come from the COVID-19 episode? We are starting to see it in other nations—an emphasis on health security. Passengers on airlines and ships will be subject to health screenings. Immigrants will be banned if they seem to pose a health threat. People may be barred from events if they show signs of illness or are running a temperature. Cruise ships have already taken to getting temperature readings and using that data to bar boarding. Random health checks may become mandatory for those in close contact with vulnerable populations.

Asia Struggles with Exit Strategy
The good news for nations such as China, South Korea, Japan and Singapore is that they have seen the peak in terms of new infection and fatalities and most are seeing a decline. The bad news is that there are still huge issues as far as restarting their economies. At the top of the list of concerns has been secondary infection from those arriving from outside these nations. Most are citizens returning home so they can't be denied entry. Borders are closed to other migrants, but that is not the problem. As some businesses open, there are others that will still be in lockdown. There have been broad differences within the borders of these nations. One city may be more or less free of the infection and another may not have reached peak yet. Can one area be opened while another remains closed? Can internal migration be halted if that is the route the nation wants to take? Can cultural response in Asia be replicated in Europe or the U.S.?

Is Oil War Ending?
Throughout the COVID-19 crisis, there has been another issue that has battered the U.S. and global economy. The Saudi Arabians and Russians seized the opportunity to pressure the U.S. oil industry and have made a concerted effort to drive the per barrel price of oil to the level that only they can make money. The U.S. has emerged as the world's largest oil producer due to the development of fracking and the exploitation of oil shale in the Dakotas and Texas. This has come at the expense of the OPEC nations and Russia. They have been seeking a means by which to recapture their lost market share.

Analysis: The attack on the U.S. oil business came from two moves by these oil producing states. They agreed to boost production and to lower their prices. The COVID-19 crisis had already crushed overall demand for oil and that had been putting downward pressure on oil prices. Adding in unneeded production at a very low price drove the per barrel cost down below $20 for a time. The Saudi Arabians can still make a little money at oil priced this low (Russia really can't—they need oil at around $40). The U.S. oil sector needs prices at or above $50 a barrel, so a price war like this was driving many out of business.

The OPEC states (and Russia) have now agreed to limit production a bit, but the amount they agreed to is far less than was hoped for and is likely to be too little to drive prices back up to levels needed by the U.S. producers. There is no sign that these two nations have any desire to reduce the pressure on the U.S. oil business; their intent remains as it has been from the start. This is an opportunity for them to crush their rival and regain control over the oil world. It has been estimated that another three or four months of per barrel prices under $50 will result in the loss of over half of the U.S. oil business—smaller companies that simply can't survive an extended period of low prices.

Is the Effort Working?
By most accounts, the stimulus effort launched by the government has been falling short and by quite a lot. To a significant degree, the problem is the sheer size of the challenge. This recession is unprecedented in some very important ways. As has been pointed out repeatedly this is a "manufactured" crisis—an economy shuttered by government edict rather than by any sort of economic crisis. The U.S. and global economies were not exactly booming prior to the shutdown, but growth rates were respectable. That all ended in less than a week as the orders were issued to shut everything down. Instantly, there were close to 10 million people rendered jobless, tens of thousands of businesses closed, billions of dollars lost by airlines, hotels, sporting events and tourist venues. There was no warning at all and no time to prepare.

Analysis: The challenge has been monumental, but the effort to deal with it has been far less impressive. The critics certainly have a lot to work with and their assessments tend to fall into three buckets. The first set of critiques center on preparedness. It is abundantly clear the U.S. (and the world in general) should have been better able to anticipate a threat like this. There have been viral outbreaks almost every year for the last decade and longer—SARS, MERS, Avian Flu, Swine Flu, Ebola, Marburg, West Nile Virus, Zika and so on. There have been ever deadlier and persistent strains of seasonal flu. At the very least, there should have been attention paid to testing and treatment. The U.S. is still testing only about 50 out of every million people while South Korea is testing about 5,000 out of every million. The lack of testing and treatment options left the U.S. (and other unprepared nations) with only a draconian option to deal with the outbreak.

The second bucket was speed of response—the U.S. was excruciatingly slow. The warnings about the spread of the virus were slow to be issued; even as the impact of COVID-19 was apparent in China and other nations affected early. The U.S. was not reacting in even a minor way until March despite the fact China had been seeing hundreds of thousands of cases by late January. The calls for isolation were sporadic and largely ignored. That guaranteed the spread of the virus. The rescue package from the government emerged weeks after the shutdown was ordered. That is perhaps the most foolish move of all. It was as if it had not occurred to anyone that shutting down the economy would cause massive unemployment and business closure. At the very least, the rescue packages should have been issued simultaneously with the lockdown order, but in a perfect world, there should have been a warning that this action was imminent so that people would have time to prepare.

The third bucket is adequacy of the effort. The sudden nature of the threat has placed an immense burden on the system, and at all levels. The medical infrastructure has been overwhelmed as there has not been enough equipment and not enough personnel. The technological demands of "working at home" have overwhelmed that infrastructure and now the bureaucracy that is charged with administering the relief is overwhelmed, slowing the delivery of that help. It is easy to point fingers during a crisis, but years of neglect has left these systems unable to respond. Spending on public health has been slashed every year. The current administration gutted the departments that had been charged with monitoring this kind of disease outbreak. Government in general has been reduced in terms of personnel devoted to this kind of action. To be fair, there is no way of knowing for sure where the next threat is going to come from—should the government emphasize protection against terrorism, natural disasters, disease outbreaks, foreign invasion, cyberwar, financial attacks or something else? Should there be an emphasis on all of these threats? If so, how much money are we prepared to spend and how high should the taxes be to finance all that spending?

The Most Awkward of Questions
Two very distinct sides have emerged in the COVID-19 debate. Reconciling them will prove to be extremely difficult—especially in a democracy. This debate has started to intensify in the U.S. and in Europe. It has been raging in many of the Asian states as well. On one side there are the public health officials and the population that worries most about the infection. Polls repeatedly show that older people and women are deeply concerned about the health impact and want a continued emphasis on controlling the spread of COVID-19 at all costs. On the other side are those that are worrying about the collapse of the global economy, the massive loss of jobs and the closure of millions of businesses. Those polls show that men are generally more concerned about the state of the economy and young people are far more concerned about the reopening of the economy than the spread of the virus.

Analysis: There is fundamental agreement on the basic issues. Everybody wants to see the virus threat fade and everybody wants to see the global economy restart. The question is timing. This becomes a matter of what kind of trade-off will be acceptable. Those focused on the economic impact are pushing hard for the lockdown to end by May at the latest and the preference is for mid-May. Those that focus on the public health side of the debate want to keep the lockdown in place for as long as it takes to push the virus out. Both sides are dealing with massive unknowns.

If the lockdown is ended in May, there will be a risk of another explosion of infection. Most of the estimates hold that the peak week for the U.S. in general will be the week of April 20. This will be the week that generally sees fewer hospitalizations and fewer deaths, but it certainly doesn't mean the virus will be vanishing by this point. In fact, the virus will never vanish completely—even if and when there is a vaccine and effective treatments. There will always be vulnerable populations and the disease will linger as all of the other viral outbreaks have.

If the decision is made to extend the lockdown into May or through August or until there is an effective vaccine that has been distributed to the global population, the short sharp recession that has been assumed to be the most likely outcome will become a very deep depression. If there is a restart in May, the bulk of the lost jobs will be regained—estimates run as high as 85%. The majority of businesses shuttered by the lockdown have been treating the layoffs as furloughs—temporary measures to be reversed at the earliest opportunity. If the lockdown extends past May, these companies will be unlikely to survive and the layoffs become permanent. There are already many businesses that will be unable to fully recover as they can't make up for the lost opportunities—airlines, hotels, sporting events, theme parks and the like.

No matter what decision is made, there will be severe consequences. End the lockdown and there will be more infections and more deaths. Extend the lockdown and people's lives will be ruined as they lose their income and ultimately their homes.

Personal Responsibility
The trade-off discussed above can either be a crisis that threatens the survival of the system, or it can be managed to some degree. The key to this potential control is personal responsibility. The lockdown that was imposed to halt the spread of the virus was deemed necessary as there is no faith that people will do the right and responsible thing. If a call could have gone out asking for people to act appropriately, there would have been no reason to mandate that behavior. Surviving the trade-off and the restart of the economy will depend on people acting appropriately. There is little confidence in the population to do this.

Analysis: Three groups of people would have to alter their behaviors significantly. The first would anyone who falls into the vulnerable category—the elderly, the already compromised and those susceptible to lung ailments. They would need to self-isolate for an extended period of time. The second group would be those who have the most contact with those potentially infected. These are the health care workers and others who will have contact with the most vulnerable. They will need to be tested—that is the minimum. Beyond that, they would need to be vigilant and self-isolate if there is suspicion that they are infected. This leaves the rest of us. We will all have to live with extreme caution. Even a hint of infection will require self-isolation. Maybe it is just a cold or regular flu, but we will have to assume the worst and impose a quarantine on ourselves. This will be more than many people will be able to do. That opens the flood gates for more infections and even the re-imposition of the lockdown.

Weird Exceptions
One can tell a great deal about a country or a culture by its response to a crisis. In some cases, there is a strong sense of community and rallying to the cause. In other cases, it becomes an "every man for himself" situation. In most places, there are people that fall into both categories. There are also more official reactions. Take the exemptions that have been allowed to the lockdown in the U.S. and elsewhere.

The U.S. lockdown has been state-by-state for the most part. This has meant differences in what is allowed and what isn't. The grocery stores and the drug stores have remained open, but in many states the gun stores are also open. Sporting events and concerts have been banned to avoid crowds, but churches have demanded they retain the ability to gather their congregations. Hardware stores are still functioning and so are most repair shops.

In Europe, it has been very hard to close cafes in France, bee gardens in Germany and pubs in the U.K. They have all been ordered to close, but enforcing the order has been exceedingly hard. In Asia, it has been nearly impossible to shut down the open-air markets and night markets. The bottom line is that people are very reluctant to change their habits and patterns—even as there are threats to their well-being. Part of the frustration with this crisis is that people can't attack the problem—all they can do is sit at home and avoid one another. This passivity in the face of crisis is counterintuitive and confusing.

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Monday, 25 May 2020