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Strategic Global Intelligence Brief for April 20, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

PMI Numbers Due Out This Week
This is going to be a bleak week as far as the Purchasing Manager's Indices are concerned. The fact is they will all be falling—the only question is how far and whether there will be any real differences between the service and manufacturing sectors. At this stage there has been very obvious decline, but nobody yet has a handle on just how bad it is going to look. The U.S. has already fallen into the low 40s and many of the European versions have been in the 30s. The one promising sign that might develop would be in Asia. The Chinese version of the PMI was in the 50s—if only barely. That might be repeated this month and it is possible that similar gains might appear in South Korea and Taiwan. This would indicate that some economic recovery has started to take place.

Some Tariff Reduction but Not Enough
The Trump administration is not ready to give ground on the trade war although there have been some gestures. The companies impacted by the COVID-19 shutdown have asked for a reprieve as far as the tariffs they are expected to pay as they ship goods in from China. The entire global supply chain is in disarray. Many operations deemed essential have still not been able to produce as they have been unable to get the supplies they need. The request for tariff relief has been granted in some cases, but the majority of the restrictions remain in place even as the pandemic has affected the global economy. Most analysts are suggesting these tariff policies need to be suspended for an extended period if there is to be any kind of economic rebound for the U.S. or the world as a whole.

Abuse Expected as Far as Financial Aid Is Concerned
The decision has been made to emphasize speed over anything else when it comes to the aid that has been authorized by the government. That means there will be plenty of opportunity for abuse and cheating. There are dozens of rules and regulations that are supposed to govern who gets the money and how it is to be spent. The problem is there has not been a new Inspector General appointed and with Congress in isolation, there will be little opportunity to create oversight. The money is supposed to be used to protect jobs. It is not supposed to funnel into stock buybacks and executive salaries, but it will be hard to identify what happens to the money once it is allocated. This will be information that will come to light after the fact.

Short Items of Interest—Global Economy

Japan Boosts Spending on Virus Relief
Prime Minister Shinzo Abe has been under intense pressure to do more for COVID-19 relief and has agreed to an additional $83 billion in spending so that money can be sent to the public and to business damaged by the shutdown. This has obliterated the previous budget and has created consternation from within his own party. The Japanese economy had been barely growing before the crisis hit and is now thoroughly in recession. The debt levels in Japan were about twice as high as they have been in the U.S. Now, they are getting close to three times higher.

Europe Looking at Nearly 60 million Jobs Lost
The job losses around the world have been staggering; every nation is looking at the same issues. The majority of the lost jobs in Europe will likely be replaced as soon as the lockdown ends, but more of the affected workers were laid off by small companies that may not be able to recover. The German system of kurzarbeit is used in other European nations as well, but the majority of the eligible companies are larger ones—there is not a similar system in place for the small- and medium-sized operations.

Africa Will Be the Hardest Hit
It has already become clear that Africa is the least prepared region in the world. There is little testing capability, hospitals are already overwhelmed and there is no effective way to impose quarantines. The expectation is that over 75% of the continent's population will be infected within the next year.

Utter Collapse in Oil Markets
There are going to be many markets that will be changed profoundly by the COVID-19 crisis, but perhaps none as much as the oil market. The price per barrel of oil has cratered again and has hit lows not seen in over two decades. The price of West Texas Intermediate fell to $14 a barrel. That has all but eliminated the U.S. oil sector in terms of competitiveness. In fact, there is no oil producing nation on earth that can make money on $14 a barrel oil. That will mean almost every producer will now be shutting down operations. It is not that they think doing so will drag the price per barrel up (although there would be hope that this would be the case). They simply can't continue to function at a loss. The Saudi Arabians can still make a little money at $25 a barrel, but even they will be losing money at these prices.

Analysis: The overall trigger for the decline in the price of oil has been the collapse in worldwide demand due to the global lockdown. Estimates vary between a 70% decline and almost 90%. The shutdown of travel and industry has destroyed demand. There has been nothing oil producers can do about it. The U.S. is going to be hit very hard as the oil produced in the U.S. is expensive compared to other parts of the world. For the most part, the U.S. oil producer can only make money when the per barrel price is over $50. That level has not been seen in weeks. Even as the lockdown starts to ease, there will be a lag in demand. There is also the issue of how much oil is in storage. It is the storage situation that has triggered the latest collapse in pricing.

The capacity to store oil is nearly exhausted. That creates a major issue for producers. Even if they wanted to keep production intact, they have no place to put what they are producing. Refineries are at maximum capacity. Every single rail car is now being used to store oil rather than to transport it. Oil tankers are not moving—they are now little more than floating storage tanks. This is expensive storage and there are dangers in terms of keeping that much oil in storage. Beyond the immediate issue is the fact that demand will be affected even as the economies of the world recover. It will be months before the oil stored is consumed—even assuming a robust rebound. The oil producers will have to wait even longer before they will be able to resume.

This creates yet another issue down the road. If the oil producers are required to shut down for an extended period, the cost to do so will be high. At some point, they will need to start back up and that cost will be high as well. If demand is resumed at anything near the levels of the pre-COVID-19 days, there will be a spike in pricing. The increase in cost is very hard to predict at this stage. Estimates have been all over the place. Some see a modest rebound to perhaps $50 a barrel and others see a possibility for $100 a barrel or more. It will depend on how eager the producers are to get back in the market and what they will need their margins to be.

What is abundantly clear is that the end of the oil war was insufficient. The agreement reached between the U.S. and oil producers such as Saudi Arabia and Russia was too late—the damage had been done. Now, all the oil states are in trouble as the consumers are shut down and unable to consume.

India Moves to Restart Economy
The Modi government is facing the same kind of crisis that every other nation has been confronting, but with far less in the way of resources. The U.S. and the nations of the European Union have the ability to cushion some of the blow through extensive government spending on relief. Japan, China and South Korea have engaged in these programs as well, but India lacks the budget to engage in even a fraction of this relief. The near total lockdown has shut the economy down and cost tens of millions of jobs. There is also a looming humanitarian crisis based just on this shutdown. This has prompted the government to develop a plan to open the industrial sector so that people can get their jobs back.

Analysis: The requirements for reopening are complex and strict. Many companies remain shuttered as they have not been able to comply. The workers must be housed in what amounts to dormitories so they can be checked for the virus. They have not been allowed to bring workers back if they have not been tested and India is woefully short of testing kits. There is also the issue of the supply chain as there are companies that can't function as long as their supplier companies are not open. The biggest fear is that opening will allow the virus to resume its spread and defeat the whole purpose of the lockdown.

Testing, Testing, Testing
There is very little that everybody seems to be able to agree on as far as the COVID-19 crisis is concerned. There is intense disagreement as to when and how to lift the lockdown and arguments over how serious the threat is and to which groups of people. The one aspect of the response that gets near universal support is the need to test. Unfortunately, testing has been one of the most difficult areas of response to coordinate. Even two months into the crisis, the U.S. has been unable to bring the numbers to necessary levels. There have been many barriers to the process. It is likely to take the better part of the year to bring testing to the levels required to address the pandemic effectively. The inhibitions have been bureaucratic, scientific, medical and simply the sheer scale presented by a population of 340 million people in the U.S. and billions in the global population.

Analysis: The challenge starts with the fact that current tests are not as reliable as would be preferred. There are two main types of test—one that looks for evidence that somebody has the virus and one that determines if the person ever had the virus—an antibody test. This latter test is critical if people are to be identified as carriers who can infect others—even when they are not experiencing symptoms. The antibody tests have not been as reliable as they need to be.

Beyond the issue of reliability, there is the widespread shortage of testing kits. The supply chain has been strained to the max. Every maker of these testing kits is frantically competing with each other to get the materials needed to meet demand. To further complicate the supply chain crisis, there is no established priority in terms of who gets tested and when. The nations that have been able to employ a more efficient set of testing protocols have clearly prioritized the process. They generally started with two groups of people—those at high risk and those from the medical community. The high-risk population includes the elderly and those with underlying health issues. The medical community includes the people working in hospitals and clinics as well as first responders likely to come in contact with infected people. The U.S. system has been haphazard with many in these categories unable to get tested while businesses find ways to get their employees tested. Obviously, it is the goal to get everybody tested, but it makes sense to test some before others.

The estimate is that the U.S. needs to have four to five times the testing capacity it has now. By most accounts, that level of testing will not be possible before the end of the summer at the earliest. As the immediate threat of the pandemic begins to fade, there will still be a need to test about 750,000 people each week. There will also be a need to expand contact testing—finding out who might have come in contact with an infected person. What has made this disease so insidious is that most of those who contract it remain unaware that they have it. It is estimated that 96% of victims have a minor version which does not require hospitalization and that perhaps 50% are asymptomatic and have no inkling that they are affected. They can pass the virus to others and be utterly unaware they are doing so.

The U.S. was not prepared for the outbreak and was not in a position to start testing at the beginning of the outbreak, but this is a situation most other nations also found themselves in. This is a new disease and it required new treatments, tests and vaccines. The U.S. was slowed initially by squabbles over who should produce the tests, but now there are efforts by both the public health sector and the private sector. The U.S. is testing around 10,000 out of every million people. Countries such as Germany and South Korea (among others) are testing closer to 25,000 per million.

When Does a Furlough Become a Layoff?
To the person who has lost their job, this seems like a pretty meaningless distinction. Either way, they have lost their income and will soon be in financial distress. It does matter as far as timing of a recovery is concerned, however. A furlough is generally defined as a deliberately short-term move made by an employer. The automakers often place employees on furlough when they are retooling a plant. There have been furloughs of government workers when Congress has been unable to pass a budget and we all know what a layoff is.

Analysis: At this point, the vast majority of the people who have lost their jobs have essentially been furloughed indefinitely. Their employers want and need them to come back to work as soon as the lockdown is lifted. The problem is that nobody knows when that will be. If the lockdown begins to lift in May (as many still anticipate), there will be a substantial period of re-hiring. It has been estimated that around 80% to 85% of those who lost their jobs will be able to get those jobs back.

If the lockdown continues into June or July, there is a distinct possibility these furloughs will turn into actual layoffs. The businesses that have been affected by the lockdown may have failed completely or they may have lost so much revenue they will be unable to resume normal operations. The temporary help offered by the government includes expanded unemployment payments and some one-time checks. That may keep a certain percentage of workers from resuming their old jobs or seeking new ones, but this is expected to be a very small percentage of those who have been rendered jobless.

These are the transactional workers who do not look at their job as anything other than an immediate means to an end. They migrate quickly from one job to another according to the immediate pay—leaving for any tiny pay hike. The bulk of those who have been rendered unemployed during the lockdown take a more future-oriented approach and want to return to a position that includes benefits and an opportunity for pay hikes and promotions. These are people who once chose the stability of a job over some kind of government aid and will want to do so again.

Coming Together or Falling Apart
The bottom line is that a crisis brings out the best and worst of humanity. There are those who seek to help those in need and those who really don't wish to see beyond their wants and needs. The COVID-19 crisis has created a real conundrum as both "sides" are motivated by a desire to help but in very different ways. It is impossible to provide help for both as steps taken to assist one will negatively affect the other.

There are those who focus in on the disease and the death toll. We have lost close to 13,000 people to this virus. They left behind 13,000 families and sets of friends. More will die regardless of what we do. We engage in new protocols in the hope that fewer will die if we do. The other side of the argument is that people will suffer and die as a result of the shutdown as well. There will be people in such dire financial straits they will perish. The truth is that most of us will not get the disease and of those who do, most will have a mild version. The truth is also that most people affected by the lockdown will survive it—they will have enough money to get by (at least for a while). The hardest truth is that millions of us will barely see any change at all—we will not get sick and we will not lose our jobs. We are then faced with a choice as to where our sympathies lie—with the people who will get sick and their families or with the people who livelihoods have been destroyed. We feel for both of course, but we have to make a choice anyway.

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Monday, 25 May 2020