Strategic Global Intelligence Brief for April 24, 2020
By Chris Kuehl, Ph.D., NACM Economist
Short Items of Interest—US Economy
More Jobless Claims
The numbers are still mounting—by most accounts this pattern will continue for a while longer. The loss of work will extend until there is a general opening of the business community and the need for employees begins to increase. The crucial factor at this stage is whether these are furloughs or layoffs. The majority of those who lost their positions early are expected to be rehired relatively soon, but the more recent job losses may be better described as true layoffs. These are people who have been working for companies that are now going out of business. These are mostly smaller companies that have not had the resilience they need to survive the lockdown. It is still estimated that roughly 80% of those who have lost jobs will be rehired in the next month or possibly two.
How Risky Is the Debt
The U.S. debt and deficit situation was not good before the need to dump trillions into the COVID-19 relief plan. Now, it is worse—a debt that is between 105% and 110% of GDP. Does this promise disaster later—a debt crisis or rampant inflation? Thus far, there is little threat from either. There has been no sign that investors are shunning U.S. debt. That is because everybody in the world is in the same situation. As for inflation—there has been no pressure from wages or commodities, and a simple expansion of the money supply is not enough to trigger it. This situation could change quickly if the Fed doesn't react to pressures in the future. As long as the Fed remains prepared to take steps to control inflation, the situation will remain stable. However, a change in Fed leadership would open up the possibility of a more sycophantic reaction and a delayed response to inflation.
Another Boost in Spending
The next wave of spending authorized by Congress is ostensibly aimed at small business—replenishing the funds that have been exhausted by the immense demand. For all intents and purposes, the entire small business sector in the U.S. has been placed in need by the lockdown. This is a recession like no other as there has not been a single sector that has been unaffected. The demand for these funds will ebb as the shutdown orders are rescinded, but that will be an uneven process at best as all 50 states will have their own plans and agenda.
Short Items of Interest—Global Economy
Feud in Brazil
The Bolsonaro government has been categorized as one of the "Ostrich Regimes" along with such luminary nations as Nicaragua, Turkmenistan and Belarus. These are the leaders who have decided to do absolutely nothing to deal with the pandemic. They have not engaged in lockdown and have not tested or added treatment. The decision by the Brazilian leader has caused a rift within his own government as even his supporters are demanding that he change tactics to deal with the virus. Brazil is the country with the most cases and fatalities in all of Latin America. It is expected to surpass all other nations in the world in the weeks to come.
EU Continues to Fight Over Rescue Fund
The divisions within the EU are deep; even the COVID-19 crisis has not been able to settle them. A multi-billion-euro package has finally been offered to address the issue, but the worst outbreaks have been in states such as Italy, Spain and Greece—the states that have been affected by financial crisis for years. The northern states are still reluctant to keep dumping funds into these nations as they have been judged to have brought much of this crisis on themselves. It is not clear how much of the bailout will reach the southern-tier states.
Brexit and COVID-19
It is too late for the U.K. to change course on Brexit, but pressure is building to reach a deal with the EU. The estimates for British GDP are beyond grim. The country is going to need every bit of help it can get. The European market is as vital as it has ever been. That is pushing Prime Minister Boris Johnson to accede to EU demands.
Global Purchasing Manager Reading Is Bleak Indeed
One of the challenges presented by a fast-moving crisis like this one is that data can't keep pace. We all know that the global economy has slipped into recession, but the specifics will not be available for weeks and even months. Recessions are called after the fact by the National Bureau of Economic Research (NBER). They will look back and determine whether there have been two consecutive quarters of negative economic growth. It is possible that Q1 fell into recession, but it might also have barely escaped that level as the first two months of the year had been growth months. The Q2 numbers will include April, May and June. It is obvious that April will be recessionary and parts of May as well, but June might show rebound. The point is there are limited data sets that provide instant insight. One of the most reliable has been the Purchasing Managers' Index (PMI). The version that is prepared by IHS Markit covers 40+ nations. It provides an accurate and comparable assessment of the global economy in a snapshot. This month's readings are grim indeed.
Analysis: This release of PMI data is referred to as the "flash" index as it does not include all the data. These readings are based on about 85% of the respondents, but that has nearly always matched up well with the completed survey. The data this month shows a true collapse into extreme contraction territory. The diffusion index used by the PMI holds that anything over a reading of 50 indicates expansion and anything under 50 suggests contraction. Last month, the U.S. index fell to 40.9 from a previous reading well into the mid-50s. Now that reading has fallen even more dramatically to 27.4. This is the lowest level ever reached. Even the 2008 recession numbers exceeded these. The reading in 2009 was at 36.2.
The numbers that have been seen in the rest of the world are even worse. The U.K. reading was already near record lows last month as it was sitting at 36. Now the British PMI is at 12.9, a record low far surpassing any previous recessionary period. The Japanese hit a low record as well with a reading of 27.8. The Eurozone collapse has been just as dramatic with France and Germany in the 20s and Italy, Spain and other southern tier nations in the teens. The estimate as far as GDP is concerned is awful—the U.S. GDP falling by 40% in the next month or two, Eurozone GDP falling by 45%, U.K.'s by nearly 60% and Japan by 35%.
The only somewhat positive news is that this may be the worst it gets as many nations are preparing to reopen their economies in May. The estimate is that rebound will be quick and these data points will improve. However, that optimistic assessment is dependent on a lot of factors—most notably the course of the disease and whether there will be a secondary wave once the world starts to open up. The Asian states that had been showing progress on the infection rate started to slip when their economies started to reopen. They have not elected to lockdown business again, but the rate of fatalities is on the rise in areas where it had declined.
Resistance to Resumption Orders
The focus of the COVID-19 crisis has shifted towards how the lockdown ends. There have been many assumptions made in Asia, Europe and the U.S. Many of these are being called into question as the orders and suggestions are being made. There are four major players as far as this process is concerned. There are the medical experts, the political leaders, the business leaders and the consumers themselves. They will ultimately have to work together to develop and execute a strategy that makes any dent in the economic crisis.
Analysis: The political community is pushing hardest for a reopening as they survey the economic damage building. In Asia, there have been governments that have rushed recovery—notably China. The specter of mass unemployment is more than Beijing wants to deal with. Some European states were reluctant to close at all (Sweden) and others are rushing to return (Austria and Italy). In the U.S., there have been states that are reopening early (Georgia and Vermont). The Trump position has been to open immediately. These decisions have been nearly universally rejected by the medical community as they have not seen the threat erode sufficiently and they worry about that secondary wave.
That leaves the real decisions in the hands of the business community and the consumers. In Georgia, there have been many businesses that have decided not to open just yet and seem to be waiting for statements from the medical community. This has been a pattern in Europe as well. In China, the businesses have been ordered to reopen. The consumer has been very cautious as well. They have shown some willingness to return, but it has yet to be a stampede back. The attitude has been careful and people seem willing to adopt new protocols to limit their exposure. The polls suggest that many consumers are interpreting the return to work plans as politically self-serving and not in their best interest.
Life After COVID-19
As challenging as these times have been, we do know there will be life after the pandemic—quite a lot of it. This is hardly the first time the world has been beset by a viral attack. As a matter of fact, there have been many of these over the last decade, this is why the COVID-19 pandemic has been referred to as a "black swan event." It has been the "expected, unexpected" event. We knew we would be facing yet another disease outbreak as we have already had to deal with SARS, MERS, swine flu, avian flu, Marburg, Ebola, West Nile virus, Zika and so on. Each of these have presented their own issues and have been dealt with in different ways. The threat from COVID-19 is ironically that it is very often a mild infection. It has been estimated that upwards of 96% of those that contract it are not hospitalized and perhaps half are asymptomatic. This has been its greatest danger—millions of people spreading the disease without even knowing they have it. This is the primary reason that a global lockdown was ordered—there was no other way to stop the spread as we simply had no way of knowing who could transmit it. This reality will affect the way we behave once the crisis starts to fade.
Analysis: It is obvious that life will not be the same as it was before the outbreak, but at this stage it is unclear what will be most likely to change. Three broad categories of adjustment seem to be emerging at this point, but it is likely there will be others as we digest the implications. There will also be events in the future that will affect the way we react. When a reliable cure is developed, the fear factor will diminish as people will be more tolerant of the spread of COVID-19 if the fatality rate falls to a very low level. There will be a dramatic shift when a vaccine becomes available and the disease can be handled the way we currently handle the flu.
Adjustment No.1 will be the imposition of new health-related protocols. Some of the suggestions will be quite intrusive, reminiscent of the security protocols ushered in by the 9-11 attacks. Airline security may include health and temperature checks before passengers are allowed past screening, office buildings may impose similar restrictions and may strictly control visitors. Large gatherings may come under scrutiny although it is hard to imagine what screening would consist of at a concert or sporting event. It is likely that expanded sick leave policy will become normal as business will seek to ensure that people stay home if they suspect they are ill.
Adjustment No. 2 comes in the way we conduct business. We have already seen a massive shift towards working at home, but there have been mixed results. At first, the majority of employees that were instructed to work remotely welcomed the opportunity, but as the weeks have passed, the polls suggest this option is not so popular any longer. The majority of managers and supervisors remain less than enthusiastic. The challenge will be to find ways to make returning to the office safe. Another issue will be the ability to engage in face-to-face interaction. The lack of trade shows and conference opportunities has affected sales and business development. People want these back but without risking the spread of disease. This will require a lot of personal responsibility in terms of distancing and hygiene.
Adjustment No. 3 will likely be the toughest—consumption. There has been a great deal of talk regarding when and under what circumstances businesses will be allowed to reopen, but that is only half the battle. The business that is in lockdown now is unable to make any money, but they are also not spending as much as they were as they are not buying inventory or paying their laid-off workers. Once they start up, they will need to pay people again and buy things again. They will then need consumers. Will consumers rush to resume old habits? Polls suggest the consumer will fall into three segments. Roughly a third will indeed rush to resume old patterns, another third will remain ultra-cautious and will continue to essentially remain in self-quarantine. That leaves the remaining third who will be waiting for real assurance they will be protected. This will rely on their faith in the leadership and its messaging.
The May Rebound
As has been stated repeatedly by economists and other analysts, this is far from a normal recession. It is described as a "lockdown recession" for a reason. It was imposed by an edict designed to deal with a medical crisis. Technically, that means it can end with a lifting of that lockdown. The sense is that some of the criteria for such a lifting will have been met at some point in May. That sets up a May rebound.
Analysis: If this is indeed the case, the recession of 2020 will end up being a classic "V" shaped downturn. The decline was intense and swift. If there is a May recovery, the ascent back to growth will be just as sharp. The estimates that are coming in from a variety of analysts are optimistic. The International Monetary Fund (IMF) suggests a decline of -3% in global growth this year, but expansion of close to 6% in 2021. Goldman Sachs, JP Morgan, Morgan Stanley and several other investment groups assert the growth numbers will return to pre-COVID-19 levels by the third quarter. The assessments that have been coming from the Asian countries all assert that growth in 2021 will exceed the growth numbers registered in 2019.
There are still many unknowns to contend with. Will the consumer return to old patterns quickly enough? Will business be able to shake off the damage of three months of lockdown? Will there be a second wave of infections that become serious enough to reimpose restrictions? Will the world recover and start buying U.S. exports again? Will the virus explode into parts of the world that have not been as seriously affected to date and will that affect the U.S., Europe and Asia? Will the markets recover and will there be major surges as far as inflation is concerned as the world tries to digest all the money that has been circulated?
PLEASE Do Not Try This at Home
In moments of crisis, there always seem to be reactions that reveal that not all of us can claim to be the sharpest knives in the drawer. Lately, there have been many "novel" suggestions on how to cope with the COVID-19 reality. There is the site that has been taking inspiration from Tom Hanks in Castaway. They are selling mannequins that can be dressed to look like those friends and family members we have been missing. Perhaps I can acquire a bunch of these and position them in my office like an audience, making my webinars more interactive.
The more dangerous ideas are worrying as there have been many nostrums touted as cures. These have ranged from eating prodigious amounts of kale (these people will stop at nothing) to including vodka with every meal. One sincerely hopes that ingesting bleach and/or hand sanitizer does not become a thing. Personally, I am seeking justification for consuming more chocolate and coffee.