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Strategic Global Intelligence Brief for April 8, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Three-Quarters of US Population Hit
The latest survey of the damage reveals that roughly 73% of the U.S. population has been affected negatively by the economic shutdown. There are those who have lost their jobs. They have taken the brunt of the assault, but most of the population has seen a reduction in their income in some way or the other. For those who still have their jobs, the impact has been through the collapse of their investments and their retirement accounts. If there is a silver lining to any of this (and it is a very thin one), it is that recovery is still a real possibility. The recession was triggered by government edict and can be reversed by another edict. The rebound would not be automatic and millions will continue to struggle. It will all come down to timing. The longer the shutdown lasts, the harder it will be to recover.

How Many Fatalities?
This would seem to be the most important question to ask and answer. How many people will die from the COVID-19 pandemic in the U.S.? If one attempts to get an answer to this, one will get a range between 84,000 and 2.3 million. This is less than useful information. The majority of these estimates rest on some model or another and can at least be evaluated according to the inputs and assumptions. Settling on a verifiable and accurate assessment is paramount if the U.S. is going to be able to determine next steps as regards the economy, but getting a straight answer seems impossible.

Small Business Rescue Bogs Down
As expected, there has been an overwhelming response by small business to the offer of financial assistance through the government's $350 billion allocation. Also as expected, that demand has overwhelmed the banks that are charged with implementing the program. The notion has been that private banks would be speedier than a government bureaucracy, but these banks still have to deal with that bureaucracy. The process has been far slower than preferred. The Federal Reserve is trying to streamline the process, however. That may provide a bit of relief, but the reality is that small business will have to wait weeks to get that help.

Short Items of Interest—Global Economy

Trump Attacks WHO
The Trump attack on the World Health Organization (WHO) has been perhaps the most baffling of a series of baffling reactions. Trump's assertion is the WHO was "wrong" about the spread of the virus in China in January. There is no evidence to support this assertion as the WHO was limited in its access to China for much of the first part of the year. They reported what China offered and warned at the time that these numbers were likely not accurate. As global health authorities were finally granted access to the affected region, the data collection improved.

Europe Faces Moment of Truth
The economic collapse in Europe has been stunning and, in many ways, has been worse than in other parts of the world as the EU economy was already weak when the crisis began to unfold. This is setting up a very challenging decision—one that every nation will have to make sooner or later. The economic shutdown has to end and this, before the virus is fully contained. The time for the trade-off has arrived and governments will have to accept a level of viral spread and fatality. The damage from economic collapse has reached the point it is causing as much death and destruction as the disease.

Anger Boils Up
It is not hyperbole to declare that the scientists are in revolt. The latest statement was the resignation of the top scientist in Europe—head of the European Research Council. His frustration with the politicians became too much and he is far from alone.

Latest Credit Managers' Index Shows Strain

There has been a cascade of negative indicators as far as the economy is concerned—shutting down a third of the system by government edict will tend to do that. The news from the collection of Purchasing Managers' Index readings around the world has been very negative and the data from the latest Credit Managers' Index is no better. What follows is the executive summary of the index as well as some breakdown for the manufacturing and service sectors.

Analysis: Needless to say, the world today is a far cry from the world that existed a month ago; it is not clear the world of tomorrow will be recognizable, at least for a while. The credit manager has truly become a crucial player in this environment—more than during other recessions. The companies critical to the success of their own companies are suddenly faced with a shutdown that could last months. That has crippled their ability to pay their bills or even hang on to their employees. They will all become highly dependent on the relationships developed over past years. Credit managers will be faced with many challenges. The data this month is as bad as has been seen since the financial sector collapse in 2008, but the numbers have not crashed into the 30s yet. This still remains a possibility in months to come.

The combined score for the Credit Managers' Index (CMI) dropped to 49. This measure has not been below the 50 line (contraction) for years. This will be the story throughout this month's assessment—record-setting declines that will match the recession numbers in 2008 and 2009. The index of favorable factors has tumbled out of the sixties in drastic fashion as it is now reading 46.5 after sitting at 62.2 in February. The index of unfavorable factors likewise fell, but not to the levels of the favorables. The full impact of the crisis has not yet hit many companies, so for the moment, the damage has been somewhat limited—falling from 52.2 to 50.6. This reading is not expected to remain above 50 in subsequent months, however.

The real damage can be seen in looking at the specific readings. The sales numbers plummeted from a high of 64 to 39.5; the reading has not been this low in years. The new credit applications also cratered from 62.2 to 44. The dollar collections numbers followed suit with a reading of 49.3 after a reading of 58.8 the month prior. The only sector that did not fall into the forties was the amount of credit extended as it went from 63.6 to 53.2. In short, there was very little to find favorable in the favorable data.

That trend continues with the unfavorable readings, but not quite as dramatically. The full impact of the business shutdown has not been felt, although it will likely start to manifest in the weeks to come and in the next iteration of the CMI. The rejections of credit applications stayed almost where they had been with a reading of 53.5 compared to 53.8 in February. The accounts placed for collection numbers were exactly the same as last month at 50.6. There has not yet been time for the crash in business activity to trigger actions as far as collection is concerned, but most expect this to develop soon enough. The disputes numbers actually improved from 50.3 to 52.1. There was a substantial decline as far as dollar amount beyond terms (53.5 to 43.9). As companies are shut down, they are hoarding their cash reserves as aggressively as they can and they will be reluctant to keep on top of their credit. The dollar amount of customer deductions did not alter much. The reading this month was 50.4 and last month it was 51.5. The filings for bankruptcies also remained stable at 53.2 from 53.3 last month. This will likely be the last of the indicators to move.

Manufacturing Sector

The impact of the COVID-19 outbreak was felt by the manufacturing sector before it hit the country as a whole. This started out as a supply chain crisis for U.S. manufacturers as the heavy industrial manufacturing area of China was essentially shut down as early as January. It has since become a bigger concern with widespread business shutdowns across most of the U.S. 

  The combined score for the manufacturing sector fell from 55.9 to 49.8. These numbers have not been this low for several years. The combined favorable factors fell from 62 to 48.2, also the lowest point reached in several years and as low as was seen during the recession of 2008-2009. The combined unfavorable reading didn't alter appreciably. It was at 51.8 and is now at 50.8. As discussed above, there has not been enough time for most business to react. The interruptions in business activity have developed in just the last two to three weeks; this is showing up in immediate data such as sales and credit applications. Sales dropped drastically from 65.7 to 40.3—nearing levels not seen since the recession in 2008. The new credit applications also fell like a stone as February's numbers were at 61.4 and are now sitting at 45. The dollar collections numbers didn't fall as dramatically, but they are expected to in coming weeks as companies struggle with the shutdown and supply chain issues. The reading was at 58.3 and is now at 53.4—still temporarily in positive territory. The amount of credit extended fell from 62.8 to 54—also still in positive territory, but down considerably from where it had been.

There has been less time for the unfavorable factors to register the impact of the shutdown. This will doubtless become an issue in the months to come. The rejections of credit applications actually improved a little by moving from 53 to 54.4. Those applications still arriving are generally coming from the better customers. The accounts placed for collection remained very close to where it had been before as there has not yet been time for many customers to get in trouble. The reading in February was 51.4 and this month it is 51.6. The disputes section also improved a little by going from 48.9 to 51.4, while most of the initial damage has been seen in the dollar amount beyond terms reading (from 54.2 to 44.3). Companies hit by the sudden shutdown are not in a position to pay their creditors and are protecting their cash flow at all costs. The dollar amount of customer deductions actually improved as the reading went from 49.8 to 51.3. As with most of the other readings, there has not been time for the bankruptcy numbers to alter—the filings for bankruptcies moved from 53.3 to 52, but in future surveys there will likely be a substantial increase.

Service Sector

In the coming months, the service sector will be taking the brunt of the shutdown impact given that the distancing restrictions have been aimed at restaurants, events, retail outlets and the like. The service side of the U.S. economy is by far the largest percentage of the GDP. It accounts for millions of jobs and billions in consumer spending. The CMI is weighted pretty heavily towards the retail community; the data will reflect that orientation.

The combined score for the service CMI is 48.1, down considerably from the reading in February when it was 56.5. The current reading is as low as it has been in years. The combined score for the favorable factors is down dramatically as was the case with manufacturing. It was at 62.3 and has collapsed all the way to 44.8. The extent of the decline is obvious as one looks at the specific sectors. The combined score for the unfavorable factors remained close to what it had been with only one area showing the strain thus far. The combined score was 52.6 and is now 50.4—still in positive territory.

The sales numbers cratered and are now in the thirties with a reading of 38.7 from 62.3—as bad as has been seen since the recession in 2008. The same collapse has been noted in the new credit applications as the numbers have fallen from 63.1 to 43. The dollar collection data was not even a bright spot as it was with the manufacturing categories. It was at 59.3 and now stands at 45.1—as low as this has been in several years. The amount of credit extended remained in positive territory although the decline was significant—from 64.5 to 52.4.

The specifics as far as the unfavorable readings were not as dramatic as those in the favorable categories and for the same reason as manufacturing. Companies are just starting to get into serious trouble. It will take a while before this makes an impact on their credit relationships. The rejections of credit applications slipped but remained in positive territory with a reading of 52.5 compared to 54.6 previously. The accounts placed for collection reading remained close to last month as well (49.7 compared to 49.8). There has not yet been time for companies to get in enough trouble to warrant collections action. The disputes category remained close to what it had been with a reading of 51.7 from 52.8. There have not been many arguments over the current situation as companies contemplate the future. The big impact in the service sector has been the same as that in manufacturing—the dollar amount beyond terms. It was at 52.8 and is now sitting at 43.5. That reinforces the sense that companies have chosen to stretch their creditors as far as they can as they strive to protect cash flow. There was also a slight decline in dollar amount of customer deductions as the number fell into contraction territory with a reading of 49.5 after last month's 53.2. The reading for filings for bankruptcies did not fall as there has not been time for companies to reach that point. The reading was at 53.4 and is now at 54.3, a number that will fall in the months to come.

March 2020 versus March 2019

These are wholly uncharted waters. In the best-case scenario, the crisis fades as soon as May or June and many businesses resume normal operations as fast as they can. In the worst-case scenario, the shutdown extends deep into the summer, millions remain without work and business failures skyrocket. The credit manager will have to decide what the likely fate of their customers might be. If they are doomed, the only course is to get as much of what is owed as possible. If they think the situation will improve soon, they will be inclined to wait it out and keep the relationship intact.

Return to Work By Phases

There have been two crises playing out at the same time—closely related but very different. The economic crisis was imposed by governments trying to deal with the COVID-19 crisis. To some degree, it has been a successful approach. At some point, these strategies will have to diverge. The fact is there will be no "end" to the COVID-19 threat—even when there is a vaccine and treatment options. It is just like when there is no end to the seasonal flu or any of the other viral threats. There is only a modicum of control. At some point, the trade-off will be determined—an acceptable level of infection and fatality will be established so that economic restrictions can be lifted.

Analysis: The most likely scenario is one that returns to "normal" in phases. The first move will be to open offices and other similar workplaces. These will be the easiest to monitor and protect with diligent hygiene efforts. The next step will be to open retail outlets more broadly. There are already millions of retail operations functioning—people can buy groceries, medicine, hardware and guns. It is a short leap towards allowing the purchase of clothes, furniture and electronics. Once again, there are simple steps to limit contact.

The harder decisions will come as venues are considered. Restaurants can be made more secure with aggressive cleaning and limiting numbers, but what can be done with sporting events, concerts and other gatherings of people? These will likely be the last parts of the economy to be allowed a chance to resume old patterns. The bottom line is that personal responsibility will come to dominate—people will be expected to exercise appropriate caution according to their vulnerability. Not all of us will be up to that challenge.

Trying to Gain Perspective

I have long had a habit of reading accounts of people facing trials and tribulations. One of my favorite genres is the travel adventure narrative. These are the stories of people who deliberately put themselves in miserable situations for some personal reason. They are sometimes explorers, sometimes just people on a quest. I read these as I am doing my own traveling so that I quit whining about airport delays and the other inconveniences of movement. I am now exposing myself to accounts of quarantine and isolation.

I have it far better than many. I have always done the bulk of my work at home and have long had a fully functional office. I don't have kids to entertain and distract—just cats that are perplexed that their servants never seem to leave the house. I miss my social contacts and the entertainments I indulged in, but most of my "hobbies" are connected to the gardening my wife does so I am outside a lot. Just about the time I am tempted to bemoan my fate, I pick up an account of some hapless soul spending their life in isolation or worse.

COVID-19 Product Shortage
One of the enduring mysteries of the COVID 19 crisis has been the great toilet paper (TP) shortage. Hoarding is a familiar response to any sort of disaster or threat as people seek to provide some modicum of security. Usually that hoarding is focused on food items, but this time, the fear seemed to take root in the bathroom. There are certainly those like the guy in the truck, but there are other reasons for the shortage. Suddenly, people are not using TP in their workplace or in public. These venues account for roughly 40% of TP usage. The product in these locations is different than that which we have at home and is produced by different facilities. They are not equipped to produce the TP we use at home. That means we have almost doubled demand for home product simply by remaining in isolation. The manufacturers of that home product can't keep up—even without hoarders.

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Monday, 25 May 2020