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Strategic Global Intelligence Brief for February 28, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Meanwhile—Back at the Ranch
It would seem that everything else in the economy stopped once the issue of the coronavirus hit, but as important as this outbreak has become, there is a certain amount of life that still goes on. One of the ongoing issues has to do with where people are moving and why. The U.S. is not quite as mobile as it has been in past years as there are more inhibitions than used to be the case, but people between the ages of 25 and 45 still do a fair bit of migrating as they settle into their lives. The fastest-growing cities last year included Nashville and Austin as they have both featured high wages and low levels of unemployment. The remaining members of the top-ten list include Denver, Seattle, San Francisco, Salt Lake City, Raleigh, Orlando, Dallas and San Jose.

Taking the Temperature
There will be some important data releases today. Most of them will likely not reflect the impact of the COVID-19 virus just yet. These are readings taken a little before this all blew up. There will be reports on the size of household income. They are expected to show some decent gains as the job market has been strong. Up until this week, the markets were holding. This week, the markets plunged, which will affect the household income going forward. There will also be reports on consumer spending and inflation. These notes should also be positive. There has been very little to push inflation at this point and consumers have been upbeat until very recently. The question is whether this data will be seen as the high-water mark after which there will be a sharp deterioration.

Oil Prices Sliding
There has already been a sharp decline in the level of business activity in Asia. By all accounts, that decline will accelerate to include the rest of the world—that worries the oil producers. There has been a sharp reduction in demand for oil already, and this is only the beginning. That has the producers radically cutting their output as prices plunge. Suddenly, people are talking about per barrel prices as low as $30. This would severely impact the traditional oil states in the Middle East as well as Russia, but it also tears a major hole in the U.S. oil economy.

Short Items of Interest—Global Economy

Central Bankers Not Overly Concerned Yet
Thus far, the leaders of the world's central banks are not reacting to the threat of COVID-19 with any sort of radical policy change. It has been a matter of wait and see, although they recognize that economies around the world have been staggered for the moment. The real issue is that there is not much the banks can do with rates as low as they are. The traditional response would be to drop rates to stimulate, but the rates are essentially at rock bottom already. All that would be left would be some sort of quantitative easing effort. There is not a lot of support for that kind of move.

Riots in Wake of Trump Visit
The Indian government was determined to put its best foot forward for the visit by Trump, but the seething nationalism was boosted by the show. Prime Minister Narendra Modi is an ardent Hindu nationalist. As the Indian economy has sputtered, he has become much more dependent on his Hindu base. The demonstrations in support of Modi quickly turned into anti-Muslim riots. They have been as intense as any India has seen in years. The trigger for all this has been a new policy that affects the status of Muslims in India and reduces their standing.

Coping with Age
Life spans are longer all over the world. It is now quite obvious that the first generation which can expect to live past 100 has been born. This can be an asset or a burden, but there will have to be attitude changes. Right now, the world behaves as if people were worn out with one foot in the grave at 65. The fact is people now have some 20 to 30 years of work left in them at 65. Can society afford to lose this and can it afford to take care of people for that 30-year period? The age of retirement would be 85 if the old measures of longevity were employed today.

All Virus—All the Time
You are likely getting sick (so to speak) of the wall-to-wall coverage of the outbreak of COVID-19. It has clearly become a major threat to the global economy, although it is not as clear what it really means to global health. There have been hundreds of conspiracy theories and more appear every day. Is it a liberal plot to weaken the economy or a conservative plot to make Trump and Pence look heroic? Is it a Chinese plot or an American plot? Some now even want to blame Iran. What do we really know? The crux of the matter is we don't know as much as we need to. What we do know is there has been a profound impact on the global economy. The supply chain from China to the rest of the world has been severely disrupted—it has been estimated that over five million companies are sourcing directly or indirectly from the affected areas of China. The spread of the virus has meant the spread of quarantines and shutdowns. That extends the economic impact dramatically.

Analysis: At this point, there is too little known about the future of this spread; leaving it up to how one chooses to interpret the assessments on what is likely to happen. There is something for the pessimists and the optimists, the pragmatists and the conspiracy theorists.

The pessimists assert this will become a full-fledged global pandemic that will infect over 80% of the global population. This will kill millions and collapse the global economy. The recession that follows will be as bad or worse as that which was dubbed the Great Depression in the 1930s. The optimists assert this is not much more than an amped up version of the flu. It will kill vulnerable populations (flu killed 600,000 globally last year). It will create strains in the global supply chain and could well drag growth in China to less than 5% and global growth down by perhaps a half-point. The disease will peak in the next few weeks and then start to recede. Vaccines will be developed.

Much will depend on overall attitude of the global consumer. Will people stop traveling? Will people start to shun crowds? Will people worry about losing their jobs and will that slow their consumption? It has been that consumption that has bolstered the U.S. economy. A reversal will impact the U.S. quickly.

Most Likely Reaction in US
It should be pointed out right away that this article is pure speculation and, for the record, so is every other story you might encounter on the subject. This is actually part of the problem. Nobody really has all the information they need to determine the extent of the threat. The major issue is that many people who contract the virus get a very mild case and are not even aware they have it. To them it feels like a bad cold. They go about their normal routine which exposes many more people. The optimistic assertion is more people will be aware and careful and will avoid infecting others. This would slow the spread and limit the impact on the more developed nations. The majority of economists are asserting the majority of the damage will occur over the next four to six months. Once the outbreak is considered under control, there will be a swift economic rebound. There are lots of assumptions here and many aspects of the outbreak that are likely to be unexpected.

Analysis: The hardest part to predict is the reaction of the public. Two reactions would make this outbreak much worse. The first would be panic with people refusing to go to work, attend school, travel, be around crowds, attend events and otherwise risk exposure. This would essentially shut the domestic economy down. The second inappropriate reaction would be to ignore all the warnings. Since most people will only get a mild version, they may be tempted to behave as they always have and thus risk infecting others. The ideal response will be for people to be cautious and pay attention to their health, but to carry on as normally as they can. That is a very narrow needle to thread.

World Leaders and Virus Crisis
These are extremely perilous times for people in political power. The citizens of these nations are scared and in some cases near panic. The economy of the world has been shaken in a way it hasn't been since the financial sector collapse. This time, the threat is far more visceral. This is when the population turns to its leaders to do something, but there is really not much that can be done. The primary goal now is to calm and reassure—to convince the population there is a plan and that everything will be OK—at some point. To do this, the leaders have to have credibility with their population. Right now, this is in very short supply.

Analysis: The Chinese are convinced their leaders knew about this threat, but chose not to tell them. They are not yet holding Beijing and President Xi Jinping accountable, but have vented their frustration at the regional leaders. However, if things don't improve, it will reflect on the central authorities. There is deep skepticism as far as Trump is concerned as he seemed to make a big mistake by appointing Mike Pence to deal with the issue given Pence's consistent distrust of science and medical expertise. The U.K. is having the same problem with believing Prime Minister Boris Johnson. There is not much more confidence in the other European leaders outside of German Chancellor Angela Merkel.

There has also been a great deal of conflicting information from the medical community with some predicting a massive disaster and others downplaying the outbreak. It is very hard for the average person to make a decision. There have been unhelpful extremes in evidence already. Some are going into self-imposed isolation and others are ignoring all the precautions and almost defying the virus to impact them. What is needed is a firm and calm response that deals with the outbreak in a manner that protects the population, but not at the cost of an economic meltdown. In the weeks and months ahead, there will be an opportunity for someone to take control, but thus far, there has not been evidence of anyone prepared to take this on. Perhaps it is too soon and too little is known. It remains a problem in Asia and a future problem elsewhere, so there is still time.

Freight Sector to Face First and Most Serious Threat
There will be plenty of economic reactions to the threat from COVID-19. Travel companies are feeling it and of course those companies that do business in China and other parts of Asia. The first major impact area will be the freight sector as there has already been a major slowdown in both outbound and inbound activity. There is far less coming from China and Asia in general as many operations have been shut down. At the same time, there has been a reduction in demand for U.S. goods in these Asian nations as their economies slow down.

Analysis: The first sector to have felt the impact has been ocean freight, but there has been a reaction already in rail and trucking as well as air freight. These companies had not been all that healthy to begin with. This has just added to their malaise. There is a potential silver lining to all this. At some point, the restrictions in China will be lifted and companies will be scrambling to get their inventory levels back to where they need to be. The only piece of good economic news in all of this is these shortages are coming at a point in the year when demand is somewhat soft to begin with. In another few months, the retailers will be aggressively trying to build for the coming holiday season and there will be a need to build inventory for the summer months.

The Jobs and Skills Dilemma
The lack of skilled workers in manufacturing, construction, transportation and other sectors has been evident for some time. Nearly every company reports that their biggest challenge is finding the right people to hire. There is now a secondary issue just starting to gain attention. What happens if these people are trained and take jobs that subsequently vanish? Manufacturers who have been frustrated by the lack of skilled workers are turning to technology and robots, transportation companies are looking hard at driverless vehicles, construction companies look to modular and manufactured segments to counter the lack of people who can build on site. Is there any reason to assume these trends will halt even if there are more trained people available?

Analysis: In the last decade or so, there has been real change in the way people make a living. The administrative assistant that once answered calls, organized schedules and made travel arrangements has been replaced by one's cell phone. Machines handle dozens of industrial tasks. These machines allow consumers to do away with cashiers (whether they want to or not). What is there left for people to do when machines and technology can do it all? Halting technological change is not possible and it is not even desired. What has to happen is a rethink of what people do that machines can't.

It isn't a matter of skill—machines can be designed to be much more skilled than even the most highly skilled people. Robots can conduct surgery autonomously. We have already seen the rise of the autonomous vehicle. Those who work with data can't possibly keep pace with the computers that can process that information. The human essentially brings two things that machines can't—the ability to empathize and the ability to build a relationship. A machine can conduct cancer surgery, but can't it sit by the bed of the cancer victim and get them through the ordeal.

Beyond the lack of skills in various trades, we are losing the ability to bring the human factor to our lives. People who do not learn to interact with others because they rarely detach from their screens are people losing the one skill that machines can't replicate. If people are someday rendered obsolete by the technology and machines we have created, it will be because they lost sight of the talents and abilities that only a person can possess.

The Real Pandemic
I am not asserting the threat from COVID-19 is to be dismissed—I recognize that this disease has killed thousands and will kill many more. My concern is that a pandemic of ignorance and stupidity has been spreading even faster and could do more damage. There are conspiracy theories emerging all over the world—Iranians think it is a U.S. plot triggered by a movie and aimed at them through China. Right-wingers in the U.S. blame liberals and China. It seems not to slow people down one bit to think that a Chinese plot against the U.S. is based on sickening hundreds of thousands of their own people and destroying their own economy—that is just how sneaky these guys are.

I have been talking about the economic impact for days (whether I want to or not). I am absolutely astonished that people have not taken the time to understand the first thing about the disease. I ask if they know the symptoms and get responses that range from becoming paralyzed to discovering one is riddled with cancer. The symptoms are a runny nose, a cough and sneezing. Basically, the same symptoms one gets with a cold. Almost 80% of those who contract it get a mild and non-threatening version, but that is why it has spread so fast. People who are paralyzed will likely seek medical help and will be unlikely to resume their normal routine. People with a cold just keep doing what they always do—they go to work, shop, attend events and travel, and in the process, they expose more people who think they picked up a cold.

The threat is real enough, but ignorance and panic will not improve the situation or one's chance of remaining healthy.

How This Outbreak Compares with SARS
Who knows how long this comparison will prove useful? The COVID-19 is still more mysterious than SARS was. The point of the graph is that the number of cases has been similar, but the death rate from SARS was much higher. Thus far, the majority of those who contract COVID-19 have gotten the mild version. The mortality rate has been less than that of the flu and certainly less than with SARS.

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Monday, 30 March 2020