Strategic Global Intelligence Brief for June 1, 2020
By Chris Kuehl, Ph.D., NACM Economist—
Short Items of Interest—US Economy—
Another Blow to Retail
The promise was a tentative one to begin with. There was supposed to be a May rebound from the lockdown recession as communities all over the country started to re-open their businesses. This process has been halting and confusing enough without the added instability that has come with the outbreaks of civil unrest. The damage from these riots has been both immediate and psychological. The communities that have been attacked suffered from looting and destruction visited on business that has not been allowed to earn revenue for months. More threatening is the fact that cautious consumers are now even more wary and unwilling to venture into the areas that have been affected by the violence. These are very often areas where the economic impact has been the most severe. Many of these operations will not recover from the double hit they have sustained.
Cities Face Very Tough Decisions
It has been abundantly obvious that the local revenue stream has been devastated and there are no easy means by which to recover. The majority of communities rely on sales taxes, property taxes and user fees of varying types. All of these sources of revenue have been compromised and virtually eliminated by the lockdown recession. The only alternatives at this point would be some means by which to gain more revenue through special taxes or radical reductions in local services. The most likely option will be reduction in services, and these will not be trims. It is very likely that whole categories will be eliminated and there will be an accompanying level of increased unemployment.
Big Data Releases This Week
Not that anybody will be surprised by the information that will come out this week, but there is some faint hope that it will not be as bad as many expected it to be. There will be a release of the latest Purchasing Managers' Index for the U.S. as well as most other nations in the world. The numbers will certainly be trending in negative territory, but just how negative will be the issue. The latest Credit Managers' Index was still in contraction territory, but there had been a gain over where it had been prior to this month. Later in the week, there will be more employment data, and that might show some gain in places. More likely, there will be a reduction in new unemployment numbers, but it is probably premature to expect gains.
Short Items of Interest—Global Economy
Ireland Back to Battling Economic Issues
At the end of the 2008-2009 economic crisis in Europe, there was a moniker devised for the hardest hit nations. They were referred to as the PIIGS by some in the press—especially those from the northern nations that were going to have to foot the bill for the recovery. These nations were Portugal, Italy, Ireland, Greece and Spain. The Irish dug themselves out of that hole before the others and seemed to have left these bad economic times behind. That is not the case now as the country has been slammed hard by the lockdown recession and the fact it was still trying to pay off that old debt. This has now become the crucial issue in the upcoming elections.
Spain Set to Face Multiple Crisis Situations
The impact of the COVID-19 crisis has been worse in Spain than in any other European state—even Italy has been sporting slightly better numbers. The lockdown has been more severe than in other nations as well. This makes leaving the restrictions in a week more than a little controversial. The situation has been made worse by the decision to sack one of the leading officials in the Civil Guard. The issue that brought this to a head has been a critique of the government by the Civil Guard accusing it of not acting fast enough on the virus. Specifically, the assertion was that a large woman's march was allowed even as the lockdown was being planned. The Socialist government has asserted this was political as the people that attacked the march did not object to a football match that involved a crowd of tens of thousands. As with almost every nation that has been going through the crisis of virus and economic shutdown, there has been a sharp politization with those on the right and left staking positions on the response.
Bluster but No Action
The world is not short of crisis situations and the markets are trying to react to every one of them it seems. After months of increased tension between the Chinese government and protestors in Hong Kong, the Beijing response escalated. An edict was delivered that essentially destroyed whatever vestige of independence the city had. This action provoked a great deal of condemnation on the part of the world, but little in the way of real action. The Trump response was as it has been before—strong threats that stopped short of concrete activity. The threat to cut Hong Kong's special status has been just that as there are significant U.S. and global assets in that city which would be severely impacted by this move.
Analysis: Markets reacted to the threat with a major decline, but that has been reversed to some degree as it has become obvious that nothing definitive has been decided. This does not mean that steps might yet be taken, but now the U.S. is embroiled in a new crisis of its own and Hong Kong is likely to slip to the back burner for a time. The European reaction has been similar to that of the U.S.—lots of outrage and condemnation, but little in the way of a real response. It has even more at stake in Hong Kong than does the U.S.
Supply Chain Disruption Likely to Lead to Permanent Change
The advanced state of supply chain logistics over the last few decades had been one of the most unnoticed and vital innovations of the new century. Most of this advancement went unnoticed by the majority of the population except in terms of what it allowed as far as consumption. Although all kind of credit was given to the internet for the rise of online shopping, the reality is that none of that "revolution" would have been possible without the massive shifts that took place in the supply chain. The appeal of online was that it could deliver quickly—nearly as fast as going to the store to buy the item oneself. There has always been delivery. Most of us grew up with the Sears and Wards catalogs and the thrill of poring over those hundreds of pages. The problem was that ordering meant planning as it would be weeks and weeks before the item arrived. The online promise has been instant gratification. That meant a supply chain that would be able to react quickly.
Analysis: There was always a way to ensure swift delivery of what people wanted, but that came at a cost. If a customer was to get that delivery fast, the item had to be available. In order for that to happen, there had to be storage and warehousing on a grand scale. It is one thing to have lots of winter clothes available as winter approaches, but quite another to have them sitting in your storage rooms the rest of the year. The stores focused on keeping popular items in stock. For everything else, the customer had no choice but to wait. That was when supply chain innovation came into its own. The notion was termed Just-In-Time (JIT). This was not limited to the consumer flow either. Factories would be able to reduce the costs of storing parts and materials as they could count on their arrival when they were needed. The consumer enjoyed stores that supplied daily. They shopped online with the assurance their purchase would show up a day or so later. That system relied on technology and strategy, but most importantly, it relied on a global trading system that was well connected. This system now shows real signs of breaking down. As it collapses, the security of the global supply chain is suffering as well.
The COVID-19 crisis is not responsible for this supply chain collapse, but it has certainly contributed to it and has hastened the developments that were challenging this system. It is not clear that there will be a return to the system after the COVID-19 crisis comes to something of a conclusion. Over the last several years, the global trade patterns that had allowed this diverse supply chain have been under attack. Ten years ago, the global trade conversation was all about new deals and arrangements. There was talk of a Trans Pacific Partnership and expansion of NAFTA, a new deal between the U.S. and Europe, expansion of the EU, development of Pan African trade, expansion of Mercosur and ASEAN and CAFTA and so on. It was a time when open borders and global trade growth seemed assured. Today, all of this talk has ceased and global trade has been replaced by protectionism and outright hostility. No business can count on access to any other nation or part of the world for anything.
This will bring back the system that was supposed to have been rendered obsolete by the rise of supply chain technology. The future is now back to the world of warehousing and inventory costs. The magic of online is suffering already as people learn that products may not arrive for weeks or months.
Economic Stress and Unrest
It is not appropriate to wade into the ferocity of the issue that has gripped the nation over the last several days in the pages of a publication that is devoted to economic issues and business. It has been equally inappropriate to try to delve into the details of a medical issue such as the COVID-19 pandemic. In both cases, however, there has been a clear economic connection. The destruction of the world economy has been apparent as attempts are made to control the impact of the disease. It has been equally obvious that there has been devastating local impact from the unrest. There is an even closer connection between the two issues.
Analysis: The reaction to the outbreak of violence in the U.S. has been shock. It is very clear there are major underlying issues that have been simmering for years, but the question is why they have exploded with such violence now. The fact is the U.S. is not alone in this experience. There have been riots and bouts of intense civil unrest in Europe, Latin America, Asia, etc. No part of the world has been immune to these outbursts and they have been more intense than in the past.
There are many reasons for a long-standing grievance to trigger. Chief among these is economic stress. In the U.S., there are over 40 million people who lost their jobs in the last two months, worldwide there has been a loss of $3.4 trillion in wages. In a matter of weeks, tens of millions of people have been deprived of even a modicum of economic security and there is no sense of improvement in the immediate future. Tens of millions have been rendered desperate. There are many reactions to this sudden situation. Some become depressed and turn to drugs and alcohol or even suicide. Some become angry and bitter. Some work harder than ever to recover their lost lives. In most of the world, there is ample evidence that people have gone through stages as a result of the pandemic—from denial and shock to fear and now to anger. The anchor for modern society is hope for a better future. When that has been stripped away, there is not much to blunt people's frustration and fury.
Ferocious Budget Battles Shaping Up
For the last several months, the only concern on the minds of the political leaders at the federal, state and local level has been how to deal with the coronavirus outbreak. For a variety of reasons, the only option on the table has been some form of lockdown or mass quarantine. The tactic may have worked to slow down the spread of the virus, but it has certainly not eliminated the threat. It has most definitely crippled the economy and necessitated a massive spend at all levels of government in order to cushion the blow. It is not clear how effective that tactic has been either. There have been at least 40 million jobs lost, businesses driven to bankruptcy and widespread evidence of social unrest linked in some way to this sudden economic shock. It has also become obvious that tax revenue has been drastically reduced. The local governments rely on sales tax—a tax that has not been collected at normal rates for weeks. The other taxes paid have been sharply reduced as income has crashed. You can see where this is headed. A massive increase in spending coupled with a massive reduction in revenue is not sustainable. One or both of these factors will have to change.
Analysis: There is very little talk of reduced spending at this point. Not that there ever is, but now the premise is nearly universal that cuts to government assistance during the virus crisis would be unacceptable. That leaves some form of "revenue enhancement." There is nothing new about calling for a tax hike as this demand has come from both the left and the right of the political spectrum over the years. The left position has traditionally been that social programs need to be better funded. Those that make the most money should be the ones to pay the highest taxes in order to finance these programs. The traditional position of the right has been that high taxes on those that make the most money is a disincentive to make that income and slows the overall rate of growth. These are grossly oversimplified interpretations of both the left and right as there is a tremendous variety when it comes to tax plans and revenue priorities. Any discussion of tax policy will swiftly become a debate over what the role of government should be.
In very broad terms, there are two approaches to budgeting—whether it is for a government or a business or a family. One strategy is to determine all the things one wants to do—what programs are desired, what machines are required, what goods and services do you want to consume. Once that list is compiled, it is then possible to know how much money is needed. This would prompt the individual to seek a job that paid what they now think they require and the business will do its revenue projections. There are obvious limits as the average person will have little luck in demanding their employer pay them a six-figure income just because they want to live a six-figure income lifestyle. The government entity has the option to tax up to a point, but then has to borrow.
The second approach is to determine how much money one has and then decide how that money will be allocated. For the majority of businesses and individuals, this is the most common tactic. The government also engages in this conversation, but has the option of demanding more income through taxation. There is always the ability to borrow as well. The individual and the business will reach a point where borrowing is not an option, but governments do not. The debt load can climb without limits.
The bottom line is that something has to give, but it is unclear what that will be. Will spending be sharply curtailed and reversed to reduce the need for revenue? Will taxes and other forms of revenue be increased to pay for the spending? Will governments continue to avoid spending cuts and increased taxes and extend reliance on debt? At the moment, it is the latter that seems most likely, but there will be more calls to address spending and taxing in the very near future.
Coping with Crisis and Disaster
I seem to have developed two responses as far as coping with the crisis atmosphere that has gripped the world of late. On the one hand. I am seeking escape in watching cooking and gardening programs on TV. On the other hand, I am suddenly gripped with the desire to watch programs and read books that deal with other crisis situations in the past. I watched the miniseries on President Grant and was reminded of the deep divisions that led to the Civil War that have lasted to this day. I also watched a series from a few years ago entitled "The World Wars." It chronicled the rise of Hitler from WWI Lance Corporal, the rise of Benito Mussolini from newspaper reporter, the rise of Stalin from imprisoned revolutionary in his native Georgia where he was known as Josef Djugashvili. It also detailed the lives of people like Winston Churchill, Franklin Delano Roosevelt, George Patton, Douglas MacArthur and others.
It was far from clear the world would survive any of this. The carnage of the Civil War cost 600 million lives in the U.S. The death and destruction of WWI and WWII was beyond human comprehension. The atrocities of the Holocaust still shock. Twenty million died in Stalin's Siberian death camps. The U.S. was essentially forced to deploy the most devastating weapon in history. We all know these stories to some degree, but it seemed appropriate for me to review this to understand that we have survived many catastrophes and disasters—many of our own making. It is trite to assert that "we are all in this together" or to declare that we will get through this latest challenge. History shows that we will and always have, it also shows that millions and millions of people did not. The price we pay for this survival has been exceedingly steep and always will be.
The Global Supply Chain
The complexity of the global supply chain has been a given for a long time. The fact is most of the manufacturers that we think of are really assemblers as opposed to manufacturers as they are bringing in parts and assemblies from all over the world to create a whole thing. This is the system that developed to maximize the efficiency of producers and to keep costs down as all these suppliers can be pressured to lower their costs or risk losing the business.