Strategic Global Intelligence Brief for June 10, 2020
By Chris Kuehl, Ph.D., NACM Economist—
Short Items of Interest—US Economy—
What Next for the Fed?
The next set of discussions for the Fed will revolve around what they do once the pandemic is considered somewhat under control. This would mean an economy that would be focused on rebuilding from the lockdown; not an economy that is adjusting to being in one. This is more than a semantic difference. It will be assuming that more and more of the economy will be returning to normal. The question then shifts to what new threats this might introduce and what the Fed will be asked to do and not do. The expectation is the Fed will leave rates near zero for an extended period, but they will also have to start watching potential inflation markers. There has been a great deal of money poured into the economy in the last few months, but it has not been able to go anywhere given the extent of the shutdown. What happens as these operations reopen and people have an opportunity to put that cash back into circulation?
Job Market Gains Wiped Out for Low-Wage Workers
In the last several years, there has been a substantial gain in the wages of those who have been at the bottom of the wage scale. Not that these have caught up with the rest of the country, but there have been several factors that have allowed gains by the low-wage worker to accelerate faster than the others—most notably the impact of an unemployment rate of 3.5% coupled with the growth of the minimum wage in manty states and communities. Seeing the loss of some 40 million jobs—mostly in the service sector—has devastated the low-wage community and erased all the gains that had been made in the last 10 years. The groups that have been the hardest hit include women in general and African American women in particular.
Consumer Prices Continue to Decline
There was an abrupt collapse of consumer prices at the start of the lockdown recession. That accelerated in April of this year. That fall has continued into May and is likely to keep heading in that direction through June. As the lockdown is eased and consumers start to resume their old habits, there will be a chance that prices will start to head up, but few are expecting these gains to promote anything close to an inflation surge. For the time being, many will be using lower prices to try to lure the consumer back to old habits.
Short Items of Interest—Global Economy
OECD Predicts Deep and Lasting Scars
The latest report from the Office for Economic Cooperation and Development (OECD) is both encouraging and sobering. That matches well with the kind of data that has been coming from the likes of the International Monetary Fund (IMF) and various global analysts. The good news is that the reversal of the lockdowns will allow for a rapid and robust rebound—the classic V-shaped recovery. The bad news is the damage that has been done is so severe it will likely take many years for the standards of living in the world to recover. The major problem is that governments will lack the ability to rebuild the economy in any meaningful way as they will have much less money to work with unless they saddle themselves with even more unsustainable debt. The future holds a major reduction in services as provided by the government at the same time that revenues will be increased through higher taxes and user fees. The costs could soar to catastrophic levels if there is any kind of lockdown imposed in future months or years.
Spread of Virus in Latin America Is Most Intense Yet
The news regarding the spread of the virus has been improving in Asia, Europe and the U.S., but the data has been getting worse by the day in much of Latin America. The shutdowns have been radical, but they have barely had an impact on the spread. That has added even more desperation. The potential exists for widespread riots and civil strife. Several governments are at risk of being toppled by the outbreak. The rates of unemployment are soaring to record levels. It is estimated that over half the population of the region will be in poverty by the end of the year—even as the virus kills tens of thousands.
One could be forgiven for assuming that all the problems that faced the world prior to the outbreak of the pandemic vanished in March. It seems that nothing other than COVID-19 has been of concern globally—at least until the surge of frustration and anger that has led to outbreaks of civil unrest all over the world. The issues that have provoked protests and demonstrations in the U.S., Europe, Brazil, India and elsewhere have long simmered, but the economic catastrophe has brought them to a head. The fact is that all the old issues are still with us and have likewise been exacerbated by the response to the pandemic.
Analysis: The Brexit discussion continues throughout all the turmoil in Europe and has become a far deeper concern than it was originally. Prior to the outbreak of the coronavirus, it was clear that a British withdrawal from the EU was going to damage the economies of both the U.K. and all of the EU. The estimates varied, but expectations held that British GDP would fall by between 1.5% and 5%. The EU would see a loss of perhaps 1.5%;s some countries would be damaged more than others. Germany and France stood to lose a great deal as they have long had a close economic relationship with Britain.
The impact of the lockdown recession on Europe has been nothing short of devastating. The region as a whole will stand to shrink by almost 9%, the worst performance since the end of the Second World War. The bailout plans are aggressive but they will still fall far short of what is needed to rescue the economies of the region. There are already 10 nations that have unemployment rates of over 10%. By the end of the year, every nation in the EU will see jobless rates double from what they were at the start of 2020. The economic distress has fueled civil unrest in Europe just as it has in other parts of the world. The business community remains pessimistic about recovery, although there remains some confidence that recovery will be noticeable by the third or fourth quarter.
A group of diplomats from nations like Ireland, Belgium, Italy, Spain and others have been applying pressure on the EU leadership to rethink the positions that have been staked out for the Brexit talks. These same considerations are under discussion in the U.K. It was obvious that a break would be costly before, but now, this is coming on top of the lockdown recession. The combination would be brutal. They are demanding that both the EU and U.K. rethink their positions on the Brexit deal and work towards preserving the trade relations that have existed between the two. The sticking points for the talks have been the same since the start of the process. The status of the border between Ireland and Northern Ireland, the willingness on the part of the U.K. to accept immigrants from the rest of Europe and the willingness on the part of the U.K. to accept EU rules and regulations. The EU position has been unyielding and the British have been just as locked into their strategy. The thinking now is that both the U.K. and the EU have far bigger issues to concern themselves with and can ill afford adding more stress to the situation. As has been the case in the past, it will be the Germans and French that will be the crucial players should there be a reconsideration.
Some Scenarios to Consider as Virus War Continues
By this point in the Great Coronavirus War of 2020, there is no element of the economy that has not been profoundly altered. The real question now is whether these impacts will be permanent. Will there be a return to what was once considered routine and normal, or will we develop a new version of normal that will permanently demand the concessions we have been forced to make in response to the pandemic? We already know that millions of people have lost their jobs and thousands of businesses have been forced to close. We know that "business as usual" remains a distant dream and one that may never be fulfilled. As we consider the options that might lie ahead, there are basically three scenarios that seem to be in play. At this point, each of them seems as likely as the other and much will depend on how the economy behaves in the next several months. The shape of 2021 will depend heavily on how we manage to navigate through the rest of 2020.
Scenario No. 1 is based on a slow and halting resumption of patterns that existed prior to the outbreak. This assumes that at some point in the next month or two, the virus is declared "contained" to a degree sufficient to allow a return to pre-pandemic behavior. There will still be admonitions to practice good hygiene and to be vigilant about one's own health, but the lockdown would be completely lifted so that events, sports and other gatherings would be allowed along with restaurants and service providers that require close human contact. The assumption is that consumers will accept the "all-clear" and be willing to engage in their old habits. That is, however, a major assumption. Polls right now suggest that almost a third of the population remains deeply worried and unwilling to engage in the way they once did.
This scenario would likely have a generally positive impact on manufacturing. The consumer will be eager to return to old patterns of behavior. That will include buying big ticket consumer items such as cars and appliances. The efforts to stimulate the economy through government checks and expanded unemployment benefits have thus far had little influence as the average person has not had much opportunity to spend that largesse. As the economy opens up, there will be more access and consumers will be able to spend again. It is assumed that some of that spending will be directed at goods that have been manufactured. The auto sector is one that could well see a surge at the end of the year—even by early in the fourth quarter.
There will be gains to be made in other sectors as well. The commercial construction sector is expected to resume its growth with most of the same areas of emphasis. There will be a dramatic surge in the development of warehousing as the global supply chain has been profoundly affected by this crisis and there is a renewed emphasis on maintaining supply close. There will also be more expansion in the medical community as there will be a recognition that capacity was lacking when this virus manifested. The oil and gas sector fell drastically at the start of the pandemic as demand for oil vanished with the lockdown. Prices fell as low as $10 a barrel for oil but have since recovered to around the $30 to $40 range. That has triggered resumed development in the energy sector.
The second scenario assumes there will be permanent changes to the way we live and work due to the experience of the pandemic and lockdown. It assumes that many of the restrictions put in place will remain. There will be restrictions on travel that will make the experience even less appealing than it has been. That may convince many in the business community to opt for the virtual interaction they have been introduced to. There will be many establishments that will not survive the continued limits on their operation—restaurants that can only open a fraction of their facility, service providers that will continue demanding extreme precautions, severe limits on gatherings that will eliminate sports, concerts and any other social interaction. These restrictions may be eased over time, but nobody seems to know what the pace might be. There has also been extreme variability among states and even within states. There have been some that have opened almost everything and those that are asserting they will remain closed until every person in their state has been given a vaccine—one that has not been developed as yet.
The impact on manufacturing will be more severe in this scenario as there will be considerable confusion as to what the rules will be. Consumers will continue to be restrained and cautious. Some will be unable to resume their old patterns and others will not be willing to. The most severe impact will come as a result of the continued high rates of unemployment. This scenario means that many of those 40 million that lost jobs will not get them back. The manufacturer gets caught between two bad employment trends. On the one hand there are far too many unemployed and they are unable to consume. In addition, the manufacturer still struggles to find the people needed in their operations. The vast majority of those that have been plunged into unemployment lack the skills needed by the manufacturer.
The third scenario is one that assumes some very-long-lasting trends and changes that will have less to do with the current coronavirus outbreak. The assumption is there will be no end to the viral threat, that it will be a significant factor for many years. This assumes that a vaccine will be slow to arrive and even slower to become universally available. It assumes the virus will adapt and change and remain in the environment forever—as most viruses do. The only option for many of these diseases has been management and control and the establishment of some system of tradeoff. This means patterns will change. More and more retail activity will be taking place online and brick-and-mortar stores will shrink radically. The office environment will change as most of the workforce will be encouraged to stay at home. Social gatherings will be restricted and discouraged and public gatherings will be curtailed as conversations revolve around playing sports without live audiences and limiting concerts and performances to some kind of electronic media. Conferences and conventions will be discouraged and, in many cases, eliminated altogether.
This is the biggest concern for the overall economy. This would mean considerable decline in almost every sector as the consumer will be sidelined to a significant degree. The U.S. economy is far more dependent on the consumer than others. It is not that nations in Europe and elsewhere do not have active consumers, but the U.S. remains 80% driven by consumption, while the rest of the world averages closer to 60%. The reason for that is the U.S. consumes their output as well as its own. The future of the U.S. system lies in the hands of its consumer. They have been dealt a near death blow by this recession. If the restrictions and the fears extend beyond a few more months, the damage will not be repairable for many. The outbreak of the viral threat forced a tough decision—allow the pandemic to spread and claim millions of lives, or attempt a massive quarantine that would theoretically slow the spread. The containment option was selected and economic damage was tolerated. If there is another outbreak, it is doubtful the global economy will survive another lockdown.
Right now, the sense is that any of these scenarios could play out. The determination as to where we are will be clearer within the next month or so, but it may be well into the year before we have a solid understanding of what 2021 will look like.
Analysis: The hope is that scenario one plays out and that we can look back on this episode with grim memories as we rediscover our old patterns. The manufacturer needs the consumer back in the saddle and soon. Delays in recovery place immense strains on companies. It will force them to start reducing operations and payrolls. That only makes the core problems worse.
Of What Use is Dialogue
I received a missive from a reader reacting to the piece I wrote earlier this week. For those who skipped that one, it was essentially a call for people to cease the screaming long enough to actually hear one another. His comments pointed out that these issues have been around for generations and there never seems to be a mechanism for solving them. In the comments, he asserts that I revealed my own bias on one of the issues. It was a comment on wearing a mask during this outbreak, but as it turns out he was wrong in that assumption. He pegged me as being on one side of the debate when in fact I am on the other. Herein lies the problem. He assumed. We are all guilty of this.
I am not naïve enough to assert there is some simple solution to the problems we have dealt with for generations, but I am also not bitter enough to ignore the progress that has been made—halting as this has been. I am of an age that allows me some historical reference. I remember the state of race relations in the 1950s and 1960s. I remember the status of women in that same period. I have seen a lot of change, and for the better, in my opinion. I also see that much more is needed. We have gotten as far as we have because we started to listen to people and allowed them to voice their feelings and grievances. We were allowed to voice our own. It seems a little like marriage counseling—allowing the other person their position, while being allowed to have a position of one's own.
Havoc Across Europe from Virus
This chart is a bit of a strain to read, but the point is easy enough to discern. Every country in Europe will be experiencing severe economic damage as a result of the lockdown recession. Some of the already-weak nations are staring at declines of close to 10%. These are declines where will take many quarters to rebound.