14 minutes reading time (2889 words)

Strategic Global Intelligence Brief for June 12, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Battle of the Forecasts
As if there was a need to add more to an already chaotic situation, the election year rhetoric is now heating up. The assertions from the Trump team have been that forecasts are too gloomy. There is an assertion that all will be well in just a couple of months. The opposition has been attacking these assertions and claiming that the economic crisis will extend well into the coming year. The truth will lie between these two self-serving opinions. The reality is very few have a solid opinion given the number of assumptions that have been made. The consumer still holds the key to all this and that remains an unknown. Will spending resume and on what? Will enough people get their jobs back to reduce unemployment numbers to reasonable levels? All that can be done at this point is observe. This is only starting to yield decent data.

More Stimulus on the Way?
Congress has indicated a desire to do some kind of additional stimulus, although the positions of the Senate and the House are radically different. The Trump team has indicated it wants another one, but there have been few specifics offered at this stage. The real question is whether a stimulus now will work any better than the last one. The consensus view is that it might. The last attempt stuttered as the consumer had little opportunity to spend that additional money due to the collapse of the economy. There was a shutdown that prevented people from spending. The stimulus under discussion now would arrive as the business community is allowed to restart. There would be an opportunity to spend. That would allow the plan to function as these are designed to. The next big question is whether the U.S. can afford to add even further to the debt and deficit.

Consumer Confidence Starts to Improve
The expectation had been that consumer confidence would rise from its 72.3% reading last month to something around 75%. The results released by the University of Michigan survey showed an even greater gain than expected. It has risen all the way to 78.9%. This remains a far cry from the levels of over 100 set just a few months ago, but that it rose this much in the face of all the uncertainty is encouraging. The consumer seems to be shrugging off some of the recent bad news regarding the new outbreaks of the virus as well as the impact of the civil unrest. The issue that seems to be propelling confidence is the increased business activity and some sense that job losses may start to reverse.

Short Items of Interest—Global Economy

Manufacturing Crushed in Europe in April
There was no shock at the miserable numbers that have come from Europe—a 17% decline in manufacturing output in the month of April alone. It may have been expected, but the damage has been profound nonetheless. The fear is that May numbers will be even worse. The usual issue is at work in Europe, but in addition, these sectors have been slammed by the almost total breakdown of global trade. The European states rely on exports for between 30% and 50% of their GDP. All of that has been put at risk by the recession.

Global Gem Business in Total Lockdown
There are things that can be effectively marketed and sold in an online environment, but fine jewelry appears not to be in that category. The purchaser of these items wants to see and touch the items for sale. Thus, the entire industry is expecting a continued period of consumer drought that has been rippling all the way through the supply chain.

Trump Attacks on ICC Provoke Response
The International Criminal Court (ICC) has long been controversial—it can't help but be. It is charged with investigating war crimes and human rights violations. Every nation it investigates is outraged. The U.S. has objected to investigations into atrocities in Afghanistan and into Israeli moves against Palestinians. The ICC has also been challenged by Russia, China, Venezuela, North Korea and many others.

What Does Global Employment Look Like?
The U.S. has been facing the most severe unemployment crisis since the Great Depression of the 1930s and the challenge is shared by every nation in the world. The lockdown recession imposed by every country on the planet is unlike any that has ever occurred. It was artificial from the start—a reaction to an even bigger crisis. There was no warning, no deterioration of economic conditions that led to the collapse. It has been a crisis that has affected a very broad range of business and cost millions of jobs and billions in wage income. Unlike other recessions, this one can be essentially ended with the same speed it was imposed—at least in theory. Given that the layoffs were not in response to some fundamental business or economic failure, they have been categorized as furloughs more than a true layoff. The assumption is that when business is allowed to reopen, the majority of those that lost jobs will be given those jobs back. The problem is that it was assumed this process would be well underway by the middle of May. Now it is mid-June and many businesses are not even close to resuming their old patterns. Even if they are opening, they are operating under severe restrictions that will reduce the number of people they will require to operate. Given the tremendous losses they have already sustained, these businesses are also planning to be very frugal and will try to get by with a very minimal staff.

Analysis: The emerging view is that job gains will be slower to manifest that was originally asserted. The Fed expects the unemployment rate to decline to 9.3% by the end of this year and perhaps to around 6.5% in 2021. There is no expectation of a 3.5% rate in the next few years. The Europeans are expecting their rates to be even higher—somewhere between 10% and 15% by the end of this year and only marginal improvement in 2021. The rate of joblessness in the emerging market states was already far higher than in the developed world prior to the outbreak and that gap will be even wider. Rates of 20% to 30% will be common. Given that most of the developed world had been dealing with severe labor shortages prior to this, the emerging reality is going to challenge a whole set of assumptions.

The litany of adjustments and threats is very long and complex. What is to be done with those that are destined to be out of work for an extended period? Given the nature of this recession, the majority of these people will be coming from the low-wage service sector. These are the jobs that will be slowest to recover. These are also people with limited skills and education. The sectors of the economy that had been dealing with labor shortage will still have the same issues as the vast majority of the newly unemployed lack the skills to take the jobs that are on offer in sectors such as manufacturing and construction, and areas involved with technology.

The usual approach to unemployment had been found wanting even before this crisis. Now the weakness is even more evident. There is not enough money to keep providing the kind of generous assistance that was offered at the start of the crisis. That largesse will begin to run out this summer in the U.S. and in Europe. The usual assertion is that governments will need to engage in training so that people can enter the job market again. It is expensive and it is never clear what people should be trained to do. The whole process of mass training has limitations. Either the demand for the newly trained is insufficient or the wave of trained people ends up lowering wages as there is so much competition. The issue of worker obsolescence had been looming. Now it stands to be the next major crisis.

Where the Greatest Risk Occurs
The response to the viral attack was motivated by desperation. It was clear from the start that all the good options were off the table. The failure on the part of China to admit to the spread of the virus in a timely manner was combined with a woefully unprepared medical and political community. There was no opportunity to introduce mass testing or tracking. It was too late for effective quarantine as the virus had already spread widely. What was left was a blunt weapon that has been minimally effective and destroyed the global economy in the process. Now the demand is for a real strategy.

Analysis: There are three factors that promote widespread infection. They include proximity of people as the most common means of transmission is person to person. The second factor is duration of exposure. A casual encounter with someone is low risk, but being in contact for hours is high risk. The third factor is how confined the environment is. People in close quarters will be more likely to be infected. The outbreaks thus far have seen all three of these factors in play. The most challenging part of recovery may well be travel as this is where all three of these issues converge. This affects air travel to be sure.

Don't Declare Victory Too Soon
Not even 24 hours ago, several politicians declared satisfaction with the performance of the markets. The statements at the start of the week were full of hyperbole and self-congratulations as it was noted the stock markets around the world had gained considerably in the last few weeks. The S&P 500 recovered all that it had lost since the shutdown recession was imposed and markets had made big gains in Europe and Asia as well. There was much self-congratulation as if these gains came as a result of some specific action by political leaders. The dangers of declaring responsibility for something as fluid as the stock market became abundantly evident yesterday as all of these recent gains were wiped out in one of the biggest falls the markets have seen since the debacle of COVID-19 started. The mood of the investment community suddenly soured and the rout was dramatic. Today, there has been yet another shift in mood. The markets are staging a small rally, but one would be wise to look at this recovery with trepidation and suspicion. Those that claimed responsibility for the recovery a few days ago are now trying to dodge responsibility for the collapse. In truth, they have nothing whatsoever to do with either the rise or the fall.

Analysis: There has long been a belief that market behavior is reflective of overall economic trends, but it rarely is. The motivations driving investor behavior are complex and varied. There are many strategies employed by investors depending on their goals and aspirations. There are cautious moves designed to protect assets and high-risk moves designed to make lots of money right away. There are those that trade on the tiniest of movements and those that buy stocks that may not recover for years. The point is that markets react to far different events and movements than do businesses, consumers and policy makers. In the simplest of terms, the markets react to trends, rumors, projections, opinions and beliefs. Not that business people and consumers don't, but more of their behavior is ruled by facts and data.

Last week, the markets reacted to some unexpected good news on the employment front as the data suggested that unemployment was not quite as bad as had been feared. There had been some positive reports regarding the virus, but these were vague. This week, the assertion has been that cases of the virus are rising as the economy opens. The reality of a 13.4% jobless rate sank in. The mood changed quickly and the markets tumbled. The nascent recovery is being led by the bargain hunters that have the patience to wait for a recovery that might not manifest until next year.

The bottom line is that politicians are grasping at straws as this crisis continues to unfold. There are some signs of recovery in parts of the economy, but there are also many segments that are still struggling. There has been some progress on dealing with the virus, but there is still no effective treatment and no vaccine and the spread has not been contained. There will be good days when it seems there is real progress and there will be bad days when it appears the crisis will never end. The politicians can do very little at this stage other than try to stay out of the way as the business community, the medical community and the consumer try to cope and adjust to what has become the new reality.

Optimism Within the Ranks of the Economists
The surveys of economists pulled together by The Wall Street Journal are usually pretty accurate and indicative of the thinking within the profession, or at least part of it. Generally speaking, the economists that participate in these surveys are best described as "working economists" as opposed to academics or those employed by the government. This simply means that they are employed by banks, investment firms, corporations and think tanks. There are those that straddle the worlds of academe and business as well. The point is they generally deal with economic issues in a very pragmatic way.

Analysis: The latest survey of the economists reveals a somewhat surprising level of optimism regarding the performance of the economy through the remainder of the year and into next. Fully two-thirds of those polled (68.4%) hold that the economy will be in real recovery by the third quarter and that this rebound will extend into the fourth and further into 2021. The assertion is that most of the lockdown will have been lifted by the end of the summer. Some semblance of normal will have been established by the end of the year.

There have been some changes to their assessment from the last time they were polled and there are still a set of assumptions that will matter. The expectation of a sharp V recovery has been somewhat tempered. Now, the sense is that recovery will be slower than originally thought—more of a "swoosh" or a U. The decline in GDP for the year will be close to 6%. It will take a while to get these numbers back to some sense of respectability.

The assumptions upon which this assessment rests include a recovery in consumer behavior, a resumption of the global supply chain and consistent policies among the states as far as reopening the economy. All three of these assumptions are risky. The consumer seems ready to resume old habits, but it has to be noted that some 40 million people are unable to do so as they do not have a job. The supply chain is still very shaky and will not fully rebound until the rest of the world gets a handle on the crisis. These analysts are well aware that COVID-19 cases are just starting to crest in most of the developing world. It is the third assumption that will matter most. The patchwork approach to opening the economy is chaotic as businesses do not have the ability to do national planning. They are operating under different restrictions in every state. That is extremely complex and costly.

Impressions
These observations could not be less scientific if I tried. I have made no attempt whatsoever to test my observations against anything at all—not even trying to determine what my friends and colleagues might be seeing in other parts of the country and the world. In fact, I would love to hear from readers regarding their own observations. These are from the perspective of a guy living and working in Kansas City.

There has been a notable decline in the numbers of people wearing a mask (unless mandated by the place they are visiting). In the beginning, the maskless appeared to be aware they were making a statement of some kind, but now it just appears that people are tired of the hassle. It appears people are trying to resume old habits. I have ventured out to newly opened establishments such as a bookstore and other retailers. They appear to have as many people as they once did. People are not exactly defying the isolation orders, but they are not treating each other as if they had the plague either. The overall sense is that people are willing to remain somewhat more hygiene vigilant, but they want their old lives back. This may not be good news as far as containment efforts are concerned, but it is reassuring as far as the ability of the economy to bounce back.

Labor Market Impact of COVID-19
The global employment patterns will change considerably according to which nations are prepared to adapt to new systems. The need to maintain some version of social isolation will affect the way people return to work. This will tend to favor the nations that can implement a more stable remote working platform.

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Wednesday, 12 August 2020