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Strategic Global Intelligence Brief for June 15, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Benefits or Bonuses?
The shutdown recession plunged millions of people out of work with no warning whatsoever and created an immediate crisis. During a "normal" recession, people can see something coming and, to some degree, they can prepare for it. There was no time to prepare. The response from the government was to provide aide through direct payments and extended unemployment benefits. This has had unintended consequences. There are many that are now reluctant to go back to work as they are getting more from the government than they would make in a job. This is the "transactional" worker—the employee who reacts to the daily paycheck and that is all. They do not see the job as their future—there is no expectation of promotions, raises, skill development or benefits—it is just a job. They will leave one employer for another if they are paid five cents more per hour. To lure this group back to work means either cutting that benefit or offering an incentive to take a job.

Retail Sales on Rebound
The new retail numbers will be released this week. They are expected to show some improvement now that many outlets have been allowed to open. It seems that consumers are starting to resume old patterns. The question will be how fast this recovery seems to be moving. The expectation is that gains will be significant, but will fall far short of the pace that was in evidence before the lockdown. Much attention will be focused on the extent to which online sales have cut into the traditional brick-and-mortar activity.

State and Local Governments Hold Their Breath
The retail data will be studied closely by state and local budget makers. There has been a crushing shortfall due to the lockdown. Many local governments have been forced to curtail services, furlough workers and consider a wide range of new revenue sources. If there is a substantial rebound in retail activity, there will be some hope of regaining some traditional revenue. But if the numbers are anemic, the process of cutting will resume. This is shaping up to be a truly miserable and challenging year for local government.

Short Items of Interest—Global Economy

France Reopens
French President Emmanuel Macron has declared that his focus is now the rebuilding of the French economy. With that, he has removed the remaining restrictions that have been in place as a reaction to COVID-19. France was straddling the issue of the virus vs. the economy with restrictions that were not as stringent as some, but tighter than others. The fatality rate has been 451 per million as compared to Spain at 580 and Germany at 100. The decision to end restrictions comes as the economic data worsens. The government has attributed the outbreaks of violence to the economic stress this collapse has caused.

Global Debt Close to WWII Levels
Every nation in the world has been pouring money into the attempt to slow the spread of COVID-19 and every country in the world has been suffering from their decisions to lock down their economies. This has been accomplished with debt. Now the world faces a debt issue that is exceeded only by the debt from World War II. There is no scenario that allows that debt to be retired in anything less than several decades. This assumes there will be no further addition to that debt burden, a woefully inaccurate assumption. The future promises much higher taxes and much reduced government activity worldwide.

First Head of State to Die from COVID-19
Last week, President of Burundi Pierre Nkurunziza died from COVID-19 and became the latest victim from within the ranks of Burundi's elite. He was 55 years old and considered in good health. He was also of the opinion the virus was no real threat and had avoided taking any measures to control it. The officials claim there had been only one death, but independent sources assert the real number is well over 3,000.

Latin America Experiences Worst of Both Worlds
The population of Latin America is around 8% of the global population, but at the moment, this region is experiencing over half of the world's viral infections and deaths. The economic damage has been equally disproportionate. It has left many nations in the region close to utter devastation and with no reasonable path out of the crisis. This has come despite some very extensive lockdown efforts. Peru was one of the first nations to take action. President Martin Vizcarra was hailed for his swift response. He called out the army to enforce the lockdowns and quarantine and poured $32 billion into a rescue package designed to provide a lifeline for the population and the overall business community. Despite this effort, the country has reported 200,000 cases and a death toll that is twice what it is in Germany. In stark contrast, there has been Brazil where President Jair Bolsonaro has asserted that COVID-19 is all in one's head. The numbers that have been coming from Brazil have been 90% less than those that are coming from global health authorities. Based on reports from hospitals and health authorities, it is estimated that Brazil has 800,000 cases and has had 40,000 deaths—the highest percentage in the world. Most assert that Brazil has not reached a peak yet.

Analysis: There are three factors that have made this region the most vulnerable in the world to date. The first issue is poverty. The majority of these populations are poor and live in dense and underserved slums. The instructions to practice social distancing and wear protective gear have been met with derision. Neither of these responses are possible in countries where people are so closely packed together and where people lack the ability to even acquire things like masks. The hospitals were almost immediately overwhelmed by patients needing respirators. The medical personnel often caught the virus as well. There have been acute shortages of everything needed to deal with the outbreak—from masks to testing kits.

The second factor has been political—the fact that many of the leaders in these nations have been unwilling to even acknowledge the seriousness of the issue. Brazil's Bolsonaro has been labeled one of the "Ostrich Alliance" along with Daniel Ortega of Nicaragua who has asserted that only those who do not believe in his Sandinista ideology will get the virus. Bolsonaro urges people to get the virus as soon as they can and "take it like a man." Mexico's Andres Manuel Lopez Obrador was in that dubious collection until very recently. Even now, he has made only small gestures. He has grossly underreported the number of cases. It is asserted that there have been four times the number of deaths than have been reported. He continues to urge people to ignore social distancing as being "un-Latin."

The third factor is the economic one, and this builds on the first. These are nations that have weak economies at the best of times. They are now very near total collapse. There is no money for government assistance or for medical attention. The rates of unemployment now exceed 40% in Mexico, Brazil, Argentina and Bolivia. The rates of joblessness in Venezuela and Nicaragua exceed 60%. The level of desperation makes it nearly impossible to address the virus in any of the ways that have been attempted in Asia, Europe or the U.S. There is no way to isolate and quarantine.

The destruction of the Latin economies poses a very serious threat to the world as a whole. The U.S. will see a massive influx of migration as people attempt to flee both the economic collapse and the ravages of the virus. The already hostile attitude towards these migrants will be intensified by the health concerns. The output of the region is key to the global agricultural supply chain. That production has been curtailed drastically. The progress that had been made in this region has all but reversed.

China Facing Second Wave Threat
The capital city of Beijing has been locked down again. It is likely this lockdown will be extended to the rest of China if the recent outbreaks spread. The city had been without a case of the virus for 50 days until a few days ago when over 80 cases were noted. All seemed to be connected to one market area. That has prompted a complete ban on imported food items. Beijing had been under the strictest of lockdown protocols when the disease began to spread from the Wuhan area. That set of restrictions will likely be renewed.

Analysis: This is considered a setback as far as dealing with the virus as China seemed to be moving rapidly towards reaching normalcy. It now appears that the second wave threat is a very real one—at least in China and it would be assumed, elsewhere in Asia. This is pushing more and more people to assert that only some kind of "herd immunity" is left, but that is an untested concept.

Battle of the Optimists and Pessimists
If one picks up a newspaper or magazine or listens to the media for a minute or two, there will doubtless be an opportunity to hear a wildly divergent set of opinions regarding the future of the economy. One minute there will a very gloomy assessment asserting that recovery will be months and perhaps years away. The future will be one of 20% unemployment, thousands of closed businesses and exploding violence as people become more and more desperate. The next minute, there will be an assertion that growth will resume in just a few months, that most of those lost jobs will be recovered and that life will resume the majority of its normal pattern by the end of the year. In both cases, the commentators are experts and analysts with data to back up their opinions. How is such a wide range of attitudes possible, such a divergent and plausible set of futures?

Analysis: It all comes down to what set of assumptions one chooses to make. There are at least three vital players in any of these scenarios. At the moment, there is very little hard data regarding their expected behavior in the months to come. All three of these groups will be interacting with the other two. This will change their behavior from day to day.

At the heart of the economy, there is the consumer. That is the way it has always been. The consumer is 80% of the GDP and close to 80% of overall employment. It really all comes down to the decisions some 330 million Americans make every minute—the decisions made by the 7.8 billion people in the world. To get the economy of the world back on track will require the engagement of the consumer. They will have to want to resume their previous behaviors. Those who take an optimistic view assert that the consumer is very eager to resume that previous lifestyle, while the pessimist asserts that something fundamental has changed and there will never be a return to that old definition of normal.

The second actor is the overall business community. They are trying to determine what that consumer will be like in the future. What will they want to buy, what will they want to do for entertainment, where will they want to live, what will they want to do for a living? The business of marketing and advertising will help define these wants and needs to some degree, but the ultimate decisions will be made by these consumers. It will be up to the business community to figure out what they need to do to meet these needs, wants and desires. The optimist thinks the business community will adjust and the pessimist is not at all sure.

There has always been a third player in all this. The government sets the basic rules by which everybody is expected to play. There are rules and regulations that affect everything a consumer buys and a business produces. Of course, there are taxes and rules applying to how people work and so on. Of late, the role of government has become overwhelming and has profoundly affected the behavior of every consumer and every business. Never before in history has the government shut down the entire economy. Never before have consumers been denied an opportunity to consume and never before has business been required to halt completely and with no sense of when these restrictions will lift. The optimists assert that the lockdown is ending and will not return. That will allow a resumption of normal activity. The pessimist listens to the government officials and their assertions of concern regarding a second, third and fourth wave. They do not think the restrictions will be lifted. They fully expect future shutdowns that would last much longer, perhaps years as the world waits for all 7.8 billion people to be vaccinated.

The challenge has always been the same—everything requires a tradeoff. This issue is no different. If the goal is the elimination of the COVID-19 virus completely, the solution would be to impose a very strict policy of total quarantine—nobody would be allowed to leave their homes for any reason whatsoever. If the goal is to resume the previous level of economic activity, all the restrictions would be lifted immediately and people would be allowed to assemble in any group they choose without masks and distancing. Neither of these is an option as we want both a vibrant economy and a virus-free environment. That is not possible, so we will get a leaky and inefficient quarantine and a crippled economy. The optimist thinks we will get through all this somehow and the pessimist is convinced we will not—at least not in a way that allows a resumption of what was once normal.

Low Wage Sector Hardest Hit
The Fed Report released last week was no shock to anyone, but it has put some data to the anecdotal observations. The sector that has been the hardest hit has been the low-wage service sector. There has been a 35% rate of unemployment for those in this category as opposed to a 5% to 15% rate for those in the middle- and upper-income ranges. Given that the shutdown profoundly impacted the service sector, this comes as no shock. What is perhaps the most distressing is there is little optimism regarding growth in this job category going forward. Prior to the shutdown, the low-wage earner was seeing gains due to the expansion of minimum wage laws and as a result of the 3.5% level of overall employment. Those gains have all been erased.

Analysis: It is estimated that no more than 20% of the low-wage workers who lost jobs in the shutdown will regain them. Many of the businesses they worked for are still not allowed to reopen. Those that have are operating under severe restrictions in terms of number of customers and patrons they are allowed to serve. This severely reduces the number of people needed. The hotel industry alone has lost over a million jobs and the majority are not expected back. Nearly two-thirds of food service jobs are likely lost for good and retail may lose over half. There had been an easing of the financial desperation in the low-income sector over the last few years, but that has now been reversed.

Not My Most Optimistic Day
The bulk of today's newsletter was written on Sunday—a day earlier than I usually do these things. There was a lot on my agenda for Monday and I thought I would get a jump on things. That may have been a mistake. I usually use the weekend to unplug and unwind with endeavors such as working in the garden and catching up on household projects. I find that I really need to escape the seemingly relentless bad news. I am generally a pretty optimistic guy—for an economist anyway. However, it gets harder to maintain that optimism these days. Whining about my travails seems awfully churlish compared to what so many are experiencing, but I really do miss my old life. I am a social person and isolation does not suit me very well. I now realize how important all those conversations I had during my conference travels were to my understanding of the world. I have very few of these now. I feel cut off and out of touch. I used to joke that I was on the speaker's circuit as I needed fresh audiences—my friends and family no longer wanted to hear from me. That is abundantly true now—even the cats are bored and leave the room.

The news is grim. There seems little that any of us can do about the threats that surround us. I remain convinced that most of us are resilient and will find ways to get past this. I will have good news to report some day and will see old friends again. I just wish that time would come a little sooner than it appears ready to.

Latin American Workers Vulnerable
The percentage of vulnerable people in Latin America is very high—perhaps not as high as those in Africa, but very close. The impact of both the viral outbreak and the collapse of these economies will have a profound impact on that population. It is unclear what these nations can do about any of this.

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Wednesday, 12 August 2020