By Chris Kuehl, Ph.D., NACM Economist—
Short Items of Interest—US Economy—
Commodity Prices Surge
In just the last few days, there has been a rapid rebound in the price of most of the industrial commodities and in oil. The price of copper has been surging and there has been upward movement in tin, steel and aluminum as well. Oil is now in the 40s and has shown signs of gaining further. All of this signals that demand for these raw materials is starting to ratchet up, and quickly as the manufacturing sector resumes its operations. The demand collapse that accompanied the global shutdown has started to ebb. Now, the big question is how quickly the producers will kick back into high gear. They had all but shut down their operations as the lockdown started. Now they have to weigh starting up against the opportunity to see some higher prices due to some shortages.
Inflation Numbers Likely Underestimated
For the next few months, it is likely to be much harder to gauge inflation than is usually the case. This has been commented upon by those that do the data collecting. They have been describing the information as "fuzzy." The problem is that collecting price data in this environment is nearly impossible. There has been panic buying and large numbers of stock outages. There has been price gouging in many sectors and there has been a total lack of access to many goods that would normally be in that basket. The upshot is that inflation is likely much worse than the official numbers reveal. That is not yet a big deal as far as Fed policy is concerned as this situation will begin to calm down by the end of the summer or early fall.
Bailout Supposedly Skewed to Large Companies
A list of the companies that accessed the bailout money will be released this week so as to determine whether this money went where it was intended. The sense at this juncture is that most of the cash went to larger companies and not to the small- and medium-sized operations that it was intended to address. This is due in part to the complexity of applying and the fact that small companies often did not have the ability to adhere to the provisions included in the plan. The sectors that seem to need the most help are those in between the very large and the small. These are companies that could not access the usual corporate debt markets, but were too large for the other bailout programs.
Short Items of Interest—Global Economy
Another War Breaking Out in Libya?
Over the past year, the Turkish leader Recep Tayyip Erdogan has been getting more and more engaged with the conflict in Libya. He has been supplying everything from money, supplies and troops to the existing regime. This aid has allowed the government to hold out against attacks from a militia led by Khalifa Haftar. The Egyptians back Hafter who operates on their border. Gen. Abdel Fattah al-Sisi has provided him with weapons and money as he tries to overthrow the regime in Tripoli. Now the Turks are getting close to seizing an important port. Egypt has warned that this will provoke an armed response. The Libyan government hangs by a thread, while the nation has been divided into dozens of warlord-led fiefdoms.
Sweden Debates Decision on Virus Reaction
The Swedes never intended to become the lab rat of Europe, but when they made the decision to employ a "light touch" strategy, that is precisely what followed. The notion was that Swedes could be counted upon to voluntarily take the steps needed to control the spread of COVID-19. For the most part, that was accurate. Swedes have complied with the tactics designed to slow the disease, but without the mandatory shutdowns. The death rate has been higher than in neighboring states, but the Swedes point out that the same vulnerable population is dying in Europe as has been dying in Sweden. The issue under debate now is whether Sweden did enough to protect the elderly and those at risk. The assertion is that the lockdowns exercised in other countries worked better, but only time will tell as these other nations now start opening up their own economies.
Will Global Trade Ever Be the Same?
The short answer is "No." This doesn't mean that trade will vanish altogether, but the shifts and changes that had been developing before the COVID-19 outbreak have been accelerating. It is probably a good time to review the motivation for trade in the first place. There are essentially two types of trade—one motivated by absolute advantage and the other motivated by comparative advantage. There is little or nothing that will ever change the motivation of absolute advantage as this means that a certain nation or region is the only place where that commodity or item is found. A country that has oil will always be selling it to those that don't. The country that has some rare earth mineral that others do not have will always have that market. The comparative advantage is more complex. This holds that each nation is better at some things than others. It is more efficient to do that which one is good at and buy the other things from somewhere else. The U.S. could grow all its own bananas, but it would require extra effort and the fruit would be enormously expensive. The U.S. could manufacture anything it likes, but there is far more money in making high-value goods than making tube socks. So why not focus on the high-value stuff and buy tube socks from somewhere else (along with those bananas).
Analysis: As logical as trade is, there have always been arguments against buying certain things from other nations—even if this would mean cheaper prices for the domestic consumer. High on the list of reasons to produce domestically is the notion of national security. A country does not want to depend on others for things that are key to defense. It makes sense not to buy weapons or crucial technology, but the concept is regularly stretched. The U.S. has limited or banned imports of such items as cars and car parts as well as electronics, medical devices and certain foods. Japan has banned imported rice for years on national security grounds. France limits the number of foreign films and other entertainments as protection of cultural security.
Very often, the move to limit trade is motivated by the desire to protect parts of the domestic economy. When a decision has been made to source outside the U.S., it inevitably means that a domestic producer will lose an opportunity. This can mean the loss of jobs. Politicians do not appreciate the reduction of jobs in their districts and states. In the majority of situations, the importation of goods will mean job gains somewhere else, but not in the place that lost out to the overseas competitor. The consumer will benefit from the lower prices, but that is a gain that is distributed throughout the economy, while the job loss is contained in a limited area. Much of the trade restriction that has taken place in the last several years has been motivated by this protectionism.
A third major reason for restricted trade is to protect the consumer and society in general from harmful or dangerous products. There are many nations lacking the kind of safety regulations that exist in the U.S. There are products that are shoddy and fail to work as promised, there are foods that are contaminated and these are products the U.S. (and every other nation) seeks to ban. As with the other two motivations for limiting trade, there are abuses of the system as companies seeking an edge over their competition will employ whatever strategy they can.
Every economy in the world is facing the same issue—how to get the economy back to normal without triggering a massive reinfection from the coronavirus. It appears that Europe is having some success in that effort. France has elected to reopen the vast majority of the country's business community and has not seen the kind of second wave that had been feared. There has been a daily rate of about 450 new infections as compared to a peak of 7,500. The more important number is that of serious cases that require hospitalization. That number has been cut in half and the number of fatalities has dropped as well. In Europe as a whole, there has been a decline of over 82% in new cases and the fatality rate has been declining in even the hardest-hit nations such as Spain, Italy and the U.K.
Analysis: The conjecture is that three factors are at work as far as this decline is concerned. The first and perhaps the most important is that the most vulnerable have been exposed by this time and the virus is simply not as deadly in the rest of the population. The second factor is that measures designed to control the spread are working well enough—social distancing and the wearing of protective gear in high-density situations. The third factor is that more careful steps have been employed to isolate and protect the most vulnerable—notably in nursing homes and in populations at risk due to other health concerns. The expectation now is that most of the economic lockdown will be lifted in the next week or so. This will include resuming events, travel and other activities that have remained shut down.
More Recovery Clues This Week?
The moment of truth was supposed to have arrived in May, but that didn't quite work out. The much-anticipated May rebound fizzled to some degree as lockdown rules were not relaxed consistently and consumer were still wary. The consumer was expected to return to their old patterns, but with some 40 to 50 million people out of work, that was not going to happen. It is now June and some of that rebound has been showing up despite the slow reduction of lockdown patterns. As expected, the virus threat has reappeared. That has thrown many into confusion again. Consumers are still unsure; business is afraid of premature recovery and the political leaders are talking about another shutdown, which muddies the waters even further. This week brings some data that might help focus attention—it appears to promise some good and some bad news.
Analysis: On the positive side, it is expected that Purchasing Managers' Indices (PMIs) from around the world will have stabilized to some degree and may even be showing some signs of recovery. The majority of the gains will likely be seen in Asian nations as they started to come out of the viral lockdown at an earlier stage than in Europe or the U.S. China had seen some gains last month and these will continue. It is expected that Japan and South Korea will join them. Europe may also see a little bit of encouraging news, but a reversal of trend is not widely anticipated. The U.S. could see some stability. The Credit Managers' Index (CMI) last month showed a bit of recovery, although the numbers stayed in contraction territory. The CMI often predicts and precedes the PMI to a degree. If that holds this month, there would be an improvement in the PMI, but it is not likely to see numbers above the 50 line at this point. It will be even more interesting to observe the behavior of the New Orders Index as it is the more future-oriented aspect of the overall PMI data.
There will be some good news on the employment front again this week as new applications will be down again. They have been dropping every week since the middle of March and there have been some substantial gains in the job market. The question is how many of these jobs have returned. At the start of the employment crisis, it was suggested that some 80% to 85% of the lost jobs would be classified as furloughs. These would be the jobs that would immediately resume once the lockdown was lifted. It has been hard to measure which of these jobs have been recovered, but the numbers appear to be far less than 80%. Many companies have been limited in terms of their ability to fully open. This reduced their staff needs. Many other sectors have not been able to open up at all. Then, there are the workers unwilling to return to their old jobs until the largesse from the government is exhausted. The estimate now is that roughly half of the layoffs could be described as furloughs.
There will be some new housing numbers released this week as well. They are expected to be down again. The homebuyer is still not feeling all that confident about their job prospects. Even low mortgage rates have not been enticing enough. The high-end homes are starting to get some attention again as the markets have bounced back to a degree. That is generally a more important motivator than mortgage rates for the high-end buyer. The existing home market is generally a better indicator for the overall state of the consumer; it will be down again. The hope on the horizon is motivated by the increase in mortgage applications and a generally higher rate for new home permits.
Where Will Brunt of Job Losses Be Felt?
The sudden nature of the lockdown recession has made it hard for data to catch up. The massive loss of jobs in a matter of a couple of weeks was unprecedented. It has taken a while to get a handle on where the greatest impact has been felt. The first jobs to make a comeback were in sectors such as manufacturing and construction. There were some gains in the medical sector as well. The next wave was in retail, but that has been limited. The sectors that have not yet seen much in the way of hiring include tourism, travel, food service, entertainment and personal services. These are jobs that are generally at the lower end of the wage scale and are dominated by women.
Analysis: In the recession of 2008, the major employment impact was felt by men, and generally those that were over the age of 40. It was a recession that hit many male-dominated sectors such as manufacturing, construction and transportation. There was also an impact on the financial sector—another male dominated area. This time, the male workers have been among the first to get their jobs back and women may be left behind.
To make matters worse, the majority of the women who have been laid off are crucial bread winners. Many are single parents and many are in households that require a dual income. The woman is still the dominant caretaker in the majority of families and has primary responsibility for not only the children but elderly parents. It has been estimated that roughly two-thirds of female income goes to handling these family responsibilities.
The majority of these lost jobs have been relatively low-paid as well. This means these people are in financial distress almost as soon as they lose their job. There has been a certain amount of government assistance, but these programs will be expiring soon unless they are extended by a Congress that looks less and less likely to engage in this activity. The assertion is that many of those who had been classified as "working poor" will not be able to get back into the workforce any time soon. They will have to rely on various social programs that are now facing extreme budget limitations at the state, local and federal levels.
This weekend was one of considered actions. I was reading the latest information from the CDC and other sources regarding the spread of the virus and it was interesting. As has been pointed out from the very start, this is a new threat. We don't know a lot about it even several weeks after its arrival. Much as people want instant answers and immediate response, it simply doesn't work that way. The evidence thus far points to what amounts to a "Viral Trifecta." It takes person-to-person transmission—getting the virus from a surface is indeed possible but rare. Number two is duration. A casual pass by someone is not sufficient, it takes a longer exposure and the right conditions. The third requirement is density. The presence of a crowd in a concentrated area and for a length of time. I plan to continue exercising caution in crowded environments and will maintain my distance, but will be a little less vigilant otherwise.
I had the opportunity to put some of this considered choice to the test on Sunday. As I was visiting a home improvement store for another supply of needed fertilizer, I passed by a woman struggling to load her trunk with a load of large, heavy pavers and bags of sand and rock. Normally, this place offers to help load, but that is now forbidden, so this woman has been left to her own devices. This struck me as uncalled for. I offered to help load. It is not as if she and I were locked in a room for an extended period of time. It took all of about 10 minutes and she was on her way. This was perhaps a risky action. I have no idea what her exposure might be. I took my chances as this time I felt chivalry or good neighborly behavior was worth the risk. It was a choice as I don't want to be part of a world that abandons people who need some help from time to time.
Number of Cases in Europe vs. Retail Activity
The chart shows that the number of new cases of the virus has been declining sharply in most of Europe. As these numbers have fallen, there has been a corresponding increase in business and retail activity. The lockdown has been lifting at a fairly rapid clip. That bodes well for European recovery.