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Strategic Global Intelligence Brief for June 24, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Home Sales Drop
As expected, the sales of existing homes dropped and there has been a significant decline in sales since the record set at the start of the year. Back then, all the factors that tend to drive the housing market were in place. There were low mortgage rates and the majority of the population was feeling pretty good about their employment situation. It is true that prices had been coming up, but these were not serving as any sort of inhibition. The new home market was booming as well. The bottom fell out as the shutdown was imposed, but there appears to be hope on the horizon as potential buyers seem to be back in the game. Mortgages are still low and the markets have recovered enough to draw the high-end buyers back. The employment numbers remain a worry, but the majority of those that lost their jobs were not likely home buyers in the short term.

How to Handle Bankruptcy and Other Financial Crises
As people and businesses attempt to recover and rebuild, their past will play a major role. Credit will be based on past behavior to a considerable extent. Usually it means people and businesses that faced bankruptcy or have been missing payments will be rejected when they want more credit. The logic is that people who don't pay their debts are a bad risk and will not pay future debts either. That is sound enough under normal circumstances, but these are anything but normal times. If a person or business was crushed by the imposition of the lockdown, it can hardly be blamed on them. Should that be taken into consideration and how exactly would that work. There will be some that escaped the ravages of the recession and those that didn't—how should both be handled?

The New Office Environment
There has been a lot of conjecture regarding the way people will work in the future. Is the whole "work at home" thing just a temporary reaction to the lockdown or is this something that is here to stay? One indicator to pay attention to is the amount of investment in these home offices. At first, people just plopped on the couch or set up on the kitchen table, but that soon grew old and inconvenient. There has been a surge in buying office furniture for the home. Remodelers are asserting this is now a booming business for them. People need a real space devoted to work—one they can enter when there is work to be done and where they can exit when the workday has ended. Top of this list of additions from a remodeling standpoint is a window!!!

Short Items of Interest—Global Economy

A Downgrade from the IMF
It is important to note that the International Monetary Fund (IMF) often puts the dismal in the dismal science. They are never the cheeriest of prognosticators. Their most recent assessment of the global economy proves that point. Their already downbeat analysis of the global economy has gotten worse as they now expect a nearly 5% decline in overall global growth. The only bright spot in all this is that they still assert that recovery will begin in earnest in the third quarter and will continue through most of next year. That said, they also point out that much of the damage done will be long term and will hold growth down through the rest of the decade. This is especially the case in the emerging market nations.

Migrant Workers Are Taking the Most Serious Hit
The decision to shut down the entire global economy in reaction to the pandemic has crushed the low-wage worker worldwide, but the worst hit sector has been the migrant worker. Their jobs vanished and there are no systems in place anywhere to protect them. This has triggered what could be the largest waves of migration seen in decades. Many are trying to return home to nations that can't support them, while many more are searching for any kind of living. They will be flooding into the developed nations and there is little help available there either. These will be the most easily exploited population in years.

Purchasing Managers' Indices Point Towards Slow Rebound
The latest round of Purchasing Managers' Index (PMI) readings is being released this week. The news is good, if not spectacular. The readings are ranging from real progress to something a little less threatening than they had been. The data from the various PMI readings provide a very good snapshot of business activity as the responses from the purchasing managers can be trusted and because they are reporting on a very basic function of business. For anything to happen in the business world, there has to be purchasing of everything from commodities to parts and assemblies. The PMI asks a simple set of questions—are you buying more or less of what you buy. The index uses a simple designation that states that anything over 50 indicates expansion and numbers under 50 suggest contraction. It was only a few months ago that most of the world's PMI readings were in the mid- to high-50s and even into the 60s. The last few months have seen these numbers crash into the 40s, 30s and even the 20s.

Analysis: The latest set of numbers for the U.S. are better than they have been in four months. The reading is still below that 50 line, but is now very close to breaking back into expansion territory as it stands at 49.6 for the manufacturing indicator and 46.7 for the services index. The composite index is now sitting at 46.8. If these numbers had been released at the start of the year, there would have been considerable concern and analysts would be talking about a coming downturn. Today, these are seen as beacons of hope and a suggestion that better times are ahead. At the same time that the PMI numbers are telling an upbeat story, there has been even better news from the Credit Managers' Index (CMI). The CMI is structured similarly to the PMI and measures the activity of the credit manager in the same way. Given that the decisions of a credit manager very often precede the decisions of a purchasing manager, the CMI has been seen as something of a predictor of future PMI activity. The numbers for the CMI in March, April and May fell as far as the 20s and 30s in several key areas. Last month, there was some improvement. This month, the growth was substantial with nearly all of these categories getting back into the mid-50s. This would suggest that growth is picking up relatively fast and should see more momentum in the months ahead.

The U.S. is not the only nation seeing better PMI numbers. This is an index that is carried out in dozens of other nations by the British company—Markit. The systems all use the same structure, which allows for direct comparisons. The composite index for the Eurozone rose to 47.5 from the previous reading of just 31.9. There has been a similar bounce-back in many of the Asian states and throughout Europe. On the other hand, the data is worsening in Latin America and other less-developed regions that are just starting to get hit with the viral pandemic. It has also been interesting to note that countries that had imposed a softer lockdown have not seen the same level of rebound. This has been attributed to the fact they didn't see the full economic impact of a strict lockdown and their businesses did not have to stage a recovery from scratch. The fact that there has been such uneven global performance suggests the recovery is going to be anything but smooth and reliable. There are still many sectors of the global economy that have been locked down tightly. That will affect the numbers for a long while.

Markets Worried Again
There has been a lot for the markets to get excited about lately. There has been some solid recovery on the news that consumers are coming back to the retailers and confidence seems to be up. There have been those good reports from the PMI and the CMI and the view by many economists that a V-shaped rebound is likely by the third quarter. Why, then, has the market been losing ground over the last few days and why has the mood of the investor community remained sour? In short, one can pin the blame on politics and specifically on the actions of Trump when it comes to trade and the viral threat.

Analysis: In the midst of a global recession, the needed response is generally some version of global cooperation. This hardly means sacrificing true national interests, but engaging in global trade is a must. The U.S. relies on exports for 15% of its GDP—roughly $3 trillion. For the U.S. to export, there need to be countries with the desire and resources to import. The U.S. has long worked to be part of that global trading system. In the midst of this global economic crisis, the U.S. has been picking trade fights with nearly every partner it has—Europe, Canada, Mexico, Japan, etc. New battles are launched every day. The latest skirmish with the Europeans worries the markets and they have fallen as a result. In addition to the trade worries, there are concerns about Trump's reaction to the pandemic. Assertions that it will fade away and suggesting that testing be stopped have shaken market confidence.

It Still Comes Down to a Trade-Off
The challenge was clear enough from the very beginning. The outbreak of the coronavirus was unexpected and unanticipated to a degree. It was a classic "black swan" situation—the unexpected but expected crisis. It was not that the world had never dealt with a viral outbreak before, this has been happening every year for decades. There have been outbreaks of SARS, MERS, Ebola, Marburg, Avian flu, Swine flu, Zika, West Nile virus and on and on. It is a fact of life. Some have been more deadly than others and some have spread more easily than others. Each of them has had an impact on local economies. Then comes COVID-19, and it is yet different again. In some ways, it is more benign than other outbreaks. Fully 97% get a "mild" version—one that does not require hospitalization and almost 60% have no symptoms at all. It is much less deadly than SARS, MERS, Ebola, Marburg, smallpox and many others. The threat comes from its ability to spread. The fact that almost two-thirds of people have no idea they have the virus makes it dangerous as they spread it without realizing it. We know all this by this point. We know about the "trifecta" by now. The Center for Disease Control (CDC) and World Health Organization (WHO) and health agencies from all over the world assert that three conditions need to be met to spread the virus. It must be person-to-person contact as the virus dies very quickly outside a host, there must be sufficient exposure time (casual contact is not enough) and density is a factor as it places large groups of people in close contact. Given the fact China was slow to react to the threat and hid vital information that might have allowed better control, the world quickly ran out of options. The only thing left was attempting a mass quarantine. Very few had high hopes for this tactic. The original goal was simply to slow the progression long enough for the medical community to keep up.

Analysis: The global shutdown has had an impact on the spread of COVID-19, but it has certainly not eliminated the risk. To date, there have been nearly 10 million cases reported. The analysts agree that this is likely a severe undercount given the lack of testing in many countries and the recent spread into less developed regions of the world. The deaths from COVID-19 now number over 480,000, but there have also been over five million recovered. The fatality rate varies considerably with age or health conditions. For those over 80 it is close to 30%, for those under 30 it is 1.3%.

The effort to contain the virus through an economic lockdown has had some impact, but it is impossible to determine how much. It has not been hard to determine the damage caused by the lockdown. Economic data collected for the last few months outlines a catastrophe that rivals the worst recessions in history. Just in the U.S., there have been over 40 million jobs lost, thousands of businesses forced to shut down, states and cities have watched their revenues evaporate and civil unrest has broken out all over the world as people face deprivation. The decline in GDP for the second quarter is unprecedented. Every other measure of economic performance has followed the same brutal pattern.

There is now an attempt underway to rebuild the economy as the lockdown is lifted in stages. There is still a long way to go before a return to some semblance of normal as the economy remains weak and vulnerable. At the same time, the reduction of the lockdown effort has resulted in a renewed spread of the virus, something that everybody knew would happen. The original choice is back. What is the price we are willing to pay? If the lockdown is renewed in an effort to contain this latest spread, the economy will tank again and likely harder. There will be millions more lost jobs and closed business, more desperation and violence. If there is no resumption of that lockdown, the virus will spread and more people will be sickened and die. That is the brutal reality. There is no "good" choice, only a decision on what can be tolerated. Is there an acceptable number of fatalities? Is there a level of economic distress that can be tolerated?

Support Getting Close to the End
The decision to lock down the global economy was not a well-thought-out strategy as the situation was unlike anything that anybody had ever seen. The virus spread with astonishing speed—rivaled only by the measles in its ability to infect. The implications of that shutdown were only barely understood. The usual reaction to a recession is to blunt the impact with some form of government largesse. That was the aim of the stimulus effort. The decision was made to pump money into the economy quickly with outright distribution of funds and extended unemployment benefits. The impact was blunted to some degree by the fact so much business had been shut down it was hard for consumers to spend, but now the issue is the governmental funds will be expiring soon and the majority of those who lost their jobs remain unemployed.

Analysis: At the start of the lockdown, the rate of consumer spending collapsed by over 33%. This was due to both the loss of jobs and the fact that so many businesses were closed. The governmental aid kicked in soon after and some of that spending recovered. In the beginning, the lower-income populations felt far less impact as they were the recipients of the largest share of the government help. The reduction in spending by middle-income people was much higher as they had received little help. Now that stands to reverse as the low-income population will be losing access to that support unless it is renewed. The sense is that most of these programs will be allowed to expire as there has been some sign of economic recovery and the drive now is to get people back to work. Some of those who have been receiving aid have been reluctant to reenter the workforce as long as they can get more money in aid than they could be earning in a job.

Deferred Gratification
This is very likely to be one of the most important factors to consider in terms of long-term success. How willing are you to make sacrifices now in order to reach a goal later? If you are honest, there are not many times when you put off immediate pleasure in order to enjoy something later. We know that passing on eating that piece of cake will mean we get closer to the weight we ostensibly desire, but we eat it anyway. We know that saving is critical if we want that life in retirement we dream of, but there always seems to be something we want now. The concept plays a huge role in terms of a life's career opportunities.

The person willing to spend time and money on their education and skill development will have a far better set of options later, but for millions of people this is a foreign concept. We live in a world which holds that "instant gratification isn't quick enough." That all but eliminates the chance to achieve long-term goals. The current situation has exposed the dangers of this mindset. There are too many people with few or no options. They do not have the education they need nor the skills that would land them a good job. There was always something more important to do and to spend resources on. Granted, there are also millions of people who were never given much of a set of opportunities, but there always were some choices available. As we all emerge from this pandemic nightmare, we will have to do some serious reevaluation. What do we need to do to prepare for a future we actually want? What do we need to be doing with our time, money and energy to achieve these ends?

Longest-Running U.S. Manufacturing Contracts of the Past 40 Years
The PMI has been below 50 many times before. Right now, the number of months in decline doesn't come close to the downturns that have been endured over the decades. The current slump would put the PMI decline as the 12th worst. If the current trends hold, the next reading will likely be back above that 50 line.

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Sunday, 17 January 2021