Strategic Global Intelligence Brief for June 26, 2020
By Chris Kuehl, Ph.D., NACM Economist—
Short Items of Interest—US Economy—
Nice Jump in Consumer Activity
There was a nifty gain in personal consumption in May—a gain of 8.2%. That has many feeling a lot better about the possibility of a solid recovery by the end of the summer, and maybe even before. The rebound in the economy has always been totally dependent on the mood of the consumer and their willingness to spend. Thus far, things are moving in the preferred direction. That said, there is a major concern emerging. The next few weeks will be critical. The resumption of consumer activity has coincided with the resumption of more normal business operations. That was expected, but so was the threat of more infections. There is a distinct possibility that another lockdown will be imposed. If that happens, these consumer gains will vanish. With them will vanish the possibility of a near-term recovery.
Loan Requirements Caused Early Spending
The original rules surrounding the Paycheck Protection Program (PPP) loans were based on a couple of assumptions. The first was there would be a major reopening of business in May as the virus threat was expected to have faded by then. The second assumption was that business would only need short-term help and would be back to hiring by the end of May. Most of those that received the loans spent it right away as instructed—paying workers rather than furloughing them. Unfortunately, the virus is not abating and business is looking at another round of closings. They need money again. There is no provision for a second wave of support. That puts many small business operations in jeopardy.
To Test or Not to Test
It is universally agreed that the response to the coronavirus worldwide would have been much different if there had been testing available from the start. The virus spread so fast because so many people carried it without knowing. The early testing was conducted on a very limited population—essentially the ones that were already sick or in the most vulnerable categories. Now the testing is hitting the general population. As expected, there are many people identified as asymptomatic carriers. This is part of the reason for the swelling numbers (but far from the only one). Expanded testing also provoked a demand by Trump to stop testing as these higher numbers were making him look bad. The bottom line is that we are only starting to understand the reach of the virus as we are only now reaching a reliable number of tests. The U.S. has now done over 30 million tests. That is over 90,000 per million, more than most of the European nations.
Short Items of Interest—Global Economy
Sweden Fights Back
The World Health Organization had listed Sweden as one of 11 nations in Europe at greatest risk of a second wave based on a rise in the number of reported cases in the last week or so. This provoked an angry response from Andres Tegnell, the state epidemiologist. He has asserted that the rise has been due almost entirely to additional testing. This is important to the Swedes as they adopted a strategy based on herd immunity from the start. Much of their economy did not close. They asserted that they would be relatively immune from that second wave as so many people would have developed temporary immunity. In fact, the testing in Sweden has revealed a large number of people with the disease that were asymptomatic. That suggests there likely is herd immunity developing. Time will tell.
Anti-Corruption Effort in Mexico Is Failing
When Andres Manuel Lopez Obrador (AMLO) was campaigning for the presidency, he based his effort on a massive anti-corruption effort. The data shows, however, that bribes are more common than ever—up by over 70%. The majority of local officials do not even attempt to hide the fact that they can be bought—some even post prices for their cooperation. The drug cartels are anything but subtle as they list the areas they own. The graft goes all the way to the top of government and those in AMLO's own inner circle, although he has not been directly implicated.
The Puzzling Nature of the COVID Crisis
There is a great deal about the coronavirus crisis that is unique and mysterious and there is a great deal that is somehow familiar. The outbreak of a virus that can be deadly is bad enough, but this crisis has been twinned with a deliberate policy of economic shutdown that has caused an equal amount of devastation. What has made this situation so different from the pandemics and epidemics of past years? The virus itself has been a challenge as it has been simultaneously deadly and benign. In the great scheme of things, it would have been seen as a good thing that it is a disease that gives 97% of is victims a mild case—one that doesn't require hospitalization. It would have been seen as a good thing that its fatality rate is far below that of diseases such as Marburg (80%), Nipah (77%), Avian flu (52%), Ebola (40%), MERS (34%) and SARS (9.5%). The fatality rate for COVID-19 is 2.2%. It would have been seen as a good thing that close to 65% get the disease and never show any symptoms at all. What has made this disease such a threat is that it spread very quickly and put the entire global population at risk in a matter of a few weeks.
Analysis: As this pandemic is assessed and researched for clues on how to deal with something like this in the future, there will be plenty of blame to spread around. Early decisions and actions will be blamed for making a bad situation far worse. China has come under intense criticism for its actions and more is to come. The outbreak in Wuhan was ignored and covered up. It took months before China started to report what was going on. By then, it was too late to test or track or effectively quarantine. The virus has spread all over China and from there to Asia and beyond. The rest of the world was sluggish as well. The Europeans were seeing it arrive and stalled for weeks and the U.S. did the same—asserting that it was no big deal. Testing was woefully inadequate for a virus that could hide as effectively as this one. There was no attempt to track and the medical community was caught totally unprepared. There were not enough respirators and not even enough protective gear. After decades of viral attacks, it remains inexcusable to have been so ill-prepared for an event like this one.
Even now, there is a dearth of political leadership around the world. Some have been in total denial and have left their countries completely vulnerable to the disease. They have been dubbed part of the "Ostrich Alliance." That miserable collection includes Jair Bolsonaro of Brazil, Daniel Ortega of Nicaragua, Aleksandr Lukashenko of Belarus, Andres Manuel Lopez Obrador of Mexico and many more. Bolsonaro called on Brazilians to "man up" and get the virus, Lukashenko asserts it is all in one's head, Madagascar's president urges people to inject herbal tea. Now, Trump has stopped funding for testing as the higher numbers make him look bad.
The reaction to the pandemic has been extreme; the economic catastrophe has been very real. The numbers of unemployed has staggered every nation. The data from the second quarter yields the worst economic crisis since the 1930s, and perhaps ever. There is every reason to question the lockdown strategy as it is abundantly obvious that it has done enormous damage. It is a policymaker's worst nightmare as there is no good choice available. Tighten the pandemic reaction and the economy crashes even further, open the economy back up and watch infection rates soar.
It is really too late to develop a strategy that truly addresses the current crisis. The outcome is already evident. There will continue to be waves of infection and death as it is not possible to keep the global economy shut down. At the same time, it will be impossible to truly restart the economy. That will mean a crippled rebound that leaves millions in financial ruin. The focus will need to shift to how a future outbreak is handled. It is obvious that actions have to be taken immediately. A full lockdown of Wuhan last year would have contained the virus. A rapid response to the virus as it entered the U.S. and other nations would have contained it. Slow, halting and confused leadership led to an unprecedented disaster. If the world is to avoid a situation where social isolation never ends, events are never held again, where jobs never return and we all shun human interaction, there will have to be a far different response to the next such threat as we all know there will be many more to come.
There has been some shift in terms of consensus on the progress of the economy. It was only a few weeks ago that most economists assumed there would be a sharp recovery in the third quarter, but that confidence is starting to fade. The comments from Kansas City Fed President Esther George outline the problem. The rebound that seemed secure in Q3 is based on a resumption of near-normal business activity. Now, that seems unlikely.
Analysis: There was an expectation of an expanded coronavirus threat as business opened up. There would be more opportunity for exposure, and that would result in more infections. There has also been more testing. That has revealed many people who have been carriers with no symptoms. Even though an outbreak was expected, there seems to be no sense of what that would mean. Governments are now shutting down again. It seems that no decision about the trade-off has been made. It seems likely that there might be a second lockdown. At the very least, the next phase of reopening will be delayed, and perhaps for months. This would mean no resumption of events and venues that draw a crowd. At first, the criteria for reopening was reaching a peak for infection. That was accomplished in May. Now, the numbers are rising again and exceeding that former peak. The criteria for reopening have started to change. It seems that normal will not be resumed until there is both an effective treatment and a widespread distribution of a vaccine. Neither of these appear to be imminent.
Will There Be Permanent Changes?
There have been a series of reactions to the last several months. In the beginning, the virus attack was seen as no big deal. There was barely a response by most governments and by the public. It was seen as just another version of the seasonal flu, something that affected the sick and elderly. Then it was apparent there was a bigger threat. Complacency switched to outright panic. The entire global economy was shut down. It appears that nobody quite understood what this would mean to the lives of billions of people. It was still assumed that all this would be in the past by the end of May as the business community reopened. Now, it has become evident the threat will be with us for months and perhaps years. There is discussion regarding what has changed and whether this change will be permanent.
Analysis: Over the last several weeks, I have been conducting a large number of webinars as these have taken the place of all those events where I once spoke. These have essentially been reports on the state of the economy and the situation faced due to the viral outbreak. The business community is starting to shift its attention to what can be expected in the future. The new webinar is entitled "The New Normal: Five Patterns That Will Change and Five That Might." Over the next few issues of this newsletter, we are going to explore some of these changing patterns. We will start that process with a look at the changes expected in the supply chain.
There is perhaps no sector of the economy that has changed as much as transportation and logistics over the last several years and decades. It is the development of the global supply chain that undergirded the whole concept of globalization. It was always possible for manufacturers to make things all over the world, but if these products could not make it to market, it hardly mattered. The whole development of online shopping was dependent on supply chain logistics. We could always avoid the brick-and-mortar store through the use of a catalog and the U.S. mail. But waiting weeks for our purchase and having to accumulate dozens of catalogs was less than convenient. Now, we have the world at our fingertips and a supply chain that delivers it to our door in a day or less. A business could elect to make a product in a place where production costs were rock bottom, labor costs were low and government interference was minimal. The logistics world was able to get that product anywhere in the world it was needed.
Today, that whole system has been threatened; it has not been entirely due to the coronavirus outbreak. Right now, there are over 500,000 sailors stuck on their ships or in ports around the world as they are quarantined or their destination has been locked down. This has affected almost half of the world's ocean cargo. Suddenly, that one-day or even one-week delivery is in jeopardy. The notion a few years ago was that "Just-in-Time" (JIT) would be the wave of the future, and it was for quite a while. It promised a reduction in inventory costs as business would get the parts, commodities and other materials as they needed them. That was all predicated on a smooth functioning global supply chain. Today, that doesn't really exist.
Three new patterns are developing and they will very likely be here to stay. The first is that supply chains will be diversifying. This was taking place even before the pandemic as many nations were engaging in some form of trade war with China. China had developed as the world's manufacturer as it offered both low production costs and an infrastructure that could support this kind of trade, but its dominance provoked opposition. Combine this with the impact of the virus and companies are looking at many other nations as an alternative to China.
The second pattern shift is reshoring. It has always been important to be as close to the customer as possible so that a supplier can be responsive. The decision to source overseas was a balance—loss of that closeness vs. getting a product at a better price. Now, it is more expensive to bring product from overseas and proximity is a bigger demand than ever. If salespeople can't travel easily and if support people can't get access to these overseas producers, it compromises the business. Today, the idea is to stick as close to the customer as possible. That means moving operations back to the home nation—especially if the advance of robotics and technology allow for less dependence on low-cost labor.
Then third pattern is the resurrection of the warehouse. The JIT system relied on a smooth and seamless logistics operation. Those days may be gone forever. The trade wars and disputes were compromising these patterns already. Now, there is the whole issue of shutdowns and virus reactions. Suddenly, the need is there to buy as much inventory as can be had and store it so that it is available when it is needed. The construction sector has seen a surge in demand for warehouse facilities. That has been further accelerated by the demand from consumers that expect nearly instant delivery of the goods they are purchasing on line.
Please take a moment to express your sympathy and extend your condolences to my long-suffering wife. For three plus months, I have been cut off from the opportunity to converse with people at all those conferences and meetings. The only person I have left to harangue and bother is my wife. All these musings and howls of outrage over the current crisis are visited upon her and the cats. She has been patient, but has taken to adopting the feline strategy of taking a nap in the middle of one of these diatribes. In all fairness, she has been engaging and has expressed her own well-developed opinions, but there is only so much that people can take.
The other day we had an epiphany when it came to the issue of expertise. Once upon a time, my father gave me a piece of advice that stuck with me—"Always strive to be the dumbest person in the room." What he meant was that if one surrounds themselves with people smarter than you, there is an opportunity to learn. If you are the smartest, you need to find some smarter friends. Today, there seems to be an immense distrust of people with knowledge and expertise. Those with the training and education and experience are dismissed in favor of some poseur ranting on social media.
When my wife takes an interest in something, she works to learn as much as she can. She has an understanding of gardening and horticulture that is unsurpassed and can visualize the outcome of a meal in detail as to taste, looks and texture. Over the years, she has been eager to share what she knows with people. Often, she gets very defensive reactions and sometimes insulting remarks from people who somehow feel threatened by that knowledge. I have experienced the same thing and it confuses me. We seek not to impose or impress—we really just assume that others want to learn in the same way we do. That is usually not the case.
Fatality Rate of Major Virus Outbreaks Worldwide
The chart is not meant to downplay the threat of the coronavirus. Even if 97% of those who get the disease only get a mild version, there are thousands at risk of death. The point is that there have been many serious threats over the decades and they have all been handled without the destruction of the global economy. The crucial question is why this pandemic evoked such a different response by governments all over the world.