By Chris Kuehl, Ph.D., NACM Economist
Short Items of Interest—U.S. Economy
Better News, but Not Great
There will be some new data releases this week, and they will definitely provide some better news than has been the case lately. At the same time, they will reveal how far the economy has declined and how tough it will be to get back on track. The Purchasing Managers' Index is likely to show some gains or at the very least a bottoming out. The New Orders Index is expected to make a decent recovery. There will also be better job numbers coming at the end of the week as it has been apparent that companies have started hiring again. The problem is that there was such a massive decline in the PMI and in terms of jobs that it will take a long time and much higher numbers to overcome the decline. The best that can be hoped for at this point is a modest rebound and an end to the falling numbers.
USMCA Off to Very Rough Start
This was supposed to be a seminal moment as far as President Trump's trade policy was concerned. After months of acrimonious debate, threats, trade wars and insults, the three leaders of the U.S., Mexico and Canada reached a deal on replacing NAFTA. The USMCA ended up looking a lot like NAFTA, but the U.S. managed to extract concessions on several key issues. The pact comes into effect this week, and it is already in shambles as there are threats of litigation from the U.S.; investors are turning their backs and there is outright opposition to then leaders of both the U.S. and Mexico. Trump is facing criticism from his own party and AMLO, in Mexico, is under attack from all sides—especially from the business community, who accuse him of giving away everything to the U.S.
States Reversing Their Strategy
The hopes for a May or June rebound are fading fast as various states are either slowing down the process of reopening or are reversing it altogether. COVID-19 case numbers have risen, but there is still much confusion as to why. Is it due to more community spread as people are allowed to gather and concentrate again? Is it a reflection of additional testing and revealing more of those that have been asymptomatic? Asia has been seeing a similar surge, and they have not been reducing the lockdown as the U.S. has. Europe is not getting hit even as they have been reopening at a rapid clip.
Short Items of Interest—Global Economy
Election Run Off in Poland is Crucial
The expectation a couple of months ago was that the Law and Justice Party was headed for an easy victory in the Polish presidential race. The incumbent seemed solid—Andrzej Duda has been the populist leading the far-right party that has held sway for years. That was before the crisis imposed by the coronavirus. The Polish economy has been hurt as have all the others in Europe, and the government was very slow to react. This has allowed the Liberals to make a comeback, and now they have forced a runoff on July 12. It pits Duda against the mayor of Warsaw, Rafal Trzaskowski, and right now Duda looks to be in trouble as the smaller parties have been lining up to support the Liberals. It will be another contest between the rural areas and the urban communities but this time the virus has been a major issue.
Ireland Engages in Grand Experiment
The politics of Ireland had reached an impasse and it appeared that no party had the ability to pull out a real victory so now there has been a historic deal between the three dominant parties in hopes that they can find a way to work together. Michael Martin will be the new Taoiseach until 2022 when he will have to hand the title back to Leo Varadkar. It is the first time that Fine Gael, Fianna Fail and the Greens have tried to run a government together. It combines the center right with the center left and the centrists and there are plenty of issues they disagree on. The number one issue at the moment is contending with the virus and rebuilding a wounded economy under the continued cloud of the Brexit negotiation.
Chances of Another Shutdown Increase
There has been very little that can be said about the Year of the Coronanvirus that can be classified as definitive. This has been referred to by every conceivable catchphrase available—"uncharted territory" pops up about every 10 seconds, and trite as this may sound, it seems a pretty apt comparison. The path into and out of this crisis has been murky and mysterious, and there have been plenty of assumptions that have not played out. One of the most important of these assumptions has been the one regarding the connection between peak infection rates and the reopening of the economy. The majority of the states reached that peak level in April, and that was supposed to lead to the "May Rebound." It promised an end to this international nightmare—hold on until May or June and all would start to return to normal. So much for that set of assumptions. We are now on the cusp of July, and numbers of infections have shot past those previous peaks in 30 states and the remaining 20 will be there soon enough. Now what? Will be there be another economic lockdown? Will a second lockdown be even more disastrous than the first? Will such a move really have much of an impact on the spread of the virus? Answers to these questions and many others are very hard to come by at the moment.
Analysis: At the start of the pandemic, there was very little that separated the various nations of the world in terms of both the impact of the virus and the response. Every government had been caught unprepared for the onslaught, and everyone was in a mad scramble to develop a response. It was too late for adequate testing and tracking and that left some kind of containment and quarantine. Few nations were ready for the pressure on the medical community, and every country watched helplessly while the numbers shot up. The little that was known about the virus made this all the more complex. Ironically, the virus was not as deadly as many that had come before, but it spread much faster than the others due in large part to the fact that some 65% of those who contracted the disease showed no signs of infection. They became the unwitting carriers and made it impossible to rely on the old admonition to stay isolated if one felt ill.
The destruction of the economy was as swift and unprecedented as the spread of the virus. It is hard to imagine that world leaders could be unaware of the damage that would be caused by the lockdown, but it apparently did not occur to them that throwing millions of people out of work and the destruction of hundreds of thousands of businesses would have a profound negative impact. Now, the world is faced with a dual crisis in which addressing one problem makes the other problem worse. Those countries that have been making some progress seemed to choose early and stuck to the plan. The resurgence of the virus has not been the issue in Europe that it has been in the U.S. as the lockdown was generally tighter, and the population cooperated with the plan to a greater extent than in the U.S. or the U.K.
The bottom line is that the global economy can't sustain another mass shutdown—it is not clear there will be true recovery from the first one for years to come. It is also clear the virus will keep spreading and will keep killing if nothing is done to halt it. Treatment options have improved a bit, but many cities are seeing their hospitals strained to the max once again. There is no immediate hope for a vaccine. If there is to be a recovery from the economic collapse and from the ravages of the virus—it will depend on the actions of the general population.
In short, the people of the U.S. will need to step up in a dramatic fashion and soon. They will need to protect themselves and one another by observing the isolation protocols (social distancing, masks and limiting contact). At the same time, they will need to resume as much of their normal consumer behavior as possible. The lack of any semblance of a national policy has made it very hard to do either of these. Instead of identifying the virus as a common enemy, there has been politization of mask wearing. Instead of an organized recovery, there has been a confusing hodge-podge of 50 state systems. Consumers are either terrified or cavalier, and neither reaction is helpful. This is the time for national leadership to step up, and there is no sign whatsoever this will take place.
Crisis Looms at State and Local Level
It is coming as no surprise but the most lasting damage from the economic crisis will be felt at the state and local level. The federal government can finance itself through debt as long as it chooses to but the states and cities and communities lack that option. The revenue shortfalls had been a major concern before this crisis and there are absolutely no options left now that nearly every source of funding has been either eliminated or sharply curtailed. There are ostensibly two options for suddenly cash strapped locales, but realistically there is only one.
Analysis: The sudden and major drop in sales tax revenue will cripple many states, and there will be further erosion as property taxes will wane, business will fail and user fees will vanish as venues remain shuttered. There will be no other alternative other than to reduce services, and in many cases, that reduction will be radical. Programs of all types will be eliminated, and city services will be curtailed. Layoffs have already started, but the expectation is that some 45% to 50% of state and local workers may be at risk. The impact of the revenue shortfall will vary considerably from city to city and state to state. The next big challenge will be financial as many cities and even states will find themselves in default on their bonds and other obligations. There were communities that faced that kind of trouble before all this started, and many more will be in that position soon. The ability of the federal government to provide assistance will be severely limited at the same time.
Will There Be Permanent Changes in Terms of Work?
The most immediate impact from the lockdown was the sudden loss of employment. The U.S. went from a jobless rate of 3.5% to an official rate of 13.4%, but many assert that the numbers are closer to 20% when one considers the number of self-employed affected as well as those classified as "gig workers." These patterns were repeated in Europe and Asia as well. The rate of unemployment in the eurozone soared to close to 20% and was even higher in hard hit nations such as Italy and Spain. The first issue of the lockdown to be dealt with will be the rate of employment, but at the same time this is being addressed there will be many profound changes in the very nature of work. The question is how long these changes will last.
Analysis: The first issue is making a distinction between "real" layoffs and furloughs. In the beginning, there was a hope that most of the people who lost jobs would be getting them back just as soon as the lockdown was lifted. The estimates ran as high as 85% of laid off workers finding their way back to their old positions. This was based on the assumption there would be a real end to the lockdown, but it soon became apparent this was not to be the case. The May rebound fizzled to a significant degree, and for many businesses, there was no June rebound either. With the spike in new cases, it appears that much of the economy will stay shuttered for the next several months, and those furloughs are turning into true and permanent layoffs. This has created a large population of people with limited skills and even more limited opportunities. They come from the low wage service sector, and without a rebound in these categories there will be little resumption of their old working lives.
One old problem that one might have assumed would improve was labor shortage, but hat has not been the case. The tens of millions of people who lost their jobs are not qualified to take the positions that are still open in manufacturing, transportation, construction, medical or technical areas. There is, as there has been for years, a crying need for training and skill development, but there will be even less money for this in the future than there is now.
One of the developments that emerged as a result of the pandemic has been the "work at home" phenomenon. It is not that many people and businesses had not already moved in that direction, but it was still the exception and not the rule. Today, it seems that everybody who once had an office job is working remotely. Will this last? In the beginning there was far more enthusiasm for the idea than exists now. Many people have tired of the isolation and the lack of interaction with colleagues and friends. Many households are not all that suitable for the task, and that has created more tension in an already uncomfortable period. The managers are struggling with how to supervise people remotely and finding it very hard to train new people or to build teamwork. For years and years, we have been urged to engage in teams, build morale and inculcate the corporate culture and now that task is all but impossible. Some sectors have been able to adapt more easily than others, but the expectation is that the future will bring some kind of hybrid arrangement where work will be done both in the office and remotely.
One of the areas that has been most profoundly affected has been sales. The old patterns have been shattered and the question now is whether any of these will resume. It is a good bet that some will but they will be altered. The sales experience has always been rooted in building relationships. This was accomplished in a number of ways, but they nearly all required considerable face-to-face interaction. Salespeople visited clients and attended a myriad of trade shows and meetings. The schedule of a salesperson was one based on travel and networking and now that is all but gone. Trade shows and conferences have been canceled all the way through the end of the year and even into 2021. Many companies are not taking outside visitors any longer. The only opportunity for a salesperson is through a phone call, an email or some kind of virtual meeting, and these have been very hard to organize. Returning to old patterns will require salespeople willing to hit the road again, but more importantly, they need the people they want to sell to. If the meetings are entirely made up of salespeople there will be no point.
One other area of concern is skill building. While it is possible to create remote opportunities to learn and develop new skills the fact is that most development is far less formal than this. The majority of what we learn is from one another in casual and informal settings and is nearly unconscious. We watch the more experienced people around us or we learn who in the office is a good source of the knowledge we require. We get information from chatting with people. Limiting our training to some kind of formal setting limits growth and wastes resources and recreating that informal learning environment will be very difficult—if not impossible.
It appears to me that there has been a shift in overall attitude towards the future of the country. At the start there was an impression that the coronavirus was a serious but short-lived threat. The references were to some kind of dramatic May recovery based on the assumption the disease would peak in April and be gone by the end of May. The economic damage would be severe but repairable. The word from the nation's leadership was dismissive and full of assurances that everything would be fine in a week or two. That has not been the case and now it is dawning on people that this will be a very long slog.
What I am noticing is not so much a feeling of hopelessness or depression, although I have seen some of that as well. It is a resignation to the fact that some things have changed forever or at least for a long time. The way that people worked was changed, but we thought we would resume old habits soon. Now we are taking steps assuming these patterns are with us to stay. We thought our old entertainments would be back soon and we now know they will not be. We are starting to focus on what we do without them. We are settling in for a siege. Our expectations have been blunted and we are now focused on making the best of what we have as opposed to looking for the return of the old patterns.
Much has been made of the difference between the U.S. and Europe as far as the spread of the coronavirus in recent days. It is certainly true that Europe seems to have made strides in terms of control, but they are quite clearly the only ones in the world. There has been a major surge in Asia, far worse than the one in the U.S., and Latin America is rapidly catching up as the global hotspot. One of the concerning parts of this development is that most Asia states have remained in lockdown and are still seeing a rise.