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Strategic Global Intelligence Brief for June 3, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Dealing with Unemployment
There has long been a significant difference between how the U.S. handles unemployment and how many of the European nations handle it. In past years, the differences were somewhat minor as both systems cost a considerable amount of government money and had a similar impact on the unemployed. The U.S. system essentially assumes that a person has been permanently laid off and the help received from the government is to get them through to their next job. The system in Europe assumes the job loss was more of a furlough, so the idea is to get the workers back to their old job as soon as possible. Employers make the employee part time and pay part of their salary and wages while, the government pays the other part. That leaves the workers employed and ready to resume full time as soon as the company is able to resume. That system is truly paying off under the circumstances facing companies in a lockdown situation.

Vegas Is in Serious Trouble
Over the last few decades, there has been a rapid growth of cities and regions based on their offerings in the entertainment arena. This explosion of growth in places like Las Vegas and Orlando came as people had more and more discretionary income to spend on diversions and entertainment. These cities and other destination spots became uniquely dependent on this flow. They are now suffering a major crisis as the lockdown has all but ended the ability of people to enjoy these diversions and entertainments. The unemployment rate in Las Vegas is the highest in the country right now—far exceeding even that of inner cities.

What Does Next Stimulus Look Like?
It is not at all clear there will even be another stimulus given the differences of opinion within Congress and the differences between the White House and Congress. The Democrats are pushing for an extension of the effort that is already underway—more individual checks to people, extending the unemployment benefits through the summer and offering other packages to make up for lost income. The GOP wants to focus on providing incentives to go back to work. They want business to be protected from liability if their employees contract the COVID-19 virus after returning to work. It is a difference between continuing to shield people and wanting the population to go back to old patterns as swiftly as possible.

Short Items of Interest—Global Economy

Israel Struggles with Reopening
The experience in Israel is challenging a great many assumptions about the spread of the coronavirus. It has been asserted by some that children do not get the disease as easily as do adults. While it is true that children are less vulnerable than those over the age of 60, they seem to be as at risk as the general population. The virus spreads faster among groups of children as they are far less likely to observe the distancing and hygiene suggestions. Israel reopened its schools two to three weeks ago. The virus has exploded among the students—150 in one up-scale elementary school alone. The entire student population of the country is back in quarantine. This has major implications for how other nations will handle school reopening in the coming months.

What Is the Japanese Model?
The Japanese did not shut down their economy through a lockdown and it did not do any more testing than any other state. The impact on the country was much less even so. There were about 17,000 infections and 894 deaths and the economy was never shut down. What was the difference? Most attribute the success to three factors. The society as a whole is more hygiene oriented. That slowed the spread. The population followed the orders of the government closely and quickly. The wearing of masks was nearly 100%. The last factor was that a state of emergency was declared very quickly. The public mobilized to take special care of the most vulnerable. The bottom line is that culture seemed to play the biggest role in the Japanese approach.

Sweden Backs Away from COVID-19 Approach
The decision by the Swedish government to impose fewer restrictions on its population in response to the COVID-19 crisis made this country something of a lab rat among the nations of Europe and the world. The policy was implemented on the recommendation of the state epidemiologist—Anders Tegnell. His assertion at the start was that it was simply too late to engage in the kinds of strategies that were being implemented around the world. The only thing left to do was rely on some form of herd immunity. It would have been preferable to engage in massive and thorough testing, followed by extensive tracking and specific quarantines based on that testing and tracking, but given that testing was not available, the only tactic left was the shutdown. Sweden did not shut down schools and businesses and left social isolation decisions to the public. The aim was to reduce the impact of the economic damage that would come from a lockdown. Tegnell is now asserting that his recommendations may have been too lax and that Sweden may have been better served had it engaged in more lockdowns, although he still does not agree with the very strict shutdown protocols that have been tried elsewhere.

Analysis: Three issues have led to this rethink. The first is that Sweden's death toll has been considerably higher than any of its neighbors and is higher as a percentage of its population than others in Europe. There have been 4,468 deaths from COVID-19 in Sweden as compared to 580 in Denmark and 237 in Norway. The deaths per million show that Sweden's rate is 443 while Denmark is at 100 and Norway is at 44. The fatality rate in Sweden is comparable to that of Spain at 580 or the U.K. at 580. The rate in the U.S. has been 327. Those that support the less restrictive approach assert that Sweden's fatality rate is not out of proportion as compared to other nations, but the damage to the national economy has been much less. It has been noted that many countries in Europe are now dealing with various outbreaks of civil unrest as people become more economically desperate. Sweden has not had the same experience.

A second reason that Sweden is rethinking the approach is that other nations in the region have been cutting off access to Swedes. These border restrictions are affecting the lives of many in Sweden as well as the neighboring states. This has created economic issues and has compromised growth even as the country tries to insulate the economy from the virus impact. The interaction between the various Scandinavian nations has long created a virtual single market. These barriers have been extremely disruptive in nearly every respect.

A third reason for the opposition is that Swedes are angry that it has taken so long to develop adequate testing procedures. This has been a common complaint all over the world. There has long been an assertion that inadequate testing capability was what made this pandemic so devastating and left the world with no other option but to impose a lockdown. There have been approximately 28,000 tests per million in Sweden as compared to 56,000 per million in the U.S., 112,000 per million in Denmark and 47,000 in Norway. The lack of testing has been held responsible for the high rate of death in facilities for the elderly.

It is too late for the Swedes to reverse course as many of the other nations in the region are now starting to open back up. Now will be the point to watch what happens next. If Tegnell is correct and Sweden is now closer to herd immunity than the others, they will not experience much of a second wave while the nations that are coming off lockdown will be hit harder by the second wave than has been feared. If their death rates rise while Sweden's stay stable, the strategy will be seen as more of a success.

Australia Finally Faces Recession
The Australian economy has been on a remarkable run for nearly 30 years. It is the only major nation that has managed to avoid recession in that three-decade period. That run has now come to an end thanks to the COVID-19 outbreak and the spread of massive wildfires at the start of the year. The decline in the second quarter was 0.3%. This coincided with the imposition of the lockdown. The assertion is that recovery is already under way and that Australia will resume its growth soon, but that will largely depend on what happens with China.

Analysis: The growth in Australia has been very closely linked to growth in China as nearly 30% of the country's exports are directed at China. This is a commodity-based economy that makes the majority of its money through the sale of iron ore, coal and agricultural output. As China has industrialized over the last 30 to 40 years, they have developed an insatiable desire for that output. The Australians have been critical of China on issues such as trade and the virus, but they clearly need this relationship to continue.

Are We in for an L or a V, or Do We Get a U?
As the decision was made to react to the coronavirus threat with a global lockdown, there were some assumptions made. It is now time to examine these to determine whether they are accurate or not. The first set of assumptions was that an economic lockdown would allow for maximum containment of the virus. The expectation was that limiting contact would slow the progression of the virus. That would mean hospitals would be able to keep pace with the number of people requiring services. The second assumption which accompanied the containment strategy was that a lockdown would be very short. This would allow a resumption of normal economic activity quickly. As we enter June, it is apparent that neither of these assumptions have played out as expected. It seems there are no attempts to rethink the approach.

Analysis: From the beginning, there were critics in the medical community who asserted it was far too late to attempt mass quarantine or containment. There was universal agreement that it would have been much more effective to test a very large segment of the population and subsequently track those that were infected. Those at highest risk could then be isolated and protected. The fact is that there was extremely limited testing, no capacity to track infections and there was little opportunity to isolate and protect the most vulnerable. That left mass quarantine, but most judged this as nearly impossible given the spread of the virus. The goal was limited at this point to protecting hospital capability. The aim was simply to "flatten the curve." Given the data presented at this time, that goal has been reached as there appears to be adequate capacity even in the hardest hit areas. Somewhere along the way, the goals changed and the focus became eliminating the threat. That is a far more difficult (if not impossible) task. That shift had profound implications for the economic recovery.

Originally, there was an assumption that most of the states in the U.S. would reach a "peak level" in April. This was defined as a point at which new infections started to decline, but a more important consideration was the rate of fatalities. It was asserted that when a state reached that peak level it could assume that its medical community would be able to keep pace with demand. That would then permit a relatively rapid economic recovery, taking place in May. The peak levels were indeed seen in April, but the goals had changed. Now there was a demand that viral infections decline further. This delayed the expected economic rebound.

The May rebound has now become the June or July or maybe the October rebound. It is not clear what the criteria for "success" now is. The medical community seems to have the needed capacity to deal with the seriously ill. The number of new cases has slowed in most areas and fatality numbers have declined, but they remain high. The latest data shows the U.S. has a death rate of 326 per million (comparable to Spain at 580, Italy at 555 and France at 443). Total cases per million stands at around 5,600. It is not at all clear what the goal now is. That has made economic recovery more uncertain.

There remain two basic schools of thought regarding the economic rebound. There is still some optimism that holds that third quarter numbers will recover dramatically and take the overall economy out of recession. This optimism is based on several expected developments. The first is that business will be allowed to reopen with a minimum of restrictions. This would allow the business community to rehire those who were essentially furloughed. It would allow consumers to resume most of their old habits. Thus far, this has not been the case in most of the states. There have been very cautious and restricted openings with provisions that have compromised many businesses. Restaurants can open but with much reduced capacity, conferences are still largely banned and events have been declared off limits. These moves have limited the number of people who can be brought back to work. This has been what has led to the more pessimistic assessments. There is a perception that consumers will remain fearful and that government restrictions will remain in place for weeks and perhaps months. If that is the scenario that plays out, there will be a much-delayed recovery.

Measuring a Moving Target
It would seem that counting the number of people working or not working would be easy enough, but over the years there have been dozens of variations tried in an attempt to get a clear picture of unemployment. There are people who move in and out of formal employment, businesses that do not report, people who do and don't avail themselves of aid, self-employed people and so on. Estimates of job loss from the shutdown recession have varied from upwards of 40 million to around 20 million, and everything in between.

Analysis: It is safe to assert that roughly a quarter of the U.S. workforce has been affected by the lockdown. Over the next couple of months, all eyes will be on how quickly these jobs are regained. The hope has been that most of the lost jobs have been essentially furloughs and that these jobs will immediately return when these businesses are allowed to reopen. The question will be how the reopening will be handled. If the restrictions and new protocols are too onerous, the business may reopen but will not be in a position to hire people back at the same rate. A restaurant that has 10% of its capacity available for customers will need just 10% of those former employees, a hotel that is limited to a quarter of its guest capacity will need a quarter of its former staff at best. The largest segment of the economy from an employment perspective is the service sector. It has been the service sector that has been hit the hardest by the lockdown recession. Recovery of these jobs may be a much slower process than originally anticipated. Those who do not get their jobs back are not in a position to resume their role as consumers.

Data = Garbage-In and Yields Garbage-Out
I am reminded of a quote attributed to the late Senator Everett Dirksen when he was a guest on the Tonight Show. "A billion here and a billion there and pretty soon you're talking real money." He was discussing the process of funding the government, but this remark holds whenever there are big numbers involved. To be honest, most of us have a hard time understanding these large data points. It is not helpful when people (like me) goof up a number that is already big and make it ridiculous. As I was trying to make a point about the lives lost in the Civil War, I asserted that 600 million had died in that war. Given that the total population of the U.S. at the time was around 32 million that would have been an incredibly costly war. The real number was 600,000. This was an honest mistake on my part—probably stemming from having been researching the size of the national debt and getting millions, trillions and gazabazillions in my mind. The real point is that we need to question the numbers we see. I have mentioned the little book entitled How to Lie with Statistics written by Darrell Huff in 1954. This is a great little tome as it equips one to either engage in subterfuge or to recognize when something is not quite right.

We are seeing lots of numbers these days. We are seeing even more interpretations. Both "sides" have been engaged in using this data to prove a point. In most cases, the numbers used will back up their position. We have to be vigilant and understand that we still don't know very much. We will see data shift and change on a daily basis as we will be getting more and more information. The other adage from economics is "one can have data that is accurate or data that is fast—one can't have both" Now that 150+ years have passed since the Civil War, I can confidently assert that the number of casualties was NOT 600 million. I am not as confident in the numbers we have at our disposal regarding the impact of the virus and the state of our economy.

Job Openings Plunge
The unemployment numbers have quite obviously been miserable since the outbreak of the coronavirus and the subsequent lockdown, but it is worth noting that there was some concern about the employment situation even before this collapse. There was a sharp decline in job openings towards the end of last year. That was expected to accelerate into this year—long before the shutdown became a factor.

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Friday, 23 October 2020