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Strategic Global Intelligence Brief for June 8, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Some Evidence of Consumer Rebound
There will be a major report from the University of Michigan consumer confidence survey later this week, but there have been some intermediate releases that show some promise. The one conducted by the New York Fed shows that consumers are slightly more upbeat about the prospects for the economy than they were the month before. That is a good sign given the damage sustained by the New York economy of late. The key finding is that people are less concerned about their jobs than was the case earlier. The opening of the New York economy took place later than in some regions, but there has been a robust response. The next hurdle will be when there is new data about the spread of the virus. So far, there have not been significant surges and the number of cases has continued to fall.

Where Jobs Are Returning and Where They Aren't
The overall news from the Labor Department was solid. There was a sense of relief that loosening the lockdown would indeed result in more jobs being regained. The next critical question is what kind of jobs are coming back and which are not. The area of the most significant gain was in the manufacturing sector. There was a dramatic recovery in the production of goods—both for the consumer market and for the industrial community. The only segment not showing much growth was in production for the export sector. The area where there has been less job growth has been in the service area, especially in those that demand face-to-face activity. The growth has been with the larger companies, while there has been less activity in the small- to medium-sized business community.

Within Service Jobs There Has Been Significant Variability
If one breaks down the service sector further, there are some predictable outcomes. This will be a pattern that plays out the rest of the year. The sector that has been crushed and is still not showing signs of rebound is travel and leisure. The fact is many of these destinations are still not open That means hotels are not open, restaurants are not open and all the support activity that arrives in the summer months remains shuttered. This could change as the summer moves ahead, but there is not a lot of time left for that recovery. The retail hiring looks far stronger and so do personal services. Education and health-related activity is recovering very fast. There have been gains in areas such as construction.


Short Items of Interest—Global Economy

Concerns Over Military Response to Unrest
The threat by Trump to call out the military to deal with civil unrest in the U.S. has provoked some very strong responses from members of the military establishment—past and present. It has been universally judged to be a very bad idea and a very bad precedent. The U.S. is not the only nation considering this kind of action. The tension between the military and the civilian leadership has been getting intense in places like Brazil, India and Nigeria. Some of these nations have a history of military intervention, but the civilian leaders now are worried that inviting more of it will result in their overthrow. Most of the military leaders are resisting the demands as they do not wish to fire on their own population.

UK Set to Open Pubs and Restaurants on June 22
The U.K. was slow to start its lockdown as the Johnson government tried to downplay the reaction. Now that the bulk of Europe has started to open up again, the British are starting their own process. The business community opened for business a week or so ago. Now the consumer is supposed to be getting access to the retail community as well as the food service industry. The hope is that a second wave will be avoided as the consumer suggests they will soon be flocking to these places as soon as the able to.

Major Economic Downturn in Europe
The shutdown in Europe has had the same impact there as has been the case everywhere else in the world. The data that has been arriving this week tells a very grim story. In some ways, the situation has been worse in Europe than in the U.S. or even in China. Industrial production in Germany has fallen by over 18%. These are the worst numbers seen in decades. The Italian economy is in shambles and so is that of Spain. The French have announced their emergency measures will likely stay in place for at least another year. There is no part of Europe that has escaped the damage. This is certainly no surprise as every nation on earth has been impacted by the crisis, but there are several issues that make Europe much more vulnerable.

Analysis: The first and most obvious is that Europe is heavily dependent on trade—much more so than the U.S. and more than many nations in Asia. Germany relies on exports for over 47% of its total GDP, France is 31% dependent, Italy is 31% and the Netherlands is 83% dependent. In contrast, Japan is 18% dependent, China is 19% dependent and the U.S. is 12% dependent. The interruption of the global supply chain has been devastating to the EU nations. Granted, a great deal of their trade is between the nations of the EU, but all of these countries have been pursuing different versions of the lockdown. That has hampered trade between the members as well as their trade with other nations.

A second major contributor to the problem in Europe has been the reaction of the workforce. Many of the companies that shut down in the U.S. did so because the unions demanded it for the protection of the workers. This affected those sectors of the U.S. economy that are heavily unionized—mostly in the automotive sector. The union influence in Europe is considerable. Many business and factories were shut down even if the government was not ordering it.

Beyond this, the European lockdown was more complete and severe in general. This varied from state to state, but there was generally a commitment to tighter lockdown than in the U.S. Those nations are just starting to come back to life. That may have a positive impact on the EU data in months to come, but at the moment, there has not been enough time for a reaction. It has been the economic engines such as Germany that have been the most aggressive as far as lockdown is concerned. The whole of the EU of has been robbed of that economic power.

Supply Chain Crisis Deepens
The estimate is that some half a million merchant sailors are stranded aboard their ships all over the world. These are crews that have been quarantined by local authorities due to the COVID-19 reaction. In many cases, they have been required to undergo a quarantine period after every single docking. Many crews have been working far beyond the regulatory limits as their replacement crews are not able to leave their home countries. The industry is worrying about fatigue and the safety issues involved. The emergency provisions that have allowed these crews to remain in place for this extra period will expire soon. There is no indication that unions will agree to extend it. Currently, the merchant fleets carry some 80% of trade volume—goods, oil, agricultural commodities and others. The inability to ship will cripple supply chains in profound manner.

Analysis: There will be severe shortages of goods and commodities worldwide. That will inexorably lead to inflation that ripples through the entire global economy. The importing nations will be hit with severe shortages and will see many consumer goods affected. Manufacturers will be hard pressed to get the commodities they require and will be shut down even as they start to get permission to reopen. Those nations that rely on exports will be plunged into crisis as their goods are stranded in ports. The entire supply chain is quickly put at risk as there will be nothing for the trains and trucks to transport from the ports if the ships can't unload or even dock.

There is no sense that these restrictions will be lifted any time soon. The unions are demanding that steps be taken to ensure the safety of the crews. This has been a major undertaking given the need to address contamination of the cargo itself. The most restrictive ports are in the U.S. and Europe, but even the Asian ports have been more cautious than in the past. There is a real threat to the whole movement of global goods. The cargo companies themselves are now in serious financial distress, a factor that will affect how quickly they can be expected to recover once these restrictions start to lift. The ongoing trade and tariff wars only make this situation worse and add to the feeling of crisis in the maritime sector.

Massive Impact on Job Market
I have a new goal in life. I want to go through a 24-hour period without using the word unprecedented. This will not be that day. The situation facing the nation's job market is truly unprecedented. It is likely to continue down this unusual path for quite a while. The latest job numbers are as bleak as they were expected to be. Several weeks ago, the CBO predicted the job losses would exceed 40 million and many people scoffed. Surely not, the shutdown can't be that bad can it? It turns out that the CBO was quite right. There is now a situation that is well…unprecedented. The unemployment rate was at a near-record low of 3.5% in February and then seemed to reach as high as 20%, a number that breaks records set during the Great Depression. That high-water mark for job loss may have come in mid-May as the latest jobless figures show that unemployment is now at 13.4%. This massive loss of jobs doesn't even tell the whole story as there are millions of self-employed that are not captured in this data. The loss of jobs has been even more dramatic in that category and in that of the "gig worker." Half of the U.S. workforce has either lost a job, had their hours reduced, or have seen their pay cut. The impact of this crash has been quite evident and has affected far more than just the economy. If there is any sort of silver lining to any of this, it is that the employment crash has been due to the lockdown recession and not to some deeper economic issue as has been the case in previous downturns. Theoretically, this means that the collapse can be reversed by the removal of the lockdown.

Analysis: There are several assumptions being made regarding the labor market. The accuracy of these assumptions will determine the course of the recovery. If these prove to be accurate, the U.S. will experience a classic V-shaped recession and will see a substantial improvement in the labor situation by the third or fourth quarter. If these assumptions do not pan out as expected, the employment picture is going to remain grim the rest of the year and into 2021. The good numbers released on Friday, June 5, support one of these positive assumptions. From the start of the lockdown recession, it was asserted that many of the lost jobs were due to furloughs—jobs that would be expected to return as soon as these businesses were allowed to reopen. They needed their employees before the lockdown and they would need them after the lockdown. The gains registered last week suggest that there is a lot of that rehiring going on as the majority of those who had been added to the employment rolls had been very recent additions to the unemployment rolls. They had been out of work for a matter of a few weeks.

The second assumption is linked to the first one in that it assumes this process of reopening will continue. This depends on two developments. The first is that businesses will continue to be opening at the pace it has been thus far. This seems likely but not guaranteed as there are still many states and cities that have imposed strict limitations on how these companies are to reopen. There is also the consumer to consider. It seems that consumers are eager to resume their old patterns, but that is not guaranteed either. If there is another outbreak that concerns the consumer, they will retreat. Coming back to old patterns will be further delayed. It is also possible that a second lockdown would be imposed. That would most likely shut down many businesses permanently.

These latest job numbers indicate that recovery is possible and that both business and the consumer want to resume what used to be normal behavior. Whether that is possible remains to be seen.

Interesting Data Awaits This Week
There will be quite a lot on offer this week as far as economic data is concerned. On Wednesday, there will be a lot of new information regarding inflation in the U.S. and elsewhere. The U.S. is likely to see lower inflation as there has been little evidence of sustained consumer demand as yet. There has been a great deal of money shoved into the system as a means by which to battle the recession, but it has not had the usual impact. That cascade of funds would normally stimulate a lot of consumer spending, but this time there is little opportunity for the consumer to spend due to the lockdown so that flood of money has had little impact. There may be more of an inflation threat later in the summer as more business reopens.

Analysis: There will be inflation data from China this week as well. It is also expected to be subdued as the consumer has been cautious there as well. It is expected this lower inflation threat will prompt China to pursue some additional monetary easing in the weeks ahead.

One of the more important data releases will come at the end of the week when the University of Michigan releases its consumer confidence numbers. These numbers are always extremely volatile. This week will certainly be no exception. The consumer has already been signaling deep concern over the COVID-19 situation and the state of the lockdown recession, but now they will also be responding to the outbreak of civil unrest all over the U.S. The expectation is that confidence levels will be very low. That is a serious complication as far as ultimate recovery is concerned.

In order for the economy to experience a rebound, it will need to see a consumer willing to engage. All of the data thus far shows there is a desire to do so, but there is also ample evidence of trepidation. There are still some 30 million people suddenly without jobs, there are still major inhibitors to normal economic activity as events and crowds remain forbidden. Now there are fears of violence in some areas. If the consumer remains in retreat, the potential for economic growth is limited and the rebound will be stalled, perhaps even for months.

Seeing Past the Obvious
I have about had it with half-truths, distortions and manipulations. Well, in truth, I have never been tolerant of these things. It just seems so prevalent these days. The entire COVID-19 issue has come down to what side of the mask debate one is on. The maskers assert an air of moral superiority as they look scornfully at the visible faces of the non-maskers who assert that wearing one is tantamount to being imprisoned in a labor camp by a military dictator. The facts are pretty simple. The mask is to prevent a person from spreading the disease—even if they do not know they have it. Since we know that over 65% of those with the disease show no signs or symptoms, the safe bet is to assume you might and therefore avoid spreading it. If you are laboring under the impression you will be protected—it doesn't work that way. If you know you are not at risk of carrying the virus, there is no need to wear one, but knowing means you got tested.

The racial protests provide ample examples of simplistic thinking. Those who do not believe that minority groups are badly treated by some in society are not paying attention. Those who believe that all police are bigots are spectacularly wrong as are those who refuse to believe that some are. Those who believe that looters are sanctioned by those that are protesting are not listening. We have all stopped listening to one another. We are demonizing entire groups of people with extreme bias and prejudice. That will get us nowhere.

We desperately need an outbreak of common sense and civility. We need to listen to those who are afraid and frustrated and angry and outraged. We need not categorize them—they are entitled to those fears and that anger. What we must do is find ways to address what makes people feel the way they do.

Ocean Cargo Pattern
The pattern of ocean cargo is clear enough. It has collapsed since the start of the COVID-19 outbreak. The last couple of weeks have shown a slight uptick, but these volumes have not been near what they were in the months before. This problem soon trickles into the rest of the economy.

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Sunday, 17 January 2021