Strategic Global Intelligence Brief for March 25, 2020
By Chris Kuehl, Ph.D., NACM Economist—
Short Items of Interest—US Economy—
Road to Hell and Best Intentions
The decision on the part of the federal government to delay the time for people to file their income taxes was designed to give people a brief reprieve in the middle of the virus crisis, but as with most such gestures, it has had unintended consequences that may do more damage. The extended filing deadline is going to create revenue problems for the states at precisely the time they are being asked to provide more and more services. The advantage of the extended tax deadline is more than a little murky in any case. The tax obligation is not changing—people will still owe what they owe. The vast majority of those who plan to get a refund have already filed. That leaves the people who owe money. They are unlikely to spend any more than they usually would as they still have to come up with the money in July.
The U.S. is the consumption driver for the world. That has been clear for years. The U.S. consumer long ago adopted the mantra of, "I can't be broke; I still have checks." The shutdown that has rolled across the nation has robbed the consumer of the opportunity to buy. The retailers are closing their doors without knowing how long this pattern will persist. The reaction on the part of the suppliers has been to panic as orders have almost instantly dried up. The economic recovery in some of the nations where the virus seemed to be subsiding has been blunted by the lack of U.S. and European demand. There has been progress as far as reopening Chinese and other Asian manufacturing operations, but they have lost their market.
Unemployment Checks Delayed
Now that Congress seems to have become aware of the urgency of the situation and pushed through a massive stimulus effort, there is another problem. The bureaucracy required to get these payments out to people and to get those unemployment checks in people's hands is not in place. Even fully staffed, the system would be overwhelmed by the sudden demand. In a matter of a few days, there will be hundreds of thousands of new requests for unemployment. The government is not even close to fully staffed as there have been required shutdowns here as well. Also, many people are requesting leave and practicing the isolation procedures that have been put in place. The arrival of support and aid will be much slower than would be preferred.
Short Items of Interest—Global Economy
Prime Minister Boris Johnson declared the U.K. would take a different approach, but he soon caved and Britain has adopted the same strategy employed by other nations. Sweden has stuck by its pledge to try something different. The limitations have been far less—schools have remained open, retailers are operating, mass transit is still operating and restaurants are still serving. Large crowds have been restricted and there have been some closures, but the focus has been on personal responsibility. People at risk are asked to self-quarantine and everybody has been asked to be very hygiene sensitive. Testing is more intense and treatment is swift. Thus far, the virus has not spread any faster than in other nations. Observers note that Swedes seem very diligent about precautions.
The peak seems to have arrived and past as far as the virus is concerned. The emergency hospitals have closed and the majority of the businesses have reopened. The number of those who have recovered is now close to 70% of those infected.
Chinese Business Update
One of the questions is whether people will accept an "all clear" when it is eventually sounded. The evidence in China is that people have been very quick to get back to old patterns as far as travel, shopping, working and interacting. Even the center of the outbreak in Hubei province appears to be back to normal.
Purchasing Managers Reveal Stunning Decline
To the surprise of absolutely nobody, the data from the Purchasing Managers' Index (PMI) has been dropping like a rock. The first set of releases has come from HIS Markit and it is grim—setting unwanted records. The U.S. version fell from 49.6 to 40.5, as low as it has fallen since the index was created after the recession in 2008. The version of the Purchasing Managers' Index prepared by the Institute for Supply Management has been in existence far longer than the Markit version and has seen declines of this magnitude before. It will be released next week, but is also expected to show a major fall.
The index for the eurozone was even more distressing with a reading of 31.4 after one of 51.6 last month. This is the lowest point reached since July of 1998. The PMI has been used as a gauge of business and economic activity for a long time as it has the virtue of being timely and accurate. Many other surveys are distorted by the respondents as they are reluctant to divulge what is really going on with their business. The purchasing managers just report whether they are buying more of something, less of it or about the same as they did last month.
Analysis: The data shows what everybody has been noting and feeling. The shutdown has affected consumption dramatically and hence it has impacted production. The impact has been greatest in those industries that have been most closely tied to these changes in consumption. The travel business was hit hard and early and is perhaps in the worst shape. This is also due to the fact consumers are expected to be slow to return to normal once the immediate threat has been addressed. The suspicion will linger and will affect people when they consider flying, going on cruises or trips of any kind. The food service industry as well as the entertainment sector has been wracked, but the expectation is these will rebound pretty fast once the limitations are lifted. The industries that produce goods are likely to be the least affected as long as people are in a position to spend. The level of consumption will be closely tied to the level of employment. If the crisis ends within the next month or so, the employment numbers should recover quickly—again depending on consumption.
Permanent Shifts on the Way?
The assumption remains that this crisis ends at some point. The question at this stage is when. If the lockdown ends relatively quickly, it is unlikely there will be major structural changes as most business and the consuming public will simply return to their old habits and breathe a sigh of relief. If, however, this crisis lingers into and through the summer, there will be shifts taking place that will establish new patterns. The most immediate will be changes in the supply chain as the world rethinks the whole notion of globalization. There could also be major changes in the way people work and the way they consume. This crisis has accelerated two already existing trends. It remains to be seen what comes to dominate.
Analysis: It is not that global trade will come to an end—there are simply products that nations need and don't produce for themselves, but the fragility of the global supply chain has been in evidence for several years now. The old assumption was that the world was evolving into a virtual single market and efficiency would rule. That assumption is not as valid as it once was as governments have moved to interfere with global trade in order to protect their own industries and workers. The supply chains have been challenged by natural disasters such as the Japanese tsunami and many other events. Now there is virus outbreak and the strain it has placed on business as usual. Supply chains will become more diverse and tighter—there may even be more use of downstream and upstream control and the reintroduction of the conglomerate.
When it comes to working and consuming, the changes had already started to appear. The online threat to the brick-and-mortar stores did not begin with the virus lockdown, but the current restrictions will accelerate that transition as people become ever more familiar with the online experience. For example, there has been reluctance on the part of consumers to shop for groceries online. Now that has become the only option for many.
Likewise, there had been more acceptance when it came to remote work, but there were always those reluctant to give up the office arrangement. The managers worried about loss of control and reduced productivity. Workers worried about the loss of social contact and the lack of supervisor assistance. Now, the whole world is getting a crash course in how to work independently and remotely. It will turn out that some adapt well and others will not. The shift will also expose the kinds of jobs that can realistically be performed in the remote setting. Not all of them will be handled effectively.
Better Late than Never
After nearly three months, the fiscal side of the government has finally decided to take action. No points can be awarded for instigating a swift response to the COVID-19 threat, but at least Congress has decided to enter the fray at last. The question now is whether it will be effective. The word stimulus means "a thing that rouses activity or energy in someone or something; a spur or incentive." Now that the powers that be have dumped over $2 trillion into the economy, it is up to the consumer and the business community to react in a way that improves the situation. There are many ways this incentive can help and there are many ways it can fail—it all depends on what happens from this point.
Analysis: There are many elements involved with this package, but four aspects seem to be key to its effectiveness. There will be direct payments made to a significant segment of the population, there will be a dramatic expansion of the funds available for unemployment compensation, there will be loans and grants made to businesses that have been hurt by the isolation orders and there will be a major increase in funding for the health care system so there can be more testing, development of treatment options and work towards a vaccine. The effectiveness of the first three will depend on what people do with the help.
It is important to understand the purpose of the effort. In essence, this is a move to buy time. If somehow the virus vanished today, the crisis would be over in hours. This is a "man-made" disaster as the economy was shut down by order of the government. In order to halt the spread of the virus and the deaths of thousands, the decision was made to isolate and shut down. The stimulus is just designed to get the U.S. through this period of isolation. When the "all clear" is sounded, the stores will reopen, meetings will resume, people will travel, theme parks will reopen and all will be well. The problem is nobody knows when that will be and it is likely the restrictions will be tightened before they are finally loosened.
To be effective, there are actions that must be taken by those getting this help. The consumer needs to spend that money. They will need to try to pay their bills and they will need to try to consume as they would in normal circumstances. If the money is simply stashed away or consumers elect to continue hoarding toilet paper and hand sanitizer, the economy will get little benefit from the stimulus. Granted, the resumption of normal consumption patterns will be impossible during the lockdown, but an active consumer is still needed. The business community that is getting help will have one key job—survival. Not just staying intact as an entity, but maintaining its workforce. The key to keeping the economy out of deep recession for the year is limiting unemployment. The money that is going to business should be used to keep its employees through the crisis and ready to resume their jobs as soon as the crisis is deemed to be under control.
Why Is This Recession Different?
There are many aspects of this economic crisis that make it highly unusual. It is not, however, unprecedented. There have been many recessions in the past triggered by non-economic events. The most recent was the reaction to the 9-11 attacks, but recessions have been ushered in by war, disease and politics many times. This downturn has been extremely rapid, but at its heart, it was an engineered recession. It is not the virus itself that shut down business. Far more people get taken out of the workforce by the flu each year—even auto accidents take more of the workforce. It has been the effort to stem the disease that has collapsed the economy.
Analysis: Those who have been through similar crisis situations are urging a course of action that errs on the side of excess rather than caution. This is a sudden body blow to an economy that derives 80% of its GDP from consumption. The point of any rescue plan has to be conserving that consumption while the virus is dealt with. The good news is this recession will differ from others in the speed of its conclusion as well. A switch was pulled to start this downturn and a switch will be pulled to end it.
Why Do People Hoard?
Once this crisis is past and everybody sets about the task of review, there will be enduring images. People will recollect seeing empty highways and streets and they will remember their periods of "social distancing." The most enduring image may be the great toilet paper fiasco.
Analysis: Hoarding is a reaction to insecurity and the unknown. It is rarely rational as it is born out of fear. There are always those who focus on preparation. They are the ones who think to fill their prescriptions, know where the flashlights are and have food in cans somewhere. Then there are those who simply react. The run on TP provoked all of us to start scouting the aisles as we assumed the "hoarders" would get it all. Thus, we all became hoarders. Those who warn about natural disasters urge people to think about these challenges long before they present themselves, but we rarely do. We don't have what we need in an emergency and we know it. This just makes us even more insecure and prone to hoard.
Tis an Ill Wind That Blows Nobody Good
The Scottish saying rings true these days. There are always silver linings and there are always positives that emerge from the negatives—although they can be hard to spot at the time. It is probably good for our sense of sanity to do such a review for ourselves as we learn to cope with all this.
Positive number one: Spending more time with my human and feline family. Now that I am not in those planes, airports and hotels, I am able to spend more time with my wife and the feline five. Not to be morbid about it but Sven is 20 and nearing the end of his nine lives. I was really worried that his time would come while I was on the road and my wife would have to deal with that alone. I am able to lavish attention on the old guy. If the worst comes to pass, I am here.
Positive number two: Getting away from the travel schedule has made me realize I miss that part of my life. I really like meeting new people and reconnecting with old friends. I have been speaking to some of these groups for over a decade and these people have become my friends. I will not be complaining so much about the vicissitudes of travel in the future as I know I am lucky to be able to make a living this way.
Positive number three: This has not really kicked in quite yet. Every year I am on the road when spring finally arrives and that leaves all that yard work to my wife. This year, I will be able to get out there and do my part. Right now, the thought of being outside in the garden is delightful. I just need it to stop raining every day and for the temperatures to climb out of the 30s and 40s!!!