Strategic Global Intelligence Brief for March 27, 2020
By Chris Kuehl, Ph.D., NACM Economist—
Short Items of Interest—US Economy—
It seems not everybody thinks the U.S. economy is in trouble. Rep. Thomas Massie from Kentucky has indicated he will vote against the bailout and will demand the vote be via roll call as opposed to a voice vote that doesn't require a quorum be present. He has not detailed his objections to the bailout, but several others in the House have expressed concerns over what this will do to an already immense debt and deficit. There are those on the GOP side that object to expanded unemployment and the Democrats have members who object to the $500 billion fund for larger companies. Most agree the effort is far from perfect, but also assert that something has to be done now. The rush is now on to get House members in place for the vote.
What Will Consumers Do with That Check?
The majority of analysts are dismissing the $1200 check from the government as little more than a gesture. The $15 an hour worker will make that in two weeks assuming a standard eight-hour day. It will not help much. The majority of other nations that have faced the economic blow of a shutdown have focused their efforts on maintaining employment. They are doing this by agreeing to pay people a portion of their salary as long as the employer keeps them on the job and pays the other portion. The majority of those getting this $1200 have indicated it will go to necessities such as rent, mortgage payments, food and the like. It is unlikely to stimulate any of the business concerns that have been most affected by the shutdown.
Already in Recession?
The formal declaration of a recession in the U.S. will not be made for months. The definition of a recession is backward looking—two consecutive quarters of negative growth. We know that we had growth in Q1 and may even be able to eke out a little expansion in the second quarter as the shutdown has only been in the last weeks. It is possible that Q2 will be negative and very likely that Q3 will be. That means that National Bureau of Economic Research (NBER) will not call a recession until the end of the year. That said, the Fed has suggested the economy is indeed headed that way and may already be showing signs of a real recession, not just a downturn.
Short Items of Interest—Global Economy
Throughout Europe there is a decision to be made. Do nations focus on stopping the spread of the virus or do they try to rescue the faltering economy at the same time? The early strategy was designed to do both—limits on interaction, but nothing extreme or draconian. That has failed spectacularly in Italy and Spain. Now, the attitude has shifted. The emphasis will be on fighting the virus and an economic collapse will be tolerated. This means governments will pour as much money into the system as they can and will impose as many restrictions as necessary. There are still holdouts such as Sweden, but even they are rethinking all this.
As the response to the virus is discussed, the objections are coming from the northern tier. In the end, it will be nations such as Germany, France and the Netherlands that will be paying for the bailouts. They are well aware the virus has hit states such as Italy and Spain the hardest. It has infuriated the average German that Italians have largely ignored the social isolation orders from the government and now ask others to bail out their economies. This is just the latest example of the North-South divide in the eurozone.
Japan Faces Reinfection
Japan was ahead of the game for a while, but seems to have declared victory too soon. They lifted many of the restrictions after it appeared the virus had peaked. Now, it is surging again. This should be an object lesson for the U.S. and a warning about rushing to judgment on the recovery, but Trump still touts an end to restrictions by Easter.
How Is COVID-19 Playing Out Globally?
The U.S. was once looking at the virus as a supply chain issue; something that really wasn't a big issue as far as the U.S. public. It was a China problem and maybe an Asian problem. That was way back in January. Since then, the U.S. has become utterly preoccupied with the issue as the number of cases has surged. The U.S. is getting the exponential growth that other states have experienced. Can the U.S. expect to see other patterns repeat and what does that tell us about the future?
Analysis: In many ways this has been a three-stage issue. The first stage was an Asian one. The second stage belonged to Europe. The third stage is now the U.S. It is very likely there will be a fourth stage as the virus spreads to states in Latin America and Africa. The situation is quite different in each of these regions.
The experience in Asia is hopeful. The virus outbreak peaked in China and South Korea and in Singapore a couple of weeks ago. The infection rate has flattened since. The emergency measures taken in China have been halted and there has been a return to near normal in the region where the virus started. There has been enough time to understand some aspects of the virus. It is now thought there are many people with natural immunity and many more that are getting mild cases and then developing immunity. This leads to the conclusion that COVID-19 will ultimately behave similarly to the flu. On the other hand, there have been reports that Japan is seeing a resurgence of infections as they have not maintained the isolation protocols that were in place and are still being employed in China, South Korea and other nations. The two factors that have played the most important role in Asia have been widespread and consistent testing and focused efforts to isolate the sick and those at most risk. Rather than assume everybody is a carrier and at equal risk, the government in Singapore has embarked on intensive testing and swiftly isolated those that test positive while demanding extreme caution from the most vulnerable.
Europe is in the midst of a crisis and has stumbled in key areas. Testing has been spotty at best (although better in some states such as Germany and the Scandinavian states). There has been widespread resistance to isolation protocols. This has been the major factor in the viral spread in Italy, Spain and elsewhere. The good news is there seems to be a peak developing in parts of Europe even with these failures. The willingness of the population to isolate and quarantine remains limited, but as leading politicians contract the disease, there seems to be a new intensity. It has been reported that Prime Minister Boris Johnson now has the virus in a mild form. Many Italian leaders have also contracted it. The testing issue remains a problem, but awareness has finally started to expand.
The Asian states are starting to see an economic rebound. It appears people are willing to resume their previous patterns as soon as they are given permission. The economic blow in Europe has been even more severe as these economies had been in trouble prior to the outbreak. They are in the early stages of economic shock and the U.S. is right behind.
The US Is Now the Epicenter
Whatever that means! There has been a saying that makes the rounds in economic circles from time to time—it states there are lies, damned lies and statistics. The reference is to the fact that one can make almost any point one desires to make by manipulating the data. In truth, these manipulations are not even lies—it is a matter of how one chooses to look at a given problem or situation.
Analysis: The fact is there are now over 83,000 cases of people with COVID-19 in the U.S. That is more than has been reported in any other nation—more than China and more than Italy. By itself, this fact seems terrifying and seems to promise an impending apocalypse. There are, however, other data points to be aware of.
The Italian population is much smaller than that of the U.S.—around 60 million vs. around 330 million. There are 261 people per million who have the disease in the U.S. and 1300 per million in Italy. The U.S. basically has more cases because it has more people. The numbers in China are what have been released by the Chinese government. The data that has emerged from China has not been as reliable as would be preferred. There was an attempt to cover up the impact of the virus at the beginning. Now it is a matter of trying to keep pace with the data.
There is more to the data than just pure numbers as well. The latest report from the CDC confirmed the fact that some elements of the population are more at risk than others. At the time of the most recent study, there had been just over 4,000 cases reported to the CDC—31% of the cases, 45% of hospitalizations, 53% of ICU admissions and 80% of deaths had been in the age group of 65 plus. The vast majority of these deaths were in senior living units of one kind or another. This latter point is another example of affecting impressions with statistics. There were stories that essentially asserted that senior living was dangerous—just look at the death rate. Better to look at the fact that senior living concentrates the affected population for statistical purposes. One would likely find that death rates for people over 65 would be extremely low at day cares and pre-schools. This would be due to the small number of elderly in those settings.
The point of this little diatribe is we are all getting a crash course in the art of statistical manipulation and we need to be a bit more skeptical of those making bold assertions based on some carefully selected set of numbers. There are those trying to downplay and deny the threat and those setting their hair on fire in a blind panic. The facts are there—we have to work at seeing them clearly. It is a hard, cold fact that over 83,000 people have contracted the virus and that over 1,000 people have died. This is enough to justify efforts to limit its impact.
People Are Dying of Other Things
As has been pointed out frequently as the COVID-19 crisis unfolded is that the number of people who die from the flu each year in the U.S. is between 28,000 and 56,000—depending on the virulence of that year's strain. The death toll from opioid abuse rises every year. This is not a contest to determine which death rate to be most concerned with. The grim reality is that the rest of us are not concerned unless the threat also pertains to us.
Analysis: The fact is society and government can direct its efforts to halt or reduce any and all of these fatalities if there is sufficient desire. Cars could be made safer with restricted speeds and armor, drug abuse centers could proliferate and so on. Whether we admit it or not, we are balancing the death toll against what it would cost to reduce it. We don't want cars limited to speeds of five miles per hour and we don't choose to spend any amount of money on controlling drug abuse. We essentially accept the death toll.
Now, we face decisions about COVID-19. How much are we willing to spend? If the optimistic assessment holds, we are likely looking at another month of lockdown and social isolation. This has been a devastating blow to the economy with massive unemployment and business losses, but if the world starts to return to normal by the end of April, there will be a swift recovery.
What happens if there is no such improvement and the period of lockdown is thought to last months and months? Can the economy recover from that? Most assessments hold that an extended period of shutdown will cripple the U.S. and world economy and send it into true depression with jobless rates of 20% or 30% and the collapse of entire industries. Will this be a price people will be willing to pay to reduce the fatalities associated with the virus? If we look at other threats, it seems logical to assume there will be a tolerance level accepted for COVID-19 as well. Then, the question becomes what we are willing to spend and what we are willing to do. We don't ban cars and we don't limit their speed, but we do mandate seat belts and air bags and establish traffic rules to reduce the threat. What measures will be used to limit COVID-19 deaths without shutting the economy down?
How Temporary Is the Employment Crisis?
The U.S. set an unwanted record with the surge of new claims for unemployment—over 3.5 million. This has utterly overwhelmed the system and likely delayed the help provided by the government through unemployment compensation. The stimulus effort by the government calls for expanded unemployment help, but that remains weeks away as the legislation has not yet passed. Also, there are those in the House who have declared they will oppose it and try to block it because they assert it is socialism. The real question is how long this unemployment crisis lasts.
Analysis: There are two schools of thought and they depend on timing. Scenario one assumes the virus threat is brought under control by the end of April at the latest. This translates to a return to business as usual and the return of the consumer. Everything opens up again and there is a rush of consumption from people who have been going stir crazy for the last six weeks. Millions of people will return to their jobs and will start to catch up.
Scenario two holds that the shutdown lasts far longer than this and people are without work for two or three months or longer. They will have burned through whatever savings they had and will be desperately seeking any kind of work. Business will shut down permanently and those jobs will be permanently lost. The consumer remains cautious even after the crisis is said to fade and they do not provide that boom that had been expected. At the moment, there is no sense as to which of these is most likely.
My reaction to the call for social isolation has been far less burdensome than for many. I have always worked from home—haven't had an actual office in decades. I did travel a lot; certainly not conducive to social distancing. I can't say I exactly miss getting crammed in an airplane and dodging people at the airport, but I certainly miss the human contact.
The biggest adjustment has been to my speaking schedule. I am now substituting the webinar and video conference for those public presentations. I can't say I am thrilled with that transition. I feed off the feedback I get from the people at these meetings. I watch their reactions and their faces so that I know what is interesting to them and what isn't. I listen to see if any of my lame jokes are working. I react to frowns and smiles and crossed arms and other body signals. Now I stare at a slide or my own face. Occasionally a cat wanders in and looks as bored as they can possibly be. I drone on for an hour and then I just quit. No side conversations, no follow-up comments, no interaction. I also get no real world information and that is crucial. I listen to people a lot and hear what is going on in their business. I get none of that now. I am isolated and can only guess at what they are experiencing. That is frustrating in the extreme.