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Strategic Global Intelligence Brief for March 30, 2020

 By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

It's Trash Day
There are front-line workers that we rarely hear much about, but we need them now more than ever. Today is the day that my trash is picked up. I am grateful that the refuse will soon vanish from in front of my house. I am a diligent recycler and composter. The paper, plastic and aluminum are picked up and I drop the glass off. The compost makes it to my garden, but there is always a bag of stuff that goes to the landfill. The guys that toss all this stuff are touching everything we throw away. It's refuse that will have more and more exposure to the virus. There will also be a lot more thrown away as we wipe everything down. We owe the medical people a lot and we owe others who are helping us cope, but we also owe these unsung heroes as well.

Face-to-Face Under Assault
There is a lot that can be done remotely and through the wonders of video conferencing (assuming the infrastructure holds up), but there are many things that require face-to-face interaction. Right now, that is all on hold. One is not likely to visit a dentist remotely and there are likewise limits to other forms of medical care. An area that is not thought of as often is banking. The small bank relies on face-to-face far more than the larger ones. They will be struggling to keep their service levels up. Many in the sales world are also in trouble as they rely on their ability to build relationships with people. The social distance requirement is far more challenging for some than others and they will be slower to bounce back to normal.

Jobs Report Will Be Partial
At the end of this week, there will be the first report from the Labor Department that will note the impact of the virus outbreak, but the data will not reflect the impact quite yet as the data was collected prior to most of the mandatory shutdowns. The numbers will not be good, but it will be important to note they will actually be worse than this week's data will show. That will start to manifest at the end of April.

Short Items of Interest—Global Economy

Good News Coming from China?
The Chinese will be releasing their Purchasing Managers Index this week. It is expected to show a significant rebound in activity. The virus has peaked and even started to decline in select parts of the country. Hubei province was the original outbreak source and the region that has been fighting this since January. The factories in this highly industrial area are back to work and the health authorities have reported that there have been no new cases in over a week. Recovery rates are at 85% now; even the elderly are getting better. This is the best signal thus far that there is an end to the crisis in sight.

Can China Lead the Way Back?

At the time of the 2008 crisis, it was China that did the most to bring the world economy back to life. They had not been hit as hard as the U.S. and Europe, but their economy took a blow as well. The government reacted with a stimulus effort that was easily twice the size of the ones launched by the U.S. and Europe combined. That surge of cash was the trigger for the world recovery. Could they do that again now that they are coming out of the crisis first? The issue is that China already has immense debt loads and is not in the same position it was in 2008-2009. They may not have the wherewithal to bolster the world.

Worst Is Yet to Come in Africa

As bad as the COVID-19 crisis has been for the developed world, it is about to reach catastrophic levels in Africa. This continent has been ravaged by disease outbreaks for years. This one will spread as the others have. It is expected that some 80% of the population will be infected unless there is massive intervention. At this point, there is not enough for the developed countries to handle their own populations.

What Made South Korea Different?

South Korea had its first case of COVID-19 on January 20—roughly the same time that China was experiencing its outbreak. The surge in cases was on February 29. It became the second-most infected nation by mid-March. Today, the country has fallen to the 10th most affected and the new cases have slowed to a few per day. Over 86% of those who have gotten the virus have now recovered. There has not been a fatality in over two weeks. The country has been pointed to as the shining example of how the crisis should be handled and may serve as the most encouraging signal for the rest of the world.

Analysis: The factors considered vital to the success of the effort include rapid development and deployment of a diagnostic test that was administered systematically. It started with any sort of first responder—everybody in the health care field as well as those serving as caretakers for the at-risk population. The next wave of tests was administered to those considered at risk. There were thousands of test sites—drive-up locations, private clinics, hospitals, police stations, fire stations and more. Information on what to do and when was constant and consistent. The quarantine order was explicit for anybody testing positive; the entire nation was ordered to take precautions. The outbreak was meticulously tracked through the use of patient questionnaires and the use of the GPS devices on people's phones. This was how people who might have been exposed were identified, warned and urged to get tested. The borders were sealed quickly—especially those to China. The population responded quickly and followed instructions to the letter.

Anyone who has familiarity with South Korea appreciates the ability of the population to respond to threat. The periodic drills to defend against a North Korean invasion transform the country in a matter of minutes. The desk clerk at the hotel changes from his suit to fatigues in seconds and stands ready with an automatic weapon. The immensely crowded streets are empty in minutes. This is a population that reacts quickly and decisively.

Weeks after the outbreak globally, the U.S., Italy, Spain and others in Europe are still not able to test health care workers and others on the front line—much less the at-risk population. The various state and local governments still can't decide whether to isolate, there is no way to track who has the virus or who they have been in contact with. The hospitals still lack basic protective gear and most are unable to offer treatment to any but the most seriously infected.

South Korea offers an encouraging message—that this outbreak can be controlled and that life can return to normal. It also sends a message that chaos and lack of basic preparation will delay that recovery by weeks and perhaps months.

India's Shutdown Order Prompts Exodus

The COVID-19 crisis hit India slightly later than in China, but now threatens to do far more damage. The government of Prime Minister Narendra Modi was not swift in responding to the outbreak. That allowed the virus to spread quickly and has necessitated a draconian response. There was to be a one-day shutdown, but that proved to be a ludicrous strategy as the number of cases quickly escalated and caught the medical community by surprise. The order to shut down for the month of April was issued, but with little in the way of prior warning and even less preparation. The collapse of the economy was rapid as virtually all business ceased to operate. This left tens of millions of workers with no income. The vast majority of these are migrant workers that live day-to-day. They have had no choice but to flee for their original homes in the rural areas of India. The roads are now jammed with people streaming out of the cities. This could well trigger a humanitarian crisis that dwarfs anything else yet seen as a result of COVID-19.

Analysis: The admonition on social distancing has been completely defied as people are packed in a mass exodus. They have little food or water. Many are now traveling hundreds of miles to villages that lack any ability to treat any aspect of the disease. The expectation is India will soon be the real epicenter of the breakout as millions will be exposed and only a fraction will be identified or treated in any way. The shortage of equipment is already at a crisis level and there are few options available for acquiring more. There has been no consistency as far as government messaging, which has made reactions all but impossible. There is still regional denial about the threat and there has been little attempt to even track the course of the outbreak. There has been a total failure to understand the almost instant desperation of the millions of laborers in the cities and towns.

Collapse in Oil Prices Continues

No matter how one looks at this dramatic fall in the price of crude oil, it is not a good thing. Over the weekend, the per barrel price of West Texas Intermediate fell below $20 a barrel and Brent crude was just over $22. This marks the lowest price in over 18 years (back to the days of the tech bubble bust). At first blush, there would seem to be a silver lining for those that consume oil as the price for fuel will surely fall, but this period of extremely low pricing will not last. When it reverses, the hikes in the price of fuel could be very dramatic. The reason for the crash in pricing is lack of demand, but this demand fall is wholly artificial and not destined to last. When the shutdowns expire, the expectation is consumers will resume their old patterns. By most accounts, there will be an explosion of activity as people seek to make up for lost time. This means that after a period of no demand for oil, there will suddenly be a tremendous demand.

Analysis: The U.S. oil producers can't make money at $20 a barrel for oil—at a minimum the price needs to be around $45 to $50 (and it has not been near that point in weeks). The Saudi Arabians are hard pressed to make money at $20 and they have the cheapest oil in the world. This means most of the oil producers in the U.S. will have no choice but to shut down their operations for a period. The best-case scenario is oil demand will resume in May or June. Then, these oil operations would be able to resume. The problem is that shutting down production is an expensive proposition and starting up again is even more costly. If demand surges, there will be a shortage of fuel available. That will not be easily or swiftly addressed. Add in the fact that oil producers will be eager to find ways to recover their previous losses and will not hesitate to hike prices just as dramatically as they fell.

It is too early to determine the exact order of response, but analysts have offered several scenarios already. The best case is that there will be plenty of oil in storage and demand will be slow to respond. This will give the sector time to react and bring new production on line. This would result in oil prices back to the levels seen before the virus crisis erupted—around $60 to $70 a barrel. That translates into pump prices around $2.50 to $3 a gallon. The worst-case scenario holds that demand surges rapidly in the summer and overwhelms the ability of the stored fuel to meet that demand. The output lags and oil companies try to recover lost revenue to some degree. This pushes the per barrel price to well over $100. Pump prices could sail past the $3 a gallon mark to as much as $4.75 or $5. The very high-priced gas on top of several months of very low prices will likely stunt some of that demand surge. Most analysts are suggesting the sector settles down by later in the year. In the meantime, the summer months will likely be tough on fuel consumers. This will include the motorists as well as the trucking industry and the already-battered airlines.

This is Not the Flu

There continues to be a very inaccurate narrative around COVID-19. This cascade of misinformation has served to confuse the public and delay the response that will be required to deal with the issue. It has been bad enough to hear people with absolutely no medical background pontificate, but now we are hearing from dermatologists, dentists, plastic surgeons and so on. It might be a good idea to listen to epidemiologists and others whose specialty is this kind of disease. COVID-19 is not the flu.

Analysis: The incubation time for the flu is from 1-3 days and COVID-19 is from 1-14. That means people can have it and not be aware for two weeks. The hospitalization rate for flu is around 2% while it is 19% for COVID-19. The fatality rate for the flu is .1% and for COVID-19 the rate is between 1.4% and 3.5% (depending on age and underlying health). Most importantly, there are vaccines for the flu and known treatments. That is not the case for COVID-19 (as yet). COVID-19 spreads far faster than flu and many other virus-based diseases (SARS, MERS, swine flu, avian flu, etc.). That means roughly 20% to as high as 60% of the world will be infected. Nobody had immunity built as do millions who have had exposure to the flu. It is true that 85% of those that contract the virus will get a mild version and will not even require hospitalization, but 15% of the population will—far more than the system is ready for.

The bottom line is this is a unique threat and will require cooperation to contend with. The economy of the planet has been plunged into recession, but it is one that can be temporary if there is a concentrated effort to contend with the virus.

Changing Tunes

Part of the confusion over the reaction to the virus stems from the inability of the Trump White House to get on the same page. A week ago, Trump was asserting restrictions would be lifted by this week. Now, he has reversed his position and indicated they will stay in place through April. There are those among his advisors suggesting the restrictions were never necessary and those who assert they should be in place through May and into June.

Analysis: There is nobody in the U.S. who wants to live under these restrictions. We are all aware tht this has done immense damage to the economy, cost millions of jobs and destroyed thousands of businesses. If this sacrifice is to have been for something, there has to be a universal response backed by national leadership—not a series of chaotic messages.

People Sure Can Be Weird

The aftermath of this virus-defined period will be chock full of reaction and examination—on a national level as well as on a personal one. The government should take a long, hard look at how it has reacted to all this, but so should we all. Were we at all prepared for this mentally or physically? Obviously, we were all trying to get by on the narrowest of toilet paper reserves and now know to buy hand sanitizer in those handy 55-gallon drums (the extended family size).

We know that our pets are woefully out of shape. I have never seen so many exhausted and gasping dogs in my life. After the 10th or 11th walk of the day, they are hiding the leash. We also know people look at everything during a video conference—not just our smiling face. Much is revealed whether we know it or not. There's the kid in the background busily employing those markers on the wall or a messy house on view.

It also strikes me that we were a lot more socially isolated before—people in my neighborhood I have not spoken to in a decade are now waving and shouting across the yard as if we were old friends.

Exponential Growth
There is both good and bad news in this chart but perhaps more of the former. The curve has been flattening in most of the nations that were initially hit with the COVID-19 virus. Some of these curves are even starting to trend down. The bad news is this curve has not started that trend downward in most of the western states and is still climbing fast in nations like India and parts of Latin America.

Manufacturing Sector Begins to Slow Down
CARES Act Helps Construction Industry
 

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Monday, 25 May 2020