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Strategic Global Intelligence Brief for May 11, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Is This as Bad as the Great Depression?
At first blush, the answer seems to be yes. The numbers are every bit as dismal as they were in the 1930s. In many respects, they have been worse. The issue with a depression is somewhat complex and requires a little consideration when trying to compare things. It is not just the depth that matters, there is also the length. This has been one of the deepest and most-sudden dives the economy has ever suffered through, but the very fact this has been so sudden will impact the length of time the collapse will last. As has been repeatedly pointed out, this is a manufactured recession brought on by a collection of government edicts. The priority has been to deal with the pandemic and the economy was sacrificed. If the restrictions are lifted and there is a return to some semblance of normal by business and the consumer, the recession will lift nearly as fast as it arrived. The challenge is these are both big "ifs."

Inflation Reactions
There has been ongoing and justifiable concern about long-term inflation brought on by the flood of stimulus dollars that has been pumped into the economy. This is an issue that will come back to haunt the economy later this year and next, but for the moment, there is nothing that is pushing inflation. In fact, the bigger concern is deflation. There has been no push from wages—not with 30 million newly unemployed people. There has been a collapse in commodity prices—especially oil. There is no demand for oil, natural gas, industrial metals or much of anything these days. That has held costs down as well. With most of retail down, there has been no reaction here either.

Retail and Industrial Numbers Will Depress
By the end of the week, there will be even more to worry about as far as the numbers. The retail data will emerge on Friday and so will the industrial production numbers. Both will be utterly miserable given the impact of the lockdown. At this moment, it is nearly pointless to even look at these numbers as they will be seen as an anomaly later. The economy is on manual shutdown and reflects nothing about business and consumer reality. As the lockdown eases, there will be an opportunity to actually gauge behavior. For now, we are falling off a cliff and are just waiting for the ground to catch up.

Short Items of Interest—Global Economy

Different Global Reactions
As data starts to come in from other parts of the world, there is a pattern emerging that might provide some light at the end of the tunnel. The latest data from China will show an improvement in most of their manufacturing and economic indices. Their worst days appear to be over. They are even starting to provide some impetus for global markets—such as oil. In Europe, there has been the beginning of a rebound in certain nations. It seems that Germany has started to level out. The steep declines in France, the U.K. and Italy have started to slow as well. If this is a repeated pattern, the U.S. would see this by the end of May.

Dealing with New Outbreaks
As the world starts to try resuming old patterns, there will be more outbreaks. The next real question will be how the world reacts. If there is a push to reinstitute the lockdown, the economic impact will be twice as devastating as the first one. The more likely response will be some combination of urging caution and accepting the outbreaks. The key will be whether the medical community can keep up. At the moment, it appears it will be able to handle the strain in most areas.

Nixing Partying
As expected, there is a percentage of the population in any country that seems to lack any sense. In nations where the lockdown has been lifted, there have been those who think this a good time for a mass party. Not surprisingly, these parties have stimulated outbreaks and governments are forced to step in.

Global Manufacturing in Serious Trouble
The reopening of the global economy will be anything but smooth. There will be sectors that bounce back quickly as consumers resume some semblance of their old patterns, but there will be sectors that have already sustained damage from which it will be impossible to recover. There have been a number of catastrophically inaccurate assumptions made by the political decision-makers as they sought to respond to a crisis they had utterly failed to anticipate and prepare for. These assumptions will mean the closure of hundreds of companies—large and small. The impact on employment will be severe and there will be a dramatic flow of negative impacts that will follow from these job losses.

Analysis: It is a discussion for another time, but overall failure to deal with a problem that had been predicted and anticipated for years left the decision-makers with few (if any) viable options. There has been little ability to test for the disease, so it has never been clear who has it and how many have been infected. There was no effective treatment and no vaccine. The most glaring error was the failure to provide enough medical care. The whole purpose of the isolation campaign was to reduce the burden on the medical system, so in essence the economy of the world was destroyed because there had been little effort to provide an adequate medical system. This failure is the more galling when one understands the argument against adequate medical care was that it was too expensive. That seems an absurd assertion now.

Business recovery will fall into three broad areas. The first to rebound will be those businesses that were able to adapt to the restrictions quickly—those that were able to continue at a near normal pace as their workforce was able to continue functioning at home. These will include the whole range of professional services ranging from law to accounting, finance and high tech. There have been those in these sectors that have thrived to some degree in this environment. The medical community that has been dealing with the crisis has boomed. There has also been a surge in demand for the technology that has become standard in today's work world.

The second to rebound will be those businesses that provide services and products that consumers truly value and will be eager to acquire once the lockdown is lifted. There will be a recovery in personal services (demand for hair salons will be off the chart for a while). Various retail operations will recover, but not all of them. The weak sectors prior to the outbreak will be finished off now. It is likely that restaurants and bars will recover if and when they are allowed to open.

The third group is most at risk. This includes many of the world's manufacturers as they will be hit from multiple sides. The first blow is that there will be a sharp decline in demand for the products they make. The entire manufacturing community is a network of companies that produce parts of a whole. If one's business is connected to the airline industry the future is bleak. The airlines may be years away from recovery. Many of the companies flying today will not survive. There will no demand for new planes and thus no demand for the parts of those planes. If one is in the business of supplying the oil sector, the crash in the price per barrel will destroy the ability of the oil producer to buy that output. The examples are numerous and that results in permanent closures rather than temporary shutdowns.

To add to the concerns of the manufacturer, there is the issue of manpower. The workers are not able to take their jobs home and must work in environments where close proximity is unavoidable. Many are unwilling to do so. These environments will continue to be viral hotspots for years to come. It had become very difficult for manufacturers to find the workers they needed prior to the pandemic. That task has now become infinitely harder. Then, there is the supply chain crisis. The manufacturing community is by far the most globalized with networks that engage dozens of nations. Parts are made all over the world and get assembled elsewhere. The crisis has all but destroyed that network. To add to the crisis, the political leadership in many nations continues to pursue anti-trade policies that further interrupt that chain. Trump's attack on China trade could not be coming at a worse time. But he is not alone as many national leaders have turned to isolation and protectionism.

There has been exposure of some deep flaws in the system. It is obvious the preparation was inadequate, but just as obvious has been the fundamental ignorance of how the global economy functions. Political decisions to shut down the economy were based on a faulty assumption that business had plenty of money and resources available and would be able to easily survive a few months of lockdown. The reality is that most business is dependent on a constant flow of revenue—even a few days of interruption can be fatal. This has been demonstrated whenever there has been a natural disaster. A hurricane can wipe out hundreds of companies. The lockdown was the equivalent of a global hurricane that lasts for months at a time. The upshot is that millions of the workers that were in manufacturing can no longer be seen as having been furloughed. They have lost their jobs permanently. This will cripple their communities permanently. There will be no coming back once these companies shut their doors forever.

COVID-19 Scenarios and Their Impact on the Economy
After close to three months of the COVID-19 crisis, there are some uncomfortable truths that have to be confronted. The most important is that viral infections are extremely widespread and persistent. This infection will be confronting the world for years and perhaps decades to come. All the other viral outbreaks have and there is no reason to expect this one to be any different. This means the virus will never be eliminated; the only option is some modicum of control. At some point, a determination will have to be made regarding what constitutes "control." In the future, there will be a vaccine that will aid in that control, but we know that even with years of effective vaccines, the common seasonal flu kills thousands of people every year. The only option available as far as COVID-19 has been to focus on treatment and limiting its spread to the point that the medical system can cope with the spread. There are now three basic scenarios under discussion as far as the outbreak is concerned. All have different economic implications.

Analysis: Scenario one is considered slightly more likely than the other two, but all three are in play. This one holds that the next two years will see more localized and intermittent outbreaks—a series of peaks and valleys. The most likely locations for these surges will be urban areas and places where there are concentrations of vulnerable people. This means increased concerns regarding the elderly population and places where it is much harder to isolate in terms of travel and day-to-day life. As vulnerable as the urban populations are, there is something of a silver lining as these will also be the areas that will see more "herd immunity." There will be a larger number of infected people—most of whom will have a mild version of the disease (three-fifths of people who contract COVID-19 show no symptoms at all). They will be far less likely to contract the disease again.

From an economic point of view, the impact would be less drastic than the current response. It would be unlikely that business would be closed although there would certainly be admonitions to continue social isolation procedures as well as intensified efforts to maintain a sterile environment. The biggest impact would be felt as people expressed a reluctance to resume work or to engage in normal consumer behavior. People in less affected areas would be likely to resume normal patterns.

The second scenario is the one often referred to as the "second wave." This assumes that there will be a major outbreak following the moves to reopen the economy. This wave could be at least as bad as the first one. The analysts point out that there are at least two major assumptions in place for this outcome. The first is that the isolation plan that has been in place since March has been effective. This would mean that many people who would have been exposed were not and now they would be at risk. The reality is the isolation policy was deeply flawed from the start and did a poor job of protecting. The exceptions to the isolation rules were wide enough to drive a truck through; the vast majority of people have likely been exposed. This would mean there really isn't a large percentage of the population that has been sheltered up to this point. The second assumption is that people will instantly resume their previous habits—that is unlikely. There will continue to be restrictions and there will be people that continue to isolate. It is likely that the most vulnerable will be the ones to continue taking steps to isolate.

Were there to be a major outbreak on a large scale, the economic impact would be severe as it will be tempting to reimpose the strict isolation protocols and a second shutdown could be ordered. This would truly crush the economy as few businesses will have recovered from the first shutdown. This time there would be even less help available from the government. The majority of business has tried to hang on through the current crisis with the assumption they could try to return to normal at some point. That possibility would be shattered and many would simply shut down permanently.

The third scenario is probably the most benign and perhaps the least likely. This calls for the COVID-19 infection to develop along the same lines as the seasonal flu outbreaks we are all familiar with. It would devolve into a "slow burn" that affects a certain percentage of the population every year. The high-risk people would be the same as those at high risk for the flu—the elderly, those with underlying health issues, those who have vulnerable lungs and those who have worn down their resistance to any kind of disease.

This would be the least dangerous option as far as the economy is concerned as there would be little reason to exercise any unusual precaution and the numbers of infected would not overwhelm the medical system. The disease would be treated like any other infection and would not require significant changes to the usual routine.

Worst of Oil Slump Seems to Be Over
The headlines of two or three weeks ago were startling. The price per barrel of oil had fallen to levels not seen in decades and the future of the industry seemed in doubt. That crisis has ebbed a little as there have been production adjustments and a slow recovery as far as demand. All of the oil producers have cut their output to match the lack of demand. At the same time, there has been more consumption in Asia and Europe as the lockdown recession starts to ease a little.

Analysis: The price per barrel is crawling back to pre-crisis levels with Brent crude delivery price up by 14% and WTI up by 22%. Most of the demand has been coming from Asia, but the U.S. has started to show some recovery in terms of consumer demand. It is still far less than normal and will not rebound until people start commuting again.

Running Out of Things to Say
The world that I was once engaged with has narrowed considerably. This has affected my writing output. I look back at most of the stuff that used to occupy this last article of the newsletter and I note that most all of it was connected to some kind of social reaction. I spent a lot of energy on the foibles of the airlines, hotels and other travel-related encounters. Today, I have to admit I really miss that quiet time on the airplane with my headphones on. I used to write about the people I observed and the conversations I had at meetings and conferences. That is how I learned what was really happening in the world. It was one thing to read some statistic, but quite another to hear from a business owner or a credit manager or accountant. Today, I have what I can see from my window and the occasional video interaction or phone call.

My world has narrowed, all of our worlds have. I know full well that I am very fortunate compared to many. I have always worked at home so that was no adjustment. I have a nice home with plenty of space and my spring activity is yard and garden-centered anyway. I don't have kids at home to entertain and I enjoy the company of my spouse. However, I am a social person and enjoy interacting with people. I feel confident we will move back towards the life we once knew, but I am also realistic enough to know that much has changed. Will these casual interactions resume or will we continue to avoid each other? It seems that we had already started to isolate ourselves from one another through social media. I fear this process has accelerated. Will all this make us less tolerant and more isolated? Will we lose the ability to interact with anyone other than a select group of friends and family?

China, Manufacturing Superpower
As the global manufacturing sector tries to adjust to the ravages of the epidemic, all eyes will be on China. This is due in part to the fact that China remains the epicenter of the outbreak and a full month ahead of the U.S. in terms of reaction, but also because they dominate the global manufacturing community still. These numbers are from 2018 when China was not as affected by the trade war with the U.S. and COVID-19, but even today, the percentages are not that far from these halcyon days.

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Monday, 25 May 2020