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Strategic Global Intelligence Brief for May 15, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Lockdown Hits Women Harder than Men
There are many aspects of this recession that have been unique. The list is almost too long to detail. One of these differences has been the impact this has had on the female workforce in the U.S. In prior recessions, the hardest hit group has generally been men—specifically those who did not have advanced education or training. The women generally fared better as they were in jobs that had not been as adversely affected, such as manufacturing and construction. They held the service sector jobs that usually survived economic downturns. Now, we are confronting a recession that has affected the service economy directly. The hardest hit are women—especially those who have less in the way of formal education. To make matters worse, they have also been more affected by the closure of schools than have men.

Industrial Production Numbers Down
As was well expected by everyone who ever looks at this kind of data, the industrial production numbers are near record lows, and on all three fronts. There was an overall decline of 11.2%. The damage was in all three areas—manufacturing, utilities and mining. The manufacturing sector has been hammered by the lockdown and the interruption in the export and import activity that has come along with this. The utilities have been affected by these shutdowns as well. In addition, the weather has played a role as this is a reduced demand period in any given year—not too hot and not too cold. Mining includes the oil and gas sector. The prices have tanked as demand has evaporated throughout the world. All of these sectors will be seeing some recovery in the months ahead, but timing is still a major question.

Low Income Impact Is Severe
There is nothing at all surprising about this data. The hardest-hit sectors have been those in low income areas. They have been hit from several different directions. The economic blow has been apparent as these are the communities that have lost the majority of the jobs. The higher income people have been able to find new ways to perform, but the low-wage jobs just vanished. The other issue is that the disease hits in crowded urban areas and affects people who are older and have health issues already. Access to medical care has also been a big issue. That has been a long-standing problem in these areas.

Short Items of Interest—Global Economy

From the Financial Times

There are concerns that reported COVID-19 deaths are not capturing the true impact of coronavirus on mortality around the world. The Financial Times has gathered and analyzed data on excess mortality—the numbers of deaths over and above the historical average—across the globe and has found that death tolls in some countries are more than 50% higher than usual. In many countries, these excess deaths exceed reported numbers of COVID-19 deaths by large margins.

The picture is even starker in the hardest-hit cities and regions. In Ecuador's Guayas province, there have been 10,000 more deaths than normal since the start of March, an increase of more than 300%. London has seen overall deaths more than double, and New York City's total death numbers since mid-March are more than four times the norm.

More Threats Leveled at China
The threats just keep coming and escalating as the Trump position on China hardens. The basic animosity between the U.S. and China has been in place for years. It certainly precedes the viral outbreak, but since the explosion of the COVID-19 crisis in China, the intensity of that confrontation has escalated. The U.S. and China have been rivals for years; this rivalry predates the current crisis. The relationship between the Chinese and the U.S. has been by far the most complex and fraught with tension in the world, and this through the better part of a century. The U.S. and China were clear Cold War rivals ever since the Chinese Communist Party defeated the nationalists at the end of World War II. The U.S. fought a hot war with China in Korea and a proxy war in Vietnam. China routinely supports nations that are hostile to the U.S. and the U.S. responds in kind. What makes this relationship even more complex is that under Deng Xiaoping (1978-1992), the Chinese abandoned many of its communist precepts and developed state-run capitalism. Almost overnight, the country became "manufacturer to the world" as the government did everything it could to support and develop its export-centered industries. It seemed a match made in heaven as the Chinese made money and the U.S. consumer got access to goods at a very low price. That relationship began to fray as the U.S. and the world realized what they had been losing to Chinese competition.

Analysis: For both Democrats and Republicans, it has long been convenient to attack China. It is an economic rival and a military/diplomatic foe as well. Unlike the USSR during the Cold War, it has also become a business partner. More importantly, it has become the second-largest economy in the world. That means that hundreds of nations do business with it. The U.S. connection to China is unlike most of the other relationships the U.S. engages in. Very little other than food is exported to China, while far more is imported in the way of consumer goods. The crucial link is that the U.S. sells to the nations that sell to China. If the second-largest economy in the world falters, so do all of those that rely on it for their own income. The U.S. does not like China and the Chinese do not like the U.S.—at least from a political point of view. That doesn't alter the intertwined nature of their economies.

Trump is seeking to lay the entire blame for the COVID-19 crisis on China. In truth, the Chinese handling of the outbreak was miserable and a disease that might have been contained has been spreading to the world. It is also true that the rest of the world mishandled this crisis nearly as badly. The U.S. barely acknowledged it until it had become a pandemic. Most of Europe was in the same boat. Despite decades of viral attacks, the world lacked adequate testing and tracking capability. That combined with the lack of treatment and a vaccine to amplify the crisis. There is plenty of blame to spread around.

Given the desperate need to restart the global economy, this is not the time to extend trade wars and tariff fights and issue threats. The need is to coordinate and get the global economy back in gear—there will be plenty of time to pursue other goals once the threat of a major global depression has been eased.

German Recession
In many ways, the Germans have emerged ahead of the game as far as the response to COVID-19 is concerned. There have been fewer fatalities and there has been less in the way of infections. The lower German rate of 95 deaths per million compares with the U.S. rate of 263 per million and Italy's 519 per million. This has hardly meant that Germany has been unaffected. It has tested more consistently and had the hospital capacity to deal with the crisis. That has not stopped the pandemic from crushing the German economy; the latest data shows that the Q2 recession is the deepest since the 2008 crisis. The German economy has been locked down just as the economies of the rest of the world have been.

Analysis: The question in Germany now is the same as it has been for every other nation. How does the lockdown get lifted and how soon will the economy bounce back? If one looks at the projections the International Monetary Fund (IMF) has released as far as 2021 economic recovery, there is an expectation for a very strong recovery—EU growth rates of close to 5%. These are numbers that have not been seen in Europe in decades. The growth is based on an explosion of pent-up demand and the usual rebound that comes from a "V" shaped recession. It also depends on the willingness of consumers to get back to their normal patterns. That seems to be based on trust. If the consumer accepts the government's assertion that it is safe to return to normal, the bounce back is swift. If there is still hesitance and worry, the recovery is lukewarm. The Germans have trusted the word of Chancellor Merkel and polls suggest they are supporting the Bavarian leader—Markus Soder—in the race to succeed her.

Retail Has Been Crushed
It has been obvious for decades that the U.S. economy rests firmly on the shoulders of the consumer. To be accurate, the entire global economy rests on these shoulders. Consumption accounts for over 80% of the GDP and nearly 80% of jobs. The U.S. has been criticized by some over the years for its consumption—the assertion being that we use far too much of the world's resources. If one wanted to know what the world would look like if the U.S. was not the aggressive consumer it has been, all one has to do is look at the U.S. and the world now. Retail has collapsed in the U.S. There have been close to 40 million people thrown out of work. Globally, the loss of income is approaching $3.4 trillion. At this moment, the world has started to consider how it plans to reopen for business. Cautious steps have been taken by a variety of nations and states within the U.S. Everything now depends on how this resumption of business is handled.

Analysis: The majority of the people who have lost their jobs (between 80% and 85%) have been essentially furloughed. Their employers have been forced to shut down, however; they have indicated to those former employees that they would be brought back when the lockdown was lifted. This process of rehiring will depend entirely on whether there is a real opportunity to reopen business and whether consumers will resume their normal activities. Neither of these situations can be readily assumed given the conditions that have been imposed on the resumption of business.

The vast majority of business in the U.S. depends on how the consumer elects to use their discretionary income. This is the money left after paying for necessities like rent, mortgages, food, medicine and other bills. In the past, much of that income was spent on things—especially by the Boomer generation. The motto seemed to be "he who dies with the most stuff wins." That attitude has shifted with the millennial generation as they have been more interested in services. Today, the breakdown as far as discretionary spending has been 65% on services and 35% on things. The lockdown has devastated the service side of the consumer economy as people have prohibited from interacting with one another. As business is allowed to start reopening, it appears that much of this isolation will continue to be mandated.

In March, there was a drop in retail sales of 8.7%. That had been the steepest decline since 1992. Already-troubled companies were hurled into crisis. Every sector of retail suffered losses. The decline in April has been even worse and has set records as it fell by over 12%. This kind of collapse cascades through the entire global economy. Manufacturers suddenly have no market for their output and imports to the U.S. dry up as overseas manufacturers lose their market. That hurts the U.S. exporters as these nations have no money with which to buy what the U.S. makes. A collapse in retail activity destroys the entire economy, and does so quickly.

The hope of a May rebound has been built on reopening the retail community. That hope remains, but this rebound will have to contend with two major obstacles. The most important of these will be overcoming consumer trepidation. The stores and restaurants and service establishments can open, but if there are no consumers, they will be in deep trouble and fast. During the shutdown they had no revenue, but they were also not spending any money on staff, supplies and other expenses. Now, they will be spending again; they will desperately need revenue. The polls suggest that consumers fall into three broad categories. Roughly 25% are eager to return to normal and will deal with the new protocols and the continued risk of infection. Another 25% plan to continue their isolation and will avoid going out. That leaves the 50% that is not certain what they want to do.

This is where the second obstacle comes in. The protocols that are being put in place are going to radically change the nature of the consumer experience, and not for the better. The social distancing rules will mean required masks, limits on how people interact, where they sit, how long they are allowed to be in a place and on and on. The prospect of a pleasant night out at a favorite restaurant is replaced by the prospect of reliving a trip through TSA security. Will people still want to eat out and shop and resume their lives? Will all these rules and regulations discourage the majority of consumers and leave the businesses with insufficient revenue to survive and rehire?

Beyond this inconvenience there will be the threat of more infection. The World Health Organization (WHO) and most other epidemiologists now admit that there is only one way this viral infection will be controlled. That is through "herd immunity." The outbreak was not identified soon enough and the world was not prepared for it. There was no capacity for adequate testing and tracking. There is no cure and no vaccine. The only option was to quarantine, but that started too late and was too full of holes.

Now the only option is getting the global population to the point that most have the immunity that comes with having had a version of the disease. It has been noted that almost 60% of those who contract the disease will not know they ever had it. That is the main reason the spread has been so rapid and hard to control. Most of the people carrying the disease have no idea they are spreading it. The data continues to show that 95% of those who get COVID-19 will get a mild version that does not require hospitalization. That leaves 5% vulnerable. In the U.S. that is around 17 million people. It is highly unlikely that all 17 million will be infected and hospitalized, but the numbers will be high.

As it has been from the very start, this continues to be a matter of trade-offs. Neither option is remotely acceptable. If there is no attempt to control the spread, there are a minimum of 17 million people at risk (theoretically). If extreme measures are taken to thwart the spread, the economy utter collapses into a depression that would make the 1930s look like a boom. Worst-case scenarios see permanent job losses of over 30 million. The plain fact is that the U.S. cannot handle either of these extremes. That means compromise which allows a resumption of commerce while trying to protect the most vulnerable in the population—not easy to do.

Consumer Determination
It is now entirely in the hands of the consumer—at least as far as economic recovery is concerned. The lockdown orders are slowly being reversed (with the emphasis on slowly). The business community is ready to try opening, but they will be watching the response carefully. If the customer doesn't come back, the business will swiftly fail. The protocols and rules are not going to make any of this reopening easy. The whole experience of going to a restaurant or shopping will be changed, and not in a good way.

Will the diner really want to go out to eat when the whole vibe is threatening and fearful—servers wearing masks and gloves, people scattered across the space, requests that people wear their masks while seated and eating (that ought to be a challenge). Is this the pleasant atmosphere people want? Obviously not. If these businesses are to survive, we are going to have to deliberately set aside our former expectations and be motivated more by loyalty to our favorite spots than by the pleasure of the experience.

Unfortunately, the initial polls are not encouraging. There are those who remain fearful and don't want to risk it. The more worrying group is the one that just doesn't want the hassle and decides to stay away. Which is more pleasant—eating in an environment that looks like an isolation ward or grabbing the meal to go and eating in one's own home. What is more enjoyable—being herded around a store and being forced to wait in line for one's turn while wearing protective gear or just having it delivered to one's door. Take the fun and relaxation out of the experience and many people will simply skip the whole thing.

Coronavirus Recoveries Have Overtaken New Cases
The message that has been coming from the likes of the World Health Organization and the bulk of the epidemiological community is that ultimate success in controlling the viral outbreak rests on some version of "herd immunity." This is when a sufficient number of the population has been exposed and has developed some level of immunity (at least temporarily). One of the indications of this development is a larger number of recoveries than new infections. It seems that we are at that point.

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Monday, 25 May 2020