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Strategic Global Intelligence Brief for May 18, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

Consumer Holds Key to Recovery Speed
This is not a shocking conclusion by any stretch. From the start of the lockdown recession, it has been apparent that consumers have held the future of the economy in their hands as they always have. The remarks by Fed Chair Jerome Powell reiterated this as he asserted the economic rebound will depend on when the consumer regains enough confidence to resume their place in the economy. This will not happen unless there is a willingness to open the business community up. That seems to be impossible without the discovery and widespread use of a vaccine. The highly constrained process of opening business has shown very limited impact on the economy at this point. The majority of the public remains skeptical regarding the rebound.

Oil Sector Rebound?
The price per barrel for oil has risen to $30 for the first time since the big collapse in March. This is not due to any sort of rebound of demand. That is the bad news. The collapse of the global economy has not eased the situation for the oil sector, but there has been a response by the oil producers as they have cut production drastically. This has ended the temporary glut that had hobbled the ability to even store oil. It means that prices will stabilize to some degree, but it also sets up problems in the future as that production will need to ramp up again when there is demand. That might take a while. There are still analysts who assert that oil at between $80 and $100 a barrel would appear at the beginning of the fall.

Extending Unemployment Criticized
A research paper from the Fed indicates that extending unemployment benefits is a less effective way to deal with the current crisis than just handing out checks. The idea behind either move has been to cushion the blow of mass unemployment, but the extension of benefits has been a disincentive for people to return to work. They get more by remaining unemployed and are not available when business is starting to open back up. It would be more efficient if they were able to get their jobs back sooner than later and pocket some temporary assistance to make up for the weeks they were not paid.

Short Items of Interest—Global Economy

China in the WTO Crosshairs
The U.S. has been a long-time critic of the World Trade Organization (WTO). These critiques have centered on rulings that frequently ignore U.S. accusations of dumping by other nations. There has been an objection to how the organization deals with China. The latest row was over designating China as a developing nation. It was thus immune to the restrictions that are faced by the U.S., Europe, Japan and other developed states. The head of the WTO is stepping down a year early. That will allow the U.S. and Europe to pursue the candidacy of somebody who would tougher on China.

Chinese Leader Pleas for Cooperation
In the wake of the concentrated critique that has been leveled at China, the statements from President Xi Jinping at the meeting of the WTO have been a combination of contrition and promises regarding the future. These are the closest that China has gotten to apologizing for the explosion of the COVID-19 crisis. Xi lays much of the blame on "cowardly and dishonest" local leaders. He has pledged billions to a new system of monitoring such outbreaks and has asserted that China will play a more constructive role in terms of global trade and supply chains. Thus far, there is deep skepticism from the rest of the world.

Emphasis Shift
The sudden explosion of the COVID-19 virus left the world with few options. The attempt to limit contact through isolation was only designed to slow the pace of transmission so that hospitals would not be overwhelmed. The fact is that herd immunity will be the ultimate but imperfect solution until a vaccine is developed. Now, the focus has shifted to testing those that are most vulnerable or most likely to be a carrier.

A Miserable Index with Some Faint Hope
Here is the monthly report of the April Credit Managers' Index (CMI) prepared for the National Association of Credit Management. See the report and archived issues at wwwnacm.org. By this time, the use of the word unprecedented has become a cliché and everybody has become frustrated with the rash of uncertainties that have characterized this economic crisis. The reference to a "lockdown recession" seems to say it all. There has been nothing natural about this global economic collapse as it was not triggered by any sort of economic issue as had been the case with 2008 recession or any of the other downturns the world has faced in the last several decades. The decision to shutter the entire business community in order to deal with a pandemic is creating a crisis that has never existed before. It leaves business with few options other than to simply hang on.

Analysis The data collected by the CMI this month is as bad as it has been in the history of the index—numbers that rival the depths of the 2008 recession and in some cases are far worse. The most vexing issue is that nobody has a real sense as to when this situation will change. The optimistic scenario holds there will be a swift rebound just as soon as the restrictions are lifted. It seems that most states will be engaging in a phased recovery through the month of May. The pessimistic outlook holds that consumers will not be ready to resume old patterns and that business will be reluctant to fully engage. That this will extend the downturn well into the summer.

Now for the litany of bad reports. The combined score for the CMI fell to 40.6 this month. That comes dangerously close to the miserable numbers from 2008, when readings in the 30s became common. The index of favorable factors has fallen into the low 30s—in record territory. The shutdown in the economy has been widespread and has left no opportunity for progress. The index of unfavorable factors had been holding up to some degree, but this month it fell to 46.3, and will almost certainly trend in a more negative direction in future months. The extent of the collapse becomes more obvious with a look at the specific factors.

The sales numbers (20) have never been this low—not since the origins of the CMI. This is no surprise given the shutdown orders; it is hard to sell much when the company has been shuttered and so have all the potential customers. The only good news is that this category can only go up from here. The new credit applications numbers have also cratered—down to 31.1, as there have been no sales. The dollar collection data has collapsed to 35.5. Almost every business is hanging on to what money they still have and have not been concerned with keeping current with their credit. The amount of credit extended sported the highest reading of the four at 41.6, but that is still obviously very low. The only thing that kept this category in the 40s has been the demand from sectors that are still functioning—medical, some grocery operations and other sectors that were deemed essential.

The data from the unfavorable categories has been weak, but not quite as catastrophic as the favorables. This is simply due to timing. This crisis is still fairly young as it began in earnest in March. There has not yet been time for all the negatives to manifest, but they have started to and will become more evident in future readings. The rejections of credit applications have remained in positive territory with a reading of 52.7 compared to 53.5 the month prior. Application numbers are way down and the only applications are coming from those few sectors that have stayed in business. Most of them have been doing reasonably well. The accounts placed for collection numbers are starting to reflect the stress with a reading of 47.4 compared to 50.6 in March. This is still a matter of timing as many creditors have not yet reached the point where collection action is mandated. The disputes category has also managed to stay just within the expansion zone with a reading of 50.8 compared to 52.1 the month before. The dollar amount beyond terms reading has fallen off a cliff with a decline from 43.9 to 27.6. The vast majority of companies are suddenly unable to keep current on any of their obligations and are falling further behind with every passing day. The dollar amount of customer deductions slipped out of positive territory with a reading of 49.4 from 50.4 in March. The filings for bankruptcies number has remained just barely in positive territory (above 50) with a reading of 50.2 compared to the 53.2 that was registered last month. This is a situation that will worsen in time as more companies find themselves in trouble.

Manufacturing Sector

The impact of the lockdown recession has been felt most profoundly in the service sector as opposed to the manufacturing sector. There are obvious exceptions to this as there have been manufacturers that have been devastated by a combination of factors. Those connected most closely to the energy sector have taken an enormous hit as oil prices have cratered and severely limited production around the world. The airline sector has been another one that will be hard pressed to rebound quickly. Other sectors have fared better—such as those related to the medical community. The manufacturers most sensitive to the consumer will be the ones that will be watching the reopening carefully.

The combined score for the manufacturing sector fell to 42 from the 49.8 reading in March. The majority of the damage was in the favorable category as this reading went from 48.2 to 34.3. To illustrate the extent of this crisis, consider the fact that manufacturing was at 62 in February. The unfavorable category has been a little less affected, but still notched a significant loss as it fell from 50.8 to 47.2. This relatively less dramatic decline is attributed to the fact there has not yet been enough time for creditors to get in real trouble.

The majority of the damage has been seen in the favorable categories—sales utterly collapsed—not a shock to anyone given the total shutdown of the economy. It had already shown a steep decline from February when it was at 65.7. By March, it was down to 40.3 and now sits at a record low of 21.4. There is simply no activity to register. The new credit application numbers show a similar collapse as they have gone from 61.4 in February to 45 in March down to 35.7 in April. The dollar collections data follows that grim trajectory—58.3 in February, 53.4 in March and 35 in April. The effort to keep current on the part of creditors has largely been abandoned in the face of the lockdown. The amount of credit extended category was on the same path—62.8 in February, 54 in March and big tumble to 45.1 in April. The slightly less dramatic drop has been attributed to the fact that some select manufacturing sectors have been handling the lockdown better than others.

There has not yet been enough time elapsed to make the unfavorable numbers crash to the extent the favorables have, but that day is unfortunately coming. The rejections of credit applications actually remained in positive territory with a reading of 52.8 compared to 54.4 in March. The fact is those asking for credit are in very hot fields right now and are producing faster than they had been. The accounts placed for collection have also managed to stay just barely in positive territory with a reading of 50. The manufacturers are just starting to encounter issues and there has not yet been enough time for them to get into collection trouble. If the shutdown extends a lot further, the collection issues will magnify. The disputes category also managed to hang on to the expansion zone by the thinnest of margins. It was at 51.4 last month and dipped to 50.6 in April.

The dollar amount beyond terms is where the crisis has become obvious. This is what is setting up for big problems later. The creditors are starting to slow down as far as keeping on top of their terms. These slow pays make it clear that companies are working hard to protect their capital. The numbers in February were solidly in expansion territory and then fell to 44.3 in March. Now, they are in record low territory at 28.6. The dollar amount of customer deductions also managed to stay just in expansion territory with a reading of 50.1 after a March reading of 51.3. There was also a positive result as far as filings for bankruptcies as it maintained a level of 51.1 after a 52 reading in March. Even with all the damage done in April, there were five of the six categories still sitting in positive territory, but only by the narrowest of margins. This will change in May, but how much they change will be determined by the speed of the rebound.

Service Sector

This recession has been immensely hard on the global economy in general, so it is not easy to single out a country or region or even an industry sector that has suffered more than another. However, the evidence shows that the brunt of the damage has been sustained in the service sector as the vast majority of the shuttered businesses have been in the service area. The data from the latest CMI makes that abundantly clear. These are record low numbers; low enough that a rapid comeback will be very hard to execute in some of these sectors.

The combined score for the service sector was 39.2, as close to a total collapse as has been seen since the Credit Managers' Index was launched. The index of favorable factors is at 29.8—a brutal reading. In February of this year, the index was sitting at 62.3; it had not been under 59 for over two years. In the last 12 months, the favorable readings had been above 60 nine times. In March, they fell to a worrisome 44.8 and now sit at a miserable 29.8. This is a stunning collapse and worse than many had projected at the start of this debacle. The index of unfavorable factors also fell, but as with the manufacturing sector, the decline has been tempered by the fact there has not been enough time to react. In February, the numbers were at 52.6; now they are sitting at 45.5.

As usual, the devil is in the details. The sales numbers have fallen to almost absurd depths—18.6 is so far below the previous record to be truly nightmarish. It was at 62.3 in February and at a very low 38.7 in March. This can be attributed to the near complete elimination of the entire service sector in the U.S. It also accounts for the fact that there has been a loss of some 30 million jobs. The new credit applications have also fallen to all-time lows of 26.5 compared to 43 last month and 63.1 in February. The dollar collections numbers fell as well to 36.1. That compares to the 45.1 in the prior month and 59.3 in February. Even the amount of credit extended has fallen to 38.1 after having been at 64.5 only two months ago.

There was not quite the drastic deterioration with the unfavorable numbers. The rejections of credit applications actually rose a little—from 52.5 to 52.6. The fact is only a very few companies are in a position to even ask for credit and they are generally in sectors that have been deemed essential. The accounts placed for collection category fell but stayed in roughly the same range as the last few years. It is currently at 44.8 and was sitting at 49.7 last month and 49.8 in February. Many companies have not reached the point that collection action would be called for, but that is expected to change in the next month or so. The disputes category stayed in positive territory but by the narrowest of margins (50.9 from 52.8). The dollar amount beyond terms shows the damage pretty clearly with a reading of 26.6. It is evident that companies are falling behind in their obligations. The dollar amount of customer deductions slipped somewhat from the March readings as it went from 49.5 to 48.7 and the filings for bankruptcies slipped below the 50 line for the first time in several years. It was at 54.3 and now sits at 49.3. Many of the service-based companies have less in the way of resilience.

April 2020 versus April 2019

It is more than obvious that these are conditions we have never seen. This is an imposed recession—a response to the need to control a pandemic. The lockdown is supposed to start easing in the month of May, but the pattern is still unknown. Each of the 50 states will decide what that pace and process will be. That will likely delay a recovery of the economy as a whole.

Puppy Love
I am now and have always been a sucker for animals. I adore my feline five of course, but have space in my heart for the other beasts as well. My neighbor just acquired a female Lab/Pit Bull mix. I have to admit that one can play with a puppy in ways that one can't with a kitten. I got an opportunity to do just that over the weekend. Granted, I am also now required to reinforce a fence to keep my squirming charmer from exploring the neighborhood. I had plenty of feline company through the remainder of the evening. I suspect that she is not much of a lap dog at this point, while I had my complement of chair warmers.

I am drawn to those animal videos on YouTube and marvel at the relationships that people build with even the wild ones. The guy who naps with his Cheetah had me thinking for a second or two. I thought better of that impulse. Over the years, we have befriended a variety of backyard visitors. The limping Canada Goose we dubbed "Gimpy" became a regular as we tossed out corn for the flock. He stood right behind my wife as she dropped corn just for him. We have had a little fox family and the usual assortment of deer. Up the road are some horse ranches and stables. I have seen deer grazing among them on several occasions. The other birds are always in profusion. This is the time of year for Goldfinch, Orioles and Bluebirds, among others. I am even fond of the skinks and snakes that enjoy our rock walls. All of this activity is better entertainment than what is on TV most of the time!

Recorded Human Pandemic Influenza Since 1885
Each and every pandemic or epidemic is different, but the fact is that we have been dealing with these outbreaks for decades and will be dealing with them for decades to come. Few seem to remember the Hong Kong flu of 1968, but that outbreak cost over a million lives in China and 100,000 in the U.S. What these previous pandemics did not include was a global economic catastrophe.

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Monday, 25 May 2020