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Strategic Global Intelligence Brief for May 6, 2020

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—US Economy

What Would a Surge Look Like?
Now that most states are experimenting with reopening the businesses that had been shut down as a means to enforce social isolation, there will almost inevitably be a jump in the number of infections. This will be due to the increased circulation and exposure. Three factors will be most closely monitored as authorities determine what the next steps will be. The first will be fatalities. The rate of fatalities has fallen to around the same level as the worst of the seasonal flu years. That will be essentially deemed "acceptable." A surge in deaths will provoke a strong reaction. The second factor will be hospital capacity. Right now, only around 5% of those who contract the virus require hospitalization. The system can handle that—more than 5% is a problem. The third factor will be consumer willingness to resume activity. If business opens up and people stay home anyway, the economic impact will be even more severe than it had been.

Oil Markets Rebound a Little
The critical issue for oil producers has not changed. Overall, global demand has collapsed as the business community remains shut down. The reaction of the oil producers has been predictable. That has stabilized the markets to some degree. The level of production has fallen dramatically as the system responds to the demand fall. In addition, there has been a culling within the producer world as many smaller operations have already failed. The third factor is somewhat speculative as there is some anticipation of a recovered demand for oil as the lockdown is eased. China is already back to near normal levels of consumption.

Differences at the Fed
There has not been much debate over what the Federal Reserve is doing to support the economy at this stage. The members have all supported the lower rates and the almost frantic moves to shovel money into the financial sector. The difference of opinion has come over when and how the economy should open. There are those who urge caution and expect the recovery to be put off until late in the year and those who are urging restrictions be lifted even at the risk of more infections. It is a matter of how resilient the economy is thought to be. The advocates for a rapid opening are of the opinion the system can't take much more of this strain.

Short Items of Interest—Global Economy

Could COVID-19 Crisis End the Eurozone?
At the moment, this seems a pretty remote possibility, but the situation has definitely exposed the fissures that have always been there. The recession is as deep as the region has ever seen. Part of the reason for that is there was already a recession underway when the crisis manifested. The only solution has been to finance the recovery with the more successful nations of the north. That is where the problem always lies. The states such as Germany, the Netherlands, Sweden, Austria, etc., have become deeply resentful of the drain that has been consistently placed on them by the likes of Italy, Spain and Greece. Now, these same nations are in trouble. This time they are being blamed for making their own situation worse.

What Happened with North Korea's Leader?
Kim Jong-un vanished from public view for upwards of three weeks. That has led to intense speculation over the state of his health. It has been suggested that he underwent heart surgery, but that has not been confirmed. Others suggest that he has been essentially hiding from the COVID-19 outbreak as he would be considered high risk for complications. He has been seen in some public appearances, but they have been limited.

UK Set for Major Decline
It is obvious there will be a severe economic downturn in the U.K. as there has been for every other nation, but the reality is that statistics will not be able to keep pace for quite a while so nobody will know just how bad the situation is until much later in the year.

Attacking China
The conspiracy theorists have been having a field day with COVID-19. After years of zombie movies, it would be expected that people would want to find something sinister and malevolent to assign blame to. There is absolutely no credible evidence to suggest that China (or anyone else) invented the virus. A cursory look at the conditions that exist in the "wet markets" of China and other parts of the world would make it obvious how disease would spread. Chinese authorities obviously attempted to cover up the outbreak and silence those who were warning about this disease in late 2019. For that they need to be held accountable as the spread might have been halted or slowed by prompt action. It is also clear that many other nations were slow to react. The "ostrich states" still do not accept the virus as a problem (Brazil, Nicaragua, Turkmenistan and Belarus among others). Russia had been hiding data for months. Even the U.S. and U.K. have been very slow to respond.

Analysis: There is now an effort to lay all the blame on China and to somehow punish them for the outbreak. The threat from Trump is to somehow prohibit U.S. companies from doing business with China in order to break the Chinese economy through the elimination of the supply chain that drives their export-centered system. It is far from clear that Trump has the power to impose that kind of restriction, but he certainly can make doing business difficult.

The point is this would be a very bad strategy to pursue if there is any hope of global recovery from the COVID-19 crisis. China is the second-largest economy in the world; it buys a great deal from nations all over the world. These countries need that market for their exports. If that is lost to them, they will lack the money needed to buy what the U.S. has to sell. The export sector in the U.S. accounts for around $4 trillion a year. The U.S. can ill afford to lose that income as it tries to come back from the lockdown recession.

The Employment Conundrum
At the center of the economic crisis has been the loss of over 30 million jobs. This has been what has prompted comparisons between this recession and the Great Depression. The job loss that stemmed from the 2008 recession was significant, but was less than a third of what has been lost to this one. There are several factors that have complicated an effective response to the current job emergency. These will have to be dealt with before there is a reasonable expectation of a consumer-led rebound. It is important to understand the nature of the layoffs, the impact of the government bailout, the attitude of the workers, the changed nature of both work and consumption, the role of technology and the stability of the business community after nearly a quarter of the year in shutdown.

Analysis: As has been pointed out, the majority of the layoffs would be better described as furloughs in the sense that these workers will be brought back to their jobs as soon as the affected business is able to reopen. The difference between this and the kind of furloughs that have been seen in the past is that nobody really knows the timing. The auto industry furlough ends when the plant retooling ends, but when does a hotel know it can hire staff back? Is it when they are allowed to function normally or when they actually start to see people willing to stay in them? The estimate is that around 80% to 85% of jobs lost to the lockdown recession will be regained as soon as the lockdown lifts, but that is still speculative.

The second major factor is the impact of the government help. There has been expansion of unemployment compensation, the provision of direct payments and a host of other steps designed to protect people from the shutdown. In some cases, it may have succeeded too well. There will be workers who look at what they are receiving in the way of aid and assistance and will decide not to go back to work even if their old job is offered. This group of workers have been referred to as "transactional" as they do not think of their employment as anything other than a paycheck. It is not a career and they have no expectation as far as advancement or promotion. They will leave for another job if offered 10 cents more a week. It is estimated that roughly 20% of jobs fall in this category. These are the workers most likely to remain unemployed as long as benefits are offered. The workers that are motivated by the possibility of raises, promotions, benefits, skill development and the like will be the ones eager to return.

The third major influence will be the changing nature of work and consumption. There has already been a mass experiment in working remotely. It has not been an unqualified success and there are many people who dislike the idea of working in isolation. There are challenges as far as managing and team building as well. The fact is that it has worked well enough to remain a viable alternative. The whole idea behind remote work has been to keep people away from one another. That will extend into the future. Crowds will be discouraged, which will affect meetings and the way people shop. Spontaneous visits to a store will be replaced by appointments and a myriad of instructions as far as how to interact. Many people will decide to stick to delivery and shun the whole thing. That means far fewer people needed for any sort of customer service.

This brings in the role of technology. Had this kind of outbreak occurred even a decade or so ago, the current response would not be possible. There was no opportunity to rely on technology to deliver products or to arrange meetings virtually. The role of person-to-person interaction has been diminishing even without the pressure of the virus. Now that process has been accelerating. If we are not to go near other people, it makes more and more sense to substitute robots, touch screens and virtual interaction. Think about all those futuristic movies and the ubiquitous tech that replaced virtually all human contact. There are very serious conversations regarding ending in-person attendance at sporting events. The vast majority of people watch these games on some media already—why not just eliminate the crowds altogether?

Will Business Respond to Soft Opening?
Throughout the country there has been a push towards some kind of end to the lockdown, but the cessation of this policy is going to look a lot different from the start of it. The lockdown quite literally began with an edict that utterly stalled the economy in a matter of hours. Business was simply ordered to cease operations and usually with no warning. One minute they were open and the next minute the doors were locked; nobody knew for how long. The reopening is phased and staged. It's crowded with new protocols. You can open, but only with a few customers at a time. They have to make an appointment to shop and wear masks and stay away from each other and the staff. The facility will have to be repeatedly sanitized and parts cordoned off to avoid social distancing issues. These measures may well make sense in terms of dealing with the virus, but they can be death to a business.

Analysis: Attracting customers is not easy. This is why so much time and energy is spent finding ways to get people to visit a store or buy a product. Placing barriers to consumption only makes that process harder. The business that is trying to recover in May will be facing an even tougher situation than was faced in April and March. When everyone was shut down, the business was not spending much money on staff, inventory, equipment or utilities. Now, they have to resume hiring and buying that inventory and equipment, but with no assurance that customers will come prepared to spend. If the experience of going to a store or restaurant becomes as pleasant as going through the TSA check at an airport, it is highly doubtful that consumers will return to old patterns.

Is There No Going Back?
Throughout the COVID-19 crisis, there has been a conceptual war between those who assert that at some point the pandemic will ease and allow things to go back to normal and those who assert there will never be a return to what was once considered normal. It would be my assertion that both are right. If there is one certainty in the world, it is that change is constant. There never has been a "normal" as there have always been massive shifts in the economy (among many other aspects of modern society). Is normal the world before we all carried cell phones? That was a world where every business traveler made a mad dash for the pay phone at the airport and every executive had a receptionist or two or three to take calls and arrange schedules. Is normal the time when one had no choice other than a department store if one wanted variety? The pre-Amazon world?

Analysis: Critics have asserted that economists and analysts have failed to adapt and continue to pursue ideas that no longer apply. The contention has been there has been only linear thinking and rigid adherence to theories that no longer apply. Examples include a staunch belief in the highly efficient but fragile notion of JIT. The just-in-time theory held that supply chains should be streamlined so that money would not be wasted on excess inventory and storage. The fact is that very few companies adhere to the JIT model anymore. The economists rejected it as too fragile and subject to events that disrupt the entire system. The fastest growing sector of commercial construction over the last few years has been warehousing.

It has been asserted that economists and policymakers have failed to adapt to challenges such as pandemics or climate change or the impact of globalization, but that does not seem to be true. The ideas that have been coming from many in the field have centered on factors such as bias and non-economic preference, institutional rigidity and the impact of politics. There are very few left in the field that really assert that people are "rational maximizers of expected utility" or that the invisible hand of Adam Smith can be counted upon to respond to all problems.

What will a post COVID-19 world look like? It will look like a post-disaster world always looks like. Some of what was valued before will still be valued and other aspects of society will alter. This is far from the first disaster encountered in the world although it can be argued that it is one of the most comprehensive. To get an idea of what happens after this crisis, look at New Orleans after Katrina or any of the communities slammed by a hurricane. Look at nations battered by war or by natural disasters such as earthquakes. These places recover and retain much of what they had before but they also change. The only constant is change and resilience is the only tool that can prepare anyone for that change.

I find myself suddenly interested in disaster. Not so much the disaster itself but how people respond to it. There are all kinds of disasters and each differs dramatically. The storm that wreaks havoc on a community has a defined beginning and an end so that people know when they can focus on the recovery. The COVID-19 pandemic doesn't have that clean end. That is what makes it so difficult to deal with—nobody knows how long all this will last. In this way, the current crisis seems to more resemble war.

I recently watched a piece called "The Queen at War." It was the story of Queen Elizabeth when she was still Princess Elizabeth and a teenager living through the attacks on Britain. It struck me that here was an example of unmitigated disaster that had no defined end. It was not clear when the attacks on Britain would cease. Every day bombs and missiles fell on London and other communities. The resilience of the British has become legend by this time. We all know that the crisis did finally end. The point is that nobody knew that at the time. We face a very different threat now—there's no enemy we can engage in combat, but we now need the same resilience if we are to preserve a world where we want to live.

Which States Are Open?
There has been nothing approaching a universal plan to reopen the economy as every state will have its own rules and requirements. This essentially turns the whole country into a giant experiment. One of two things will happen at this point. Either those states that have opened will see a spike in infection that illustrates the need for isolation, or these states will not see the expansion of the virus. That will be taken as a sign that more business resumption can take place.

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Monday, 25 May 2020