By Chris Kuehl, Ph.D., NACM Economist—
Short Items of Interest—US Economy—
Lots of Data to Work with This Week
There will be a chance to gauge just how important the virus outbreak has been. The various iterations of the Purchasing Managers' Index (PMI) will be released and several will be parsed very carefully. We already know the Chinese PMI plummeted to lows not seen in their history—40.3. The most pessimistic assessments had assumed the level would be around 45. The U.S. is expected to see a drop, but not that drastic. Europe will also be down, but not to the point of China's collapse. The service sector readings will be released later in the week. These are not expected to be as miserable, although the sector as a whole will not have escaped the impact.
Labor Market to Remain Healthy?
On Friday of this week, there will be another report from the Labor Department on the jobs situation. It is expected to be pretty solid. The sense is there will be another gain of around 175,000 jobs and the overall rate of unemployment will remain at 3.5%. Thus far, there have been no big rounds of layoff due to the COVID-19 crisis, but that is expected later in the year due to the decline in activity for transportation and manufacturing. The bigger issue at the moment is most of the job creation is still in the lower-paid service sector categories. The good news of late has been wages are starting to creep up. That will be something to watch this Friday.
Canada's Central Bank Likely to Cut Rates
The Canadian economy has been stuttering for the last several months and the virus outbreak is not going to do it any favors. The decline in the price per barrel of oil has been due to a major drop in demand. This hurts a commodity-based economy such as that in Canada. In reaction to this decline, the Bank of Canada will very likely drop its interest rates a little at their next meeting. This will affect the U.S. because it will make the Canadian dollar a little weaker against the U.S. dollar—affecting export and import activity between the nations.
Short Items of Interest—Global Economy
Draconian Measures in China
It appears China has made immense progress towards halting the spread of COVID-19. By most accounts, the outbreak has peaked and has even started to recede. This would seem to suggest the world could learn from the Chinese and make similar progress. The problem is China's tactics would be all but impossible to replicate outside China. The authorities have been using police and military to enforce mass quarantines. If anyone should attempt to defy these rules, they face arrest and severe punishment. This is the main reason the Chinese economy has been decked—millions of people have been essentially placed in prison of one kind or another.
Why Stimulus Might Not Work
The idea behind some kind of government stimulus is pretty simple. The monetary authorities make money easier to get and governments find ways to get money in the hands of the consumer through lowering taxes and increased spending. The idea is to boost demand. Most of the time, it is the loss of demand that triggers a recession. This time the crisis is in supply—millions of idled workers and drastic production cuts. The stimulus efforts will be far less effective as they have little to do with supply.
Continued Manufacturing Slump in Italy
For the 17th month in a row, there has been a decline in the manufacturing sector of Italy. This makes their economy one of the weakest in the EU as manufacturing has been key to this economy for years. This latest reading was taken prior to the COVID-19 outbreak. That suggests future numbers are going to be even worse. The chaos in the Italian government is now on full display as there has been no coherent response to the slump in the economy nor to the outbreak of the virus.
Turkey Threatens Europe with Migration Crisis
The EU has called an emergency meeting to deal with the latest round of threats from Turkey's leader—Reccip Tayyip Erdogan. To note that relations between Turkey and Europe have never been more strained would be an understatement. The Turkish leader has become a total autocrat and has abandoned all pretext of being a democratic presence. The latest point of contention has been over Libya. Erdogan is attempting to pressure the EU into supporting his position with a threat to "open the gates." Turkey is currently home to some five million refugees and migrants from the Middle East and North Africa. These are largely people who fled Syria and Iran, but there are many from elsewhere. If Europe does not agree to back the Libyan government, Erdogan is going to push this population into Europe.
Analysis: Turkey has sided with the current government in Libya against a warlord who has backing from Russia, Egypt and the UAE. The Libyan "government" barely controls a few blocks in the capital city and the nation as a whole has deteriorated into a warren of warlords and tribes. The Turks have placed troops in the area to back the government and they have been taking heavy casualties. It is not entirely clear what Erdogan wants the EU to do other than dump billions into the effort to shore up the regime.
It is not that the EU wants the Russian-backed militia to succeed, it is clear it backs the existing regime in Libya diplomatically. The hesitation is that Europe doesn't have the money to do more than offer token assistance. The Turkish demands might also require military support. There is absolutely no support for this engagement in Europe. The fear in the EU is that Turkey will force millions of refugees into Europe. This will create a massive and expensive crisis in a part of Europe that is highly unstable in its own right. The majority of the refugees and migrants would be pouring into the nations of East Europe where hostility towards the migrant community is already very high. It might be enough to cause some of these nations to elect to withdraw from the EU altogether unless they receive vast sums of money to help cope with the influx.
Economic Cost of COVID-19
The health impact of the COVID-19 virus is still a matter of intense debate. The sense is this danger has been amplified by an overexcited media. That has been fed by the fact too little is yet known about the virus. It is roughly as dangerous as the flu, but not nearly as deadly as previous outbreaks such as SARS. Meanwhile, the economic impact has been nearly overwhelming.
Analysis: Just to illustrate some of the more dramatic of these economic impacts look at transportation alone. There has been a 25% decline in container ship activity at the major west coast ports in the U.S. and a nearly 70% decline in port activity in China and Asia. The maritime sector is at a dead stop. The price per barrel of oil has fallen to $50 and is expected to be in the $40 to $45 range soon—some even expect less than $40 as demand plummets for oil. This crushes oil-dependent economies and could peel as much as half a point from U.S. GDP growth. Over 90% of exporters in China have reported extreme difficulty getting product produced or delivered. There have been over 200,000 flights canceled. This has caused a ripple effect on everything from hotels to entertainment areas. What is even more sobering is this is just the start given the virus has yet to make major inroads in the U.S. or Europe.
Global Institutional Reaction
The COVID-19 outbreak is a test for a great many sectors of the world. Quite obviously, it has been a test of the medical system. Thus far, there has been a good response from public health authorities. It has been a test for governments tasked with issues of control and information. They have not been at all adequate—China withheld data for weeks, Europe was underprepared and the messages from the Trump team have been almost incoherent. It has been a test of the media. That has been an absolute disaster as the entire coverage has verged on the hysterical while providing very little actual information. Yet another sector is being tested and has only just started its reaction. The extent of the economic impact had not been anticipated. Now there is a frantic effort to both warn of possible outcomes and calm jittery markets.
Analysis: Over the last day or so, there has been a bit of a rebound in global stocks. That seems entirely connected to the latest statements by the world's central banks. These have been coordinated comments from the largest institutions such as the Federal Reserve, European Central Bank, Bank of Japan and Bank of England as well as many of the smaller banks. The message is they are all ready to do whatever it takes to stimulate the economy if that course of action is required. This determination is certainly appreciated, but the banks have also been honest about what the limitations are. The interest rates around the world are generally at record low levels already. That makes any impact from lowering them fairly minor. The point is they have all recognized the stress and stand prepared to do something about it.
The reaction from the various international institutions has been a mix of warnings and suggestions. The Organization for Economic Cooperation and Development (OECD), International Monetary Fund (IMF) and others are all asserting this disease outbreak has the potential to carve as much as a point to two points off global growth. There will be intense reaction in some key sectors such as transportation, energy, manufacturing and finance. In fact, there will be very few areas that will remain untouched. At the same time, they are urging everyone not to panic and make the economic impact worse than it is. This means information needs to be constant and accurate.
The primary threat (beyond the disease itself) is the cascade of inaccurate information and outright fantasy. There has been a decline in the sales of Corona beer as there are some people ignorant enough to think there is a connection. The surge in demand for face masks continues despite the repeated assertions they do nothing at all to prevent the spread of the disease. This spread of idiotic rumor and conspiracy theory has been 20 times faster than the spread of the virus and arguably far more dangerous for the economy.
The challenge as far as data is concerned is that timing is everything when there is some new crisis. The latest consumer confidence numbers looked pretty good. The fact is incomes had been rising in January and the rate of inflation was still down at the same time that employment remained low. The consumer seemed to be shrugging off the COVID-19 threat. What many did not notice was that the survey was largely complete before the global market reaction.
Analysis: For those consumer responses that were tallied at the very end of the survey, the mood had radically changed with the majority expressing deep concern and fear with most asserting they would become extremely cautious about the economy's progress. The sense is that by the next round of consumer confidence readings, there will be a stark and threatening plunge as people start to worry about everything from their health to whether they will be able to keep their job if the economy seems to be stumbling into a recession.
What Does a Bernie Sanders Economy Look Like?
There is a real danger in predicting what kind of economic policies develop when looking at candidates in the campaign season. Especially when the focus is on the faithful in the primaries. The policies set forth by Trump in his effort against other Republican challengers four years ago looked nothing like the policies he pursued once he was president. Sanders has a much longer track record in government and has a lot more history as far as his economic ideas, but he would likely alter some of these should he be successful. The real question is how much of his current position to expect to survive.
Analysis: There is no doubt that he positions himself as a democratic socialist and an ardent foe of "big business" (as he defines it). His positions do not neatly match up with the positions of those parties in Europe who define themselves as "democratic socialists," his positions would be somewhere between the center-left and the extreme left. At this point, his focus is on a few areas where there is more sympathy with his position. Implementing his policies would dramatically alter the economy.
The top issue for him is health care. His plan is essentially universal, single-payer health care. This would be a government-run system along the lines of those in Europe, but in some ways more exclusive to government. There would be no room at all for private insurance—everyone would be in the same system. There are many variations on government-provided health care in the world, but few ban private insurance entirely.
A second major issue is taxation. Sanders favors higher taxes on the wealthy—a position shared with nearly all the Democrats and even some in the GOP. The question is how much additional tax and how to define wealth. The assumption behind higher taxes is that transferring wealth from the individual or company to the government is an efficient means to ensure growth and some notion of fairness, but this is very tricky. Tax too much and there is little incentive to build new business, use the tax revenues for the "wrong" purpose and there is stagnation as well. How is wealth defined? By wages, by investment, by land? Sanders has always been very vague on these details.
A third issue has been energy production. His opposition is to fracking and the development of shale oil. The expansion of these operations in the U.S. have transformed the U.S. from an imported oil-dependent nation to the dominant producer in the world. Limits on this expansion would profoundly alter the U.S. and global economy. It would have a minimal impact on climate change as long as the U.S. continued to require oil.
There are many other issues that are part of his campaign. Some will fade as the campaign proceeds and others will become more important. It is hard to evaluate rhetoric. At this point, there is not much else to examine with Sanders or any of the other candidates.
I attended a presentation by a woman who spoke about the value of being organized. Her presentation was high energy and highly entertaining. That is not all that easy to pull off when the topic is organization. It is not as if there was some magic system that nobody has ever heard of that will make people more organized. We all know the basics—prioritize, make lists that make sense, play to one's strengths, etc. It is not unlike the conversations we have with ourselves over diet and exercise. We know what to do—it is the doing that can be hard.
There were several pointers that resonated during her talk and certainly bear repeating. The most common failure (at least for me) is staying busy but not productive. There are always the big and somewhat intimidating tasks that will require a lot of work. I can manage to avoid them by doing a lot of less important things. I feel I am being productive, but in reality, I am stalling. The other interesting observation is that reacting is a bad thing. I get lots of urgent messages from people on a wide variety of topics. They all demand an immediate response from me, so I drop what I am doing and respond—to the detriment of the task I had been working on. It reminds me of a sign I saw at a print shop one day. "Failure to plan on your part does not constitute a crisis on ours." She strongly suggests informing people where they are on the priority list (gently) so they understand you have other assignments and duties.
Libya: Who Controls What?
If you can locate a nation in what used to be called Libya—more power to you. The death of Muammar Gaddaffi was certainly not mourned by many. He was a definite thorn in the side of the western world, but he did hold this fragmented nation together by force and the actions of his police and military. Today, the nation basically fails to exist. That takes one of the largest oil producers out of commission.