By Chris Kuehl, Ph.D., NACM Economist—
Short Items of Interest—US Economy—
Hawks and Doves on Same Page
It was expected the Fed would take action at some point, but that they chose to do this now was a shock as they had been asserting there was no immediate plan as recently as three weeks ago. That there was unanimous support was also a bit of a surprise, but this was described an emergency action. Trump has called for rates to be cut to zero or even to enter negative territory, but that suggestion has been rejected and even ridiculed given the reaction of the markets. There has been a slight recovery in some global markets, but for the most part, this move has not affected the underlying issue of a supply-side recession.
ADP Reports Job Gains
The official job numbers will be released by the Labor Department at the end of this week, but in the meantime, we have the report on private sector job gains by ADP. This report is generally pretty close to the Labor Department numbers even though it doesn't include government jobs. It is suggesting a gain of 183,000 jobs. That tracks pretty well with the pace of job growth this year. If these numbers hold when the official data is released, it suggests the employment situation has not yet been affected much by the virus crisis. The thinking is companies have yet to start laying people off and the reaction to the global slowdown is still muted.
There has been a great deal of attention focused on the cities that have been bursting at the seams over the last few years. The growth in cities such as Nashville, Austin, Denver, Seattle, etc. has strained their infrastructure in almost every respect. Less attention has been paid to those cities that have not been growing; there are far more of these. The problem is not new—populations moving into the suburbs and exurbs. The hope a few years ago was that higher fuel prices would convince people to live closer to the central city, but cheap gas and suburban job expansion has allowed people to leave those central regions behind. Their infrastructure needs are even more acute as the systems are old and in need of repair and replacement.
Short Items of Interest—Global Economy
Iran Stockpiles Uranium
While the world fixates on the virus threat, there are all the other issues to worry about. It has been reported by the Iranian government that they are stockpiling uranium again and now, reportedly, have enough to make weapons. They are still far from having that capability, but this puts them somewhat closer. It is known they have the delivery systems available to threaten nations in their region such as Israel and Saudi Arabia. There is not much that anybody can do about this scaling up given the collapse of the nuclear deal.
Narrow Victory for Netanyahu
This was the third time the Israeli voter was asked to make a decision. This time, it looks as if there has been a winner—if only by the narrowest of margins. The Likud coalition led by Netanyahu has a very tiny majority, but enough to form a government. Now, he will have to keep this coalition intact. That may be a major challenge as he still faces trial on corruption charges. The public seemed to tilt towards Likud in recent weeks over concerns regarding security and the fear that Iran poses a new threat.
Peace Deal in Afghanistan?
There has been a deal struck between the U.S. and the Taliban in Afghanistan, but the deal doesn't involve the Afghan government and they have not indicated support for the provisions. In essence, this is simply a deal that allows the U.S. to get out of a war that has lasted over 18 years. The aftermath of this withdrawal will not be pretty and the civil war will continue unabated. The U.S. will have little to point to in terms of accomplishments, but supposedly the Taliban will no longer host terrorist groups threatening the U.S.
What Can be Done to Protect the Global Economy?
The decision by the Federal Reserve to cut rates will almost certainly trigger the other central banks to follow suit. The pressure is now on the European Central Bank as well as the other major players. They had already indicated they favored coordinated policy. The impact of the central bank is limited in this particular crisis, so the natural question is what else can be done to insulate the world from a global economic meltdown. The bottom line is there will have to be attention paid to restoring the supply chain which has supported that global economy for the last 20 years. That means paying attention to what China needs.
Analysis: The trigger for the global economic collapse was the almost total shutdown of the Chinese export economy. The effort to control COVID-19 meant mass quarantines and isolation. Virtually nothing has been produced from one of the largest industrial areas in the country. This has affected every economy in the world as there are simply no immediate substitutes for these parts and assemblies and products. The best-case scenarios indicate it would take upwards of three years to develop alternative suppliers for about 80% of what is or was coming from China. The recovery of the global economy will require the recovery of the Chinese economy.
This would be a monumental task under the best of conditions as China is still faced with the virus threat and the need to continue policies of quarantine, isolation and restriction of travel. The additional problem is that China has been subject to a concentrated attack on its trade policies by the U.S., Europe and Japan. The last two to three years of the Trump administration have been marked by overt hostility towards China along with numerous moves to restrict trade. There have been billions of dollars' worth of tariffs imposed. These efforts have worked in the sense that Chinese imports into the U.S. have been blunted. There are, however, still many good reasons to want to reset the trade relations between the U.S. and China. These same reasons exist as far as China trade with the rest of the world.
The fact is the world is not in a position to do without Chinese output. Unless there is a significant recovery in China's export economy, the rest of the world will be staring at a supply-side-led recession. Now is the time for nations to rethink their tariff policies and their antagonism towards China—at least on a temporary basis. There seems very little desire to do any such thing, however. Rather, there is talk of further inhibition as far as Chinese exports are concerned, motivated by fears of the virus. In the bigger picture, this episode makes it very clear that global supply chains are far too dependent on China. This should prompt extensive long-term planning as to how to diversify in anticipation of the next such crisis.
Using Refugees as a Threat
There has been an ongoing humanitarian crisis involving migrants and refugees for many years now. Europe had been embroiled in this mess even before the decision to take in millions of Syrian refugees who had been fleeing the civil war. The U.S. has had issues with migration from Mexico and Latin America and there have been massive displacements of populations in South Asia and East Asia. Lately, there have been additional issues that have made the situation even worse. Nations such as Turkey are overtly using the refugee as a political weapon to force behavior. The millions of refugees from Syria and other parts of the Middle East that sought havens in Turkey are now being urged to leave and enter Europe. The implied message to the refugees is that they will be forced out if they do not voluntarily depart.
Analysis: Erdogan has elected to throw his support behind the existing government in Libya and is demanding that Europe do the same. If there is reluctance to do so, the Turkish government will flood Europe with the millions of refugees that now harbor in this country. The same tactics are being employed in places such as Myanmar and throughout Africa. The populations are being used as pawns in bigger global struggles. That makes their already tenuous existence unbearable. The Venezuelan government is forcing people to leave for Colombia as a way to reduce pressure on the Maduro regime. That pattern has been seen in other places as well. This is not necessarily a new development, but the extent to which this has taken place is unprecedented and has put immense pressure on nations that stand to receive the brunt of this forced migration. The EU has no desire to become embroiled in the Libyan mess, but the alternative is to be flooded with another refugee wave that will come through the nations that are least equipped to handle this influx. The Greek government is already facing the early waves of new arrivals. That has created mass social protest while threatening to bust the Greek budget wide open.
What If You Cut Rates and Nobody Cares?
Less than a week ago, the statements from the Federal Reserve were all about caution and confidence. The same commentary characterized the output from the world's other major central bankers. They all asserted they were ready to take action if the need arose, but they didn't believe the crisis warranted such a response as yet. That position obviously changed as the Federal Reserve stunned the financial community with a rate cut of 50 basis points—taking the Federal Funds Rate to 1.25%—a record low. This marks the first time since the 2008 financial crisis the Fed has altered rate policies in between scheduled meetings. The cut takes rates as low as they have been in decades. It is very likely other central banks will follow suit in the days and weeks to come. The decision was unanimous as even the hawks such as Loretta Mester and Patrick Harker agreed that radical measures would have to be taken to calm the markets. The problem is it appears this move did not have the desired impact—at least not yet. The equity markets continued to slide, the treasury yield fell below 1% and the rush to safe haven investments continued unabated.
Analysis: The reaction of the markets to this move illustrates the challenge facing the central banks and the financial community. The bottom line is they are not really equipped to handle this kind of recessionary crisis. The vast majority of these crisis situations stem from a loss of demand. The consumer starts to hunker down and they reduce their levels of consumption. Business slows its rate of investment in reaction to that reduced consumer activity and the whole economy begins to stutter. The central banks can then take steps to bolster potential demand by making access to money easier. The lowering of the rates means that banks can lend more (assuming there is demand for these loans) and there are also reductions in everything from mortgages to car loans. The banks only have indirect influence at best, however. The more direct stimulus would have to come from the fiscal side through the reduction of taxes or additional government spending, but even these tactics would have a limited impact as they are also based on a consumption crisis.
The outbreak of COVID-19 has created a supply-based crisis. This is not subject to the usual remedies. The consumer has been fairly confident thus far and was more than willing to keep spending. Job numbers have been solid and there were indications of additional wage growth. Business investment has not been robust, but most sectors were holding their own. Manufacturing was in a slide before all this emerged, but even that slump was sector based. The decision to cut rates will have no impact on the supply crisis as this is due to the shutdown of the Chinese export sector as well as the other nations affected by the virus. The potential does exist for there to be a consumer slump as the virus threat expands. That is what motivated the Fed to cut rates now. The problem is lower rates will not boost confidence when the issue is the virus as opposed to some economic fear.
The threat from COVID-19 is real—that much we know for sure. We also know the threat is neither unprecedented nor unmanageable. The world has faced outbreaks of communicable disease many times in the past and especially in the recent past. There are the long-time threats of the flu (which killed over 600,000 people last year). There was MERS and SARS and many other exotic threats such as Ebola. There is reason to take these threats seriously—especially for the populations that are most vulnerable, but there is no justification for blind panic and the destruction of the global economy.
Analysis: The universal assessment from the medical community is that face masks do absolutely nothing to protect people nor do they prohibit the virus from spreading. Yet, there is now a worldwide shortage as people desperately try to acquire them. There have been runs on WWII vintage gas masks. People are stockpiling bread and milk. There are millions of people canceling vacations and business trips and avoiding contact with anyone. There have been cases of people attacking those of Chinese descent and attacking people for sneezing or coughing in public. The fact is that COVID-19 has created dual crises—a medical one and an economic one. The unfortunate fact is the economic version is causing a great deal more damage than the medical one. That is quite obviously not the case for those who have contracted the virus. The need is to approach the crisis as deliberately and rationally as possible. That requires a lot less panic on the part of the public.
This is an area that has special importance to this writer given the way I spend a good deal of my time. Due to concerns regarding the spread of the COVID-19 virus, there has been a sudden spate of cancellations by business organizations and conferences. The logic is that these large crowds would give the virus an opportunity to spread rapidly. Thus far, the majority of these cancellations have been in Asia and in parts of Europe, but there have been alterations in the U.S. as well. These cancellations are proving to be very damaging to the local economies and to the groups as they face decisions regarding loss of revenue and the need to refund money.
Analysis: Thus far, we have not seen any cancellations or postponements, but it would not come as a surprise. What we have seen is attention to hygiene and more suggestions as to how to minimize risk. It is the same message that has been provided by the entire medical community—wash your hands and don't mess with your face!
Fear is a funny thing. Over the years, it has been the subject of a great deal of investigation and study as people try to determine what people are afraid of and how they will react to that fear. We are all aware of the famous statements from FDR, "All we have to fear is fear itself." That illustrates a finding that is very instructive. What we most fear is the unknown. We are actually pretty adept at confronting a threat when we know what it is and what we are supposed to do. Where we struggle is when we don't know what we are dealing with and how we are supposed to react. I ran across an article that indicated people with cancer are less afraid of their disease than people thinking about COVID-19. This is fascinating.
On the one hand, you have people who know they are fighting a very deadly disease versus people who are not fighting anything at all other than the concern they might get it. The seriousness of cancer is far more than that of COVID-19 for most people, but the difference is people dealing with cancer know what they have and know what they are supposed to be doing about it. They certainly worry about the impact of chemotherapy, radiation and surgery. They worry about their survival, but they are taking action. The virus attacks are mysterious. We still don't know what we are supposed to do and fear that most of all.
The Stock Market Crash of 2020
How quickly things can change. The assessment of the market was pretty solid just a month or so ago. Now we are looking at a situation that seems to bring the possibility of a real global recession. At the same time, we know that markets are fickle and can rebound just about as fast as they fall. The question is what would make the markets recover their lost momentum at this point.