COVID-19 Changed Our World: How Will We Know How Much?
A Well-Known, Comfortable Business Environment
For the past year, I have been giving speeches with the title “The Last Cycle.” I chose that title to emphasize the contrast between the normalcy of the immediate approach to a possible recession and the dramatic changes coming in the long run from the digital revolution. Were that still true, I would be approaching this article about trucking prospects in the summer of 2020 by citing the established rules of the business cycle and trucking’s well-known response to it. Instead, this article will ponder a set of changes unthinkable in early February (or, for that matter, at any time since 1946).
A New World—For Sure!
What’s new? Before I answer that, let me remind you of two important messages from those “Last Cycle” speeches I gave. First is the phenomenon of external shocks. Sometimes a big external shock imposes itself on the normal business cycle and changes its timing and severity substantially. The banking failures of 2008 come to mind. Well, our current business trajectory is driven by the biggest external shock since World War II. Making a useable forecast for this summer’s business conditions depends in large part on the effect of the shock we received. Some cattle prod it was!
The second idea I used, and always emphasize, is that we must be wary of extreme events because they are the ones that generate big changes. They may have only modest probability, but if they occur, people go out of business. That need for serious risk management is the issue in the summer of 2020. The external shock, especially our government’s reaction to it, is more than enough to create extreme results. It has made big changes very likely. So let’s dive into recent events and see what extremes this external shock might produce.
One Important Qualifier
I am writing this article in mid-April with the elements of this external shock clearly revealed but without outcomes that are clearly determined. As a result, I will lay out the five most important possibilities and let you conclude the outcome based on what you are observing in the June business environment.
Bad Flu Season, Epidemic or Pandemic?
One has to start by addressing the COVID-19 contagion, its severity, and timing. People have been warning us about such things for years. Is this the time it finally happens? We can understand that in part by naming it. Is it a “pandemic,” narrowly defined as a disease that spreads across the entire globe? Yes, this certainly is. But, the word has the additional ruling connotation of a widespread disease with very significant mortality.
The common cold of today and the Black Death of the Middle Ages were both widespread. One is an annoying sniffle, the other a life-threatening pandemic. This contagion has been widespread, but how widespread and how deadly? An epidemic is a mini pandemic, a contagion that affects a bunch of people in a limited region. This event is clearly not an epidemic. It is everywhere.
A Bad Flu Season
This is the mild version of either phenomenon. In 2018, more than 40 million Americans had the flu, and at least 60,000 died. Where does this one fit? In mid-April, the U.S. looked to be about halfway through, pushing 600,000 cases and 25,000 deaths. Double both (and add some buffer) and you get to 2 million cases and 60,000 deaths. I’m sure you have all seen far bigger forecasts than this one.
Still, the actual numbers, again as of mid-April, say this is a bad flu season, not a pandemic. It should be largely over sometime in early May, and we can return to our normal lives. With that background, you can now determine, based on what’s happened since I wrote this, whether this is still a bad flu season or really a pandemic.
We are quickly learning the economic costs of the restrictions, with unemployment up to 20%, empty airplanes, closed stores, and an economy that could shrink by 30% in April.
People Will Die If We Don’t Sequester!
This fear brings up the second issue, that of the government’s response. Our governors are treating this as a pandemic, the kind of threat to life that justifies extreme restrictions on economic activity, the kind not seen since World War II. We are quickly learning the economic costs of the restrictions, with unemployment up to 20%, empty airplanes, closed stores, and an economy that could shrink by 30% in April. The latter would make it the worst economic month in U.S. history.
These consequences make understanding the real size of this contagion critical. If, as the numbers in April indicate, the number of new cases and deaths keeps falling, the governors will recognize that this is not a pandemic and will yield to the growing pressure to ease the restrictions. If that hasn’t happened by the time you read this, then the forecast for the summer is easy to see. Just head for the bunkers; the economy will be toast.
Government to the Rescue
By the time you read this, the Treasury Department and Federal Reserve will have begun distributing $4.9T of stimulus to the economy. Conventional wisdom says that such a boost to the economy will fund substantial growth. As precedent, economists point to the 100-basis-point expansion of the economy in 2018 from the $1.1T tax cut of 2017. Surely a stimulus four times that will stimulate major growth. Dumping that amount of money on the strong pent-up demand when restrictions are eased is expected to bring the economy roaring back. You can be the judge of that yourself. Is your business roaring right now?
If not, there are a combination of three reasons. One is simply that the federal stimulus doesn’t work. If people choose to save the money rather than spend it, then some future years might benefit, but not the 2020 economy. Second, such programs take time to get the cash out and to get it to the right people. The people with closed businesses need the money now. Finally, we are entering uncharted waters with such borrowed largesse. Congress assumes that the Treasury Department can borrow $2.2T without upsetting financial markets. The Federal Reserve assumes that they can print $2.7T of new money without causing inflation. That may have been the case historically, but the free ride our government has been receiving must end sometime.
Remember, in 2008 Moody’s threatened to downgrade the U.S. federal credit rating due to the huge budget deficits of that era. The latest projections for this year are a $3.8T deficit—three times the amount in 2009. What will the credit markets say about that? It behooves you then to keep track of interest rates and inflation as the summer warms. You can also use Italy as a leading indicator, since they were already on thin financial ice before their difficult contagion. Our government’s fiscal and monetary response to this crisis will sorely test our ability to ignore what our parents taught us about financial prudence. 1
That Risk May Be a Few Years Out
Our history of large budget deficits says that our reckoning may still be years off (I think within this decade); however, there is another factor that could keep the economy in recession despite the stimulus. It has to do with consumer and investor confidence. As scary as this event has been, investors and consumers may decide to save more just in case this happens again next year. If you were a small business owner, whom the government can now shut down without notice, wouldn’t you build up your reserves once this crisis has passed?
Moreover, will there still be sufficient levels of “disease fear” to keep people off airplanes and cruise ships, out of hotels, and at home watching sports on TV? How long will it take to get Americans going to Las Vegas again? You would be wise to keep your eye on such entertainment and leisure markets this summer. If they stay empty, or as is more likely, partially empty, the economy will hurt. Such services are a big deal to our economy these days.
Could Any of This Be Permanent?
There are two parts to this last item. That first involves the government. History is clear about the government’s use of its economic powers. When it intervenes (supposedly temporarily), the regulations and stimuli tend to become permanent. The current U.S. farm program got its start as an “emergency” program during the Great Depression. Additionally, the necessarily heavy-handed, broad-brush nature of governmental economic steps usually reduces economic efficiency and productivity. We see that frequently in the economic regulation of transportation, as with the Interstate Commerce Commission, another one of those programs resulting from an economic crisis. Please forgive this seemingly doctrinaire statement from an avowed Austrian economist.2
The economic restrictions and stimulus stemming from this crisis set a bad precedent for further governmental control of our economy. Ironically, the “progressive” Bernie Sanders has dropped out of the presidential race at a time when our governments have embarked on their most extensive collection of socialized policies since the Great Depression. While most of these effects will emerge in future years, you should be able to get a hint of the future in how quickly and completely the sequestration restrictions are lifted.
Those Are the Governments’ Responses; What About Individuals?
The internet is already abuzz with comments on how this crisis could be changing business patterns and lifestyles. I will list several things here to get you thinking.
•Sourcing things overseas doesn’t look as attractive as it used to, especially in Asia, where these contagions tend to start.
•Sequestration is forcing people to learn more about working remotely. That already strong trend is due for acceleration—going into Manhattan doesn’t look as necessary as it used to.
•My wife and I have both talked to doctors over the phone this last month. Why go to their office if the exchange is mainly verbal? I know how tall I am and how much I weigh. My wife already keeps a digital thermometer and a pulse-oximeter.
•We have also gone to our last theater movie.
•The e-commerce people are in the only sector working overtime during the sequestration. The brick-and-motor people are worried if their customers will come back.
Are Large Groups of People Still Necessary?
Here’s the point: historically speaking, commerce has been driven by economies of scale in manufacturing, finance, retailing and entertainment. We are quickly learning that the crowd has fewer benefits and some high costs. I would especially watch how big-league sports handle the recovery from their outages. The certain slowness of their live fans’ returns will give them a valuable laboratory for determining how to provide the necessary human excitement while all but a few watch from home. That is already a statistical case; they make way more money from TV than seat fees. But, the excitement of the fans in the seats is still part of the tableau. I suspect, as I have moved my career to a one-person office, connected to my customers via electrons, that sports will find a way to present their product without the concentrated excitement of Lambeau Field.
Time to Test Your Abilities as a Forecaster
I have laid out the process for you. Here are the keys.
•Has the contagion stayed on its downslope since I wrote this? If yes, there is hope. If no, all bets are off.
•Has the government reduced or eliminated the restrictions? If yes, there is hope. If no, all bets are off.
•Have you received a stimulus check, and have you spent it? If yes to both, there is hope. If no, the economy is on its own.
•Have interest rates risen? If yes, this recession will go on. If no, there is hope.
•Has inflation increased? If yes, watch out very carefully. Inflation has a way of accelerating. If no, there is hope.
•Has the government kept a bunch of regulations to “make sure this doesn’t happen again?” If it has, it will still happen again, and we will handle it poorly. If not, a new contagion will happen, but we may handle it more rationally.
•Are you more likely to pay a bit more to avoid the risks of a very long, multi-country supply chain? If so, trade flows will stagnate. If not, keep investing in China.
•Have you, your company, your school, or your friends increased their use of electronic tools? If so, the digital revolution is accelerating even more than expected. If not, the digital revolution is still accelerating, and you and your compatriots are being left behind.
1The U.S. currently can borrow heavily because it remains the least ugly girl or boy at the dance. At some point the suitors will leave the dance and try another hall where there is a choice of attractive partners.
2An Austrian economist believes in limiting governmental involvement in the economy to a bare minimum. He or she trusts that individuals can determine how to spend their money and offer their services far better than an expert in a capital. The reference to Austria comes from the home of the early developers of this theory.
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