SARS-COV-2: The Key Economic Determinant for 2021

Noël Perry | Transport Futures

WHAT’S IT CALLED? The virus we hear so much about can best be described as an abnormal immune system reaction called coronavirus disease 19 (COVID-19). The disease is a reaction to a new strain of coronavirus called severe acute respiratory syndrome coronavirus 2 (SARS-COV-2). So, the virus, SARS-COV-2, is one thing, and the danger, COVID-19, is another. Most people who get SARS-COV-2 suffer little to no symptoms. But a small number of infected people (about 1%) suffer a strong reaction and become very sick with COVID-19. Importantly, the vaccines being administered are designed to prevent the abnormal, extreme immune system response and not prevent us from becoming infected.

Why Is This Important?

There are two reasons: First, this flu is worse than a normal, seasonal flu, maybe as much as 10 times worse. Usually, we just ignore the flu season—until we get sick. This one, however, is deadly enough for the medical community to act. Indeed, the numbers suggest strongly that such aggressive action has saved lives. I am talking about medical action now, not civil action.

The second reason this flu is important is that we don’t understand it well. When humans understand a disease or any risk, they quickly develop a means of dealing with it, including ignoring it, just as we often ignore the inherent risks of driving every time we drive our car. When we don’t understand a risk, we tend to think the worst, assuming in this case that SARS-COV-2 is like the Spanish Flu of 1918 which killed roughly 40 times more people per million than the normal flu. We want to act.

I SEE AN ECONOMIC LANDSCAPE MUCH MORE LIKE 2019 THAN 2017. WE CAN SURVIVE IT, BUT NOT PROSPER.

That emotional state is where we were last March when the Centers for Disease Control and Prevention (CDC) was spinning worst-case scenarios that predicted deaths to rival the 1918 pandemic. That is the position the authorities adopted when they did something and shut down the economy. Fortunately, we now know that this challenge remains in the “bad-flu” season range, much like the 1958 season, rather than the catastrophe in 1918. Unfortunately, the CDC, governments around the world, and the media continue to insist that we do something, even as scientific evidence challenges most of the current behavior. Because those actions have profound effects on the current economy and that of the near future, the somethings we do to combat the pandemic make it a valid subject for a 2021 macro-economic outlook.

Thank God the Worst Is Over

Although the latest statistics show a 60% reduction in cases since the December peak, I am talking about our government’s understanding that draconian lockdowns of businesses and schools do far more harm than good. Part of that change is a belated recognition of the growing understanding of this virus. Part is the public’s resistance as people realize that the risk is not nearly what we thought. Eleven months ago, the roads of South-Central Pennsylvania, where I live, were empty. Now they look fully normal. This is a powerful, “lifesaving” realization, because the lockdowns of last March and April shut down almost a third of our economy, causing a loss of lives the experts now calculate to be far greater than the pandemic itself.

To those of us who stayed employed, those lockdowns were an inconvenience. To the third put out of work, is was a time of missed medical procedures, heightened drug use, increased violence and suicide. But, again, thank God those conditions are behind us. This is why many economists predict a boom year for the United States in 2021, not the depression conditions we suffered in 2020:2. If those lockdowns were to reappear, this analysis would be easy—disaster! I use such language purposely because we did it to ourselves last year. We may have skated through—but won’t a second time.

What’s Next for 2021?

Obviously, the first item is the degree of the remaining restrictions and fears. You know how those restrictions feel. The economy grew by 4% in 2020:4 despite them. As we look forward, it is wise to consider two things. Almost all the recent, rapid economic growth is a catchup from the 2020:2 shutdown. Total GDP is still 2% below its 2019 peak. Services, the most important sector of the economy, is down by 6%. This realization suggests that growth will recede to normal levels on the goods side as the catchup is completed.

On the service side, one wonders what the sustained effect will be for those businesses that failed during the past year. Yes, certainly, our resourceful economy will repurpose those buildings, just as it did after the Great Recession of the 2000s. Still, that takes time and will not be anywhere near completion in 2021.

Moreover, such new business, or the wounded survivors’ revitalization, will not occur until the population gets fully over its fear of infection. My wife and I are there, but many of our friends continue to shelter in their homes. I am more than ready to get on an airplane to go play some winter golf with a good friend in Atlanta. He is not there yet. I fail to see how we can have a robust economy if the ballparks are empty, the restaurants a third full, and conventions are being held via Zoom.

It looks to me like the pandemic will still be a force in the 2021 economy. I see an economic landscape much more like 2019 than 2017. We can survive it, but not prosper.

What About All Those Rosy Forecasts from Other Economists?

I sure hope I am wrong. It is possible that a combination of the rapid, natural decline of this pandemic and President Biden’s promise of complete vaccinations by mid-summer will spark an economic boom as relieved consumers and investors breath a huge sigh of relief and plunge back into the economy. Don’t you want to visit Glacier National Park this summer or reclaim your college football seats? The optimists also look hungrily at the massive stimulus programs making their way through Congress: another $2 trillion on top of the $4 trillion in 2020. This scenario is the most likely upside opportunity since 2017. I am not convinced, but I am watching events closely and am clearly much more optimistic than I was three months ago.

capacity

No Downside

One only needs to look to Europe to find significant downside exposure. Western Europe thought its strict lockdowns of last spring had blunted the pandemic, only to experience a dramatic two-peak surge in the fall and early winter. That emotional trauma has sparked a resumption of relatively strict lockdowns, more like those here last spring than what we endure now. They are close to, if not at, the double-dip economic contraction I worried about above.

Moreover, European governments are prone to the extravagant Keynesian, debt-financed stimulus that has already put their borrowing under worrisome scrutiny. Such policies might help rescue 2021 in well-off countries like Norway and Germany. Others are not so fortunate, led by Italy which is already in technical bankruptcy. Only the continued generosity of German banks has kept the euro from collapsing under threats as least as dire as those of the 2000’s debt crisis.

Here’s the point. Between our skyrocketing federal deficit and the Federal Reserve’s unprecedented printing of money, U.S. Federal financial behavior is also worrisome. Even that confirmed Keynesian, Janet Yellen, is now concerned about federal borrowing. In a normal environment, such scrutiny would not likely have much effect over the next few years. However, throw in a significant European sovereign debt crisis, and financial markets worries about U.S. sovereign debt might cause immediate pain. This threat is why I am not convinced of the positive scenario presented above. Keep a close watch on inflation, something thought highly unlikely by most observers. Should it move upward, or should the U.S. dollar weaken in global markets, we are in for trouble.

What Does That Mean for Trucking?

So far, in this continuing saga, trucking has fared surprisingly well. If you reduce service demands at the same time you flood the market with money, you get a surge in the demand for goods. What else is one to spend money on? Since goods are better for trucking than services, trucking has benefited. As a result, when 2020 GDP fell by 3.5%, truckloads fell by only 1.7%. Compare that to 2009, when GDP fell by 2.5% and truckloads by 8.5%.

Even a Washington what’s-their-name NFL fan can see that something strange is going on. Economists call it a “sectoral shift” from services to goods. Unless you think Americans have permanently tired of going to Cancun, Vegas, or Disney World, will stop spending on medical care, won’t go to college football games, or will consign eating out to history, the pendulum will swing back to normal—as soon as people feel comfortable interacting with other humans as we have done since the time of Fred Flintstone. Homo Sapien Sapiens are social creatures. That means, of course, that money will flow back from goods’ spending toward services. Institutional food service trucking will love it, but most of the rest of us will not. Ironically, then, an economy gratefully returning to normal, even with strong growth, will not share its fruits fully with trucking, and may well be felt only as a slowing of growth in an otherwise booming economy. It will not, in any way, resemble the boom we in trucking are now experiencing.

do not forget about amazon and zoom

Don’t Forget About Amazon & Zoom!

Thirty years hence, we will tell our grandchildren stories about the “Great Pandemic” of 2020, much like my parents told me of the 1918 Spanish Flu when I was a child. One hopes we will have learned much more about treatment and vaccine production by them.

Those anecdotes will say little about the economy, any more than my elders talked about the economic impacts of the 1918 pandemic. However, those of us surviving in 2051 (I’ll be 105) will be living in a dramatically different world, the beginnings of which are hinted at during this pandemic. I’ll name just three forces for lasting change from a much longer list. Each of these trends is a very big deal!

Number One Is Already Under Way

I am writing about the acceleration of the existing powerful trend toward online marketing of consumer goods. In 2020 under the stay-at-home pressures of the pandemic, online retailing grew 44% to more than 20% of all retail sales and now is close to 40% of nonfood and fuel retail sales; it is already 75% of industrial sales. We could speculate for days over the supply chain implications of this trend. I’ll just make one point here.

Amazon now accounts for almost a third of all e-commerce. They and their competitors are rapidly forcing a portion of the traditional retailer cadre out of business. That means your book of retail customers will turn over dramatically during the next 10 years. What’s worse, Amazon intends to do its own trucking and brokering, even providing those services to others as they do now with online sales and cloud-computing services. They intend to compete with you! I told you this was a big deal!

Downtown Real Estate

Whatever the urban chauvinists say, dense urban land use is hideously expensive, noisy, and cramped with little parking and inadequate open space. In countries like the U.S., where people have abundant alternatives, there has been a move to the suburbs and regional small towns ever since the development of cars and good roads after WWI (see Detroit) 100 ago. The surviving downtowns (New York, Boston, Philadelphia, Chicago, et al.) are dependent on substantial public subsidies and well-paying financial employment. While the subsidies will continue until the great fiscal reckoning, the financial jobs have taken a big—perhaps permanent—hit from the pandemic. We are learning to perform financial office work from home offices, without the commutes, and without the high costs of downtown offices or apartments.

I write this piece from my home that I bought 12 years ago for just over $300,000. I’m looking out at a forest but can be at any function from D.C. to NY in less than three hours. An equivalent home would cost three to 10 times that in Philly and much more in New York. So, if you don’t have to pay those prices to gain access to your job, not to mention the chances of getting the virus in a crowded office, you move. This development has only modest supply chain implications. Rather it is a looming economic crisis that are certain to cause several mid- to large-city bankruptcies nationwide. A number of traditional mid-sized Pennsylvania cities like Joe Biden’s birthplace of Scranton have already gone under. They already lacked the financial employment that is now at risk in Philly and Pittsburgh. That’s big deal

bottlenecks at our ports

Bottlenecks at Our Ports

Such congestion is but one of many disadvantages to global sourcing that have been emphasized by the pandemic. Three-month lead times, typical of Asian sourcing, have been lengthened first by lockdowns, then by scrambled order patterns, and now by capacity crunches. Despite the well-known problems with truckload driver capacity, our domestic trucking has seen no bottlenecks nearly as bad as the current problem in L.A. Digital technology is steadily eroding the once-powerful labor advantages of Asian manufacturing. The pandemic has helped highlight the substantial challenges of multi-cultural, multi-modal, 10,000-mile-long supply chains. Although catchup demand has temporarily obscured it, the trend was already moving toward slower global trade growth.

Such a change is at least as good for trucking jobs as it is for manufacturing jobs. There is a three-to-one tonnage multiplier when an Asian-sourced good is reshored. That’s because you get the upstream movements as well as the finished good movement. This trend is great for most American trucking, but troublesome for any operation with heavy intermodal volume, a mode strongly dependent on international cargo. Big deal, again, I think.

Remember the Word “Exogenous”

It is economist jargon for those events that come at us outside the realm of the traditional economic cycle. I haven’t talked about the normal cyclical economic issues in this outlook because the pandemic—an exogenous development—outweighs them. It will pay to keep your eye on the regularly reported pandemic metrics and our government’s quirky responses. That will most likely determine your business conditions this year. That said, the environmental, global, and political risks for this year are more likely to force you to adapt your business plans than a swing in normal economic events. When I scan the headlines each day, I will be looking for news of the pandemic, European finances, relations with China, and early signs of building inflation. I suggest you do the same.

Noël Perry is Principal with Transport Futures, located in Lebanon, PA. He can be reached at nperry@transportfutures.net.

The viewpoints expressed by the author are for general informational purposes only and is the opinion of the author. All information in 3PL Perspectives magazine is provided in good faith, however we make no representation or warranty of any kind, express or implied, regarding the opinion of the author.

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