Despite this week’s dreadful economic data, the sun came up this morning. It seems a sharp reduction in US economy activity over a 3-month time frame doesn’t have much of an impact on the Earth’s rotation. I would submit it doesn’t have any impact, but I am not a planetary scientist, astronomer, or what have you. Heck, I don’t even read my horoscope. Maybe I should in order to make sense the historic 32.9% (annualized) swoon in US output during 2Q 2020.
As I was looking at numbers yesterday, I couldn’t help but wonder, rightly or wrongly: “did we gain anything from this? Were the benefits from the various economic lockdowns worth the economic costs?” This will be a matter of debate for politicians this Fall and historians in the future.
One side will argue: “Just look at all the damage we have done! All of those people out of work! Those companies bankrupt! Public coffers drained! For what? We still don’t have a cure or vaccine, and more people than ever are getting sick!” The other will counter: “Who knows how bad it would have been IF we hadn’t done what we did? We undoubtedly saved thousands of lives, and that is far more important than profit!”
Who is right? At the risk of pleasing of no one, both sides probably are. However, you can adequately quantify only one argument. As a result, that side will eventually prevail. At the end of the day, probably is a stronger argument than perhaps.
This morning, on our daily market call, a co-worker asked something along these lines, and there were a lot of moving pieces: “We now know what happens we will lock down the economy. What is going to happen when the first relief packages dry up and Washington is still bickering over the next one? But we can’t keep doing that forever, can we? At some point, the economy has to stand on its own. But the GDP numbers suggest it can’t right now. It also seems the big guys just keep getting bigger. How can smaller companies compete? So, when do we finally get back to normal or some kind of normal?”
Anyone else wondering the same thing(s)?
No, we can’t just keep borrowing obscene amounts of money and creating it out of thin air, as tempting as it may seem at first blush. The continued debasement of a currency will eventually produce negative results, at least it always has in the past. True, we are the mighty USA, the world’s economy is far more integrated, and money flows throughout the global financial system more freely than at any point in history. So, perhaps this time is different, huh? Perhaps, but, again, probably is a stronger argument.
As for what happens to the economy while the Congress haggles and bickers with one another? Nothing good will, as PPP loans and generous unemployment benefits will dry up, evaporate, dissipate, you name it. The reason is simple: the entirety of the US economy is not open or otherwise unfettered in some form. Many states have reversed their reopening plans due to spikes in COVID-19 cases. Others have paused their reopening at various points in the process. Politicians in some locations haven’t threatened to postpone, delay, or reverse their reopening procedures, which hardly engenders business optimism. If that weren’t enough, any number of counties and municipalities have put their own shackles on a number of different businesses and other activities.
Taken together, no one could sensibly argue it is ‘business as usual’ in the US. So, what happens when the money spigot from Washington dries up before it is? Well, bad things tend to happen when ‘you’ lose one income stream and don’t replace it with another. In business, that is always the case. Perhaps this time is different and things will bounce back to normal after the funds deplete, even with all the restrictions. Perhaps, but, yet again, probable is a stronger argument.
What about big business getting bigger and smaller businesses struggling to compete? This is a tough one, as the proverbial ‘mom & pop’ business probably doesn’t maintain the cash balances a company like Apple might. Am I Captain Obvious or what? The SG&A and S&B line items on the income statement aren’t nameless and faceless either. The small business owner is far more apt to personally know their employees, until a like the CEO of an S&P 500 company, which makes reducing, um, employee-related costs far more difficult. Then there is the whole economy of scale issue with vendors and suppliers. As a result, the CFOs office at a large company undoubtedly has more ‘levers to pull’ to reduce expenses during an economic downturn. Hey, I am not saying an inexhaustible number, just probably more than the small business owner.
I could be wrong about this, but I am probably not. As such, I told them to be sure to ‘go out of your way to shop small and local’ if that is a priority. For some people, it will be. However, by the time the dust settles and smoke clears, the US economy will have shed a depressing number of ‘mom & pop’ establishments. Try as I might, I don’t see any way to avoid this as long the economy remains in some form of limbo. It is the probable case scenario.
This takes, or took, us to the finally part of their query: “when do we finally get back to normal or some kind of normal?” Whew, that is the $64,000 Question isn’t it? Everything else pales in comparison. Unfortunately, this is also the most difficult one to answer without being necessarily vague.
Suffice it to say, things won’t get ‘back to normal’ until there is some form of safe and effective vaccine, available and approved for use. That is the starting point. To be sure, we can lift all the legal restrictions on business, but end-consumer behavior probably isn’t going to get ‘back to normal’ until folks feel safe enough to return to their former consumption patterns. Until there is said vaccine, that probably isn’t going to happen, not completely.
But, how long will it take to finally develop one? To appropriately test it and approve it? How long will it take to manufacture and distribute literally hundreds of millions and even billions of doses? Who gets them first? Who distributes them? Who pays for them? At what price? Who decides that? Will countries politicize or otherwise weaponize available supply and delivery? Will there be enough chicken eggs on such short notice to fill the immediate demand? You read that correctly. What percent of the population needs to get treated in order to declare success? 20%? 40% 60? 80?
Oh, the devil is in the details. However, our investment committee feels confident we are talking quarters and years, not weeks and months. As a result, back to normal? The low-hanging fruit, the path of least resistance, the easy answer, and the probable truth is: at least a year, and probably a little longer, before things are completely back to what most would consider normal.
This takes me back to the beginning.
Knowing what we now know, are the benefits of locking down the economy (in some form or fashion) to slow the spread of COVD-19 worth the economic costs? Remember, the US economy shrank at a 32.9% annual rate last quarter. Are we prepared for more quarters of deep red ink, even if they aren’t quite as bad as the last one? If so, how many? One? Two? That probably won’t be enough. What is an acceptable Unemployment Rate if we decide we want to keep some restrictions in place? Is it 8%? 10%? 12%? Because it isn’t going back to 4% for a long period of time, or ever if we remain in some form of lockdown. Is that okay? Because that/this is the probable case scenario, it isn’t perhaps.
In the end, lives are indeed more important than profit, but the latter is pretty important too. Perhaps there is some way to protect ourselves without ruining the economy in the process. The more I think about it, there probably is.
Have a great weekend. Don’t forget to wear your mask when in public. Be sure to wash your hands when you can. Do a better job cleaning up after yourself. Keep a safe distance from others when possible, and keep your hands to yourself. Finally, and this is a big one, support your small and/or local businesses whenever you can do so.
John Norris
Chief Economist
As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.