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Nov 19, 2020

If you are an engineer or credit manager, you might answer that the glass is twice as big as it needs to be.  The sales leader would add that while you were debating whether it was half empty or half full, they sold it.

The outlook for the economy is arguably mixed right now, and factually there is an argument for both the glass half full and glass half empty crowds.  In fact, when we study forecasts for the economy, we get three dominant scenarios that couldn’t be further apart.

The most optimistic of scenarios assumes that localized lockdowns work against the pandemic and a smaller section of the economy is impacted. Some success with early vaccine distribution is accomplished early in Q1 and some broader-based travel starts to open. It also assumes that the new Congress is able to pass a stimulus bill and greater certainty surrounding the outcome of the election frees nearly $3 trillion in cash reportedly sitting on the sidelines ($1.3 trillion in consumer holdings and @$2 trillion in corporate investments). If those conditions were met, the economy is projected to return to 2019 levels of total GDP output by April of next year and an annual Y/Y growth rate of approximately 6% in ‘21.

The downside forecast looks almost like a double-dip with risk of recessionary conditions in Q1 and total GDP output not returning to 2019 levels until 2022. This forecast assumes no vaccine impact until late 2021, continued election uncertainty up to January 20th, no stimulus, increasing unemployment, and a conservative consumer that stops purchasing products.  This outlook has some forecasters suggesting no growth in 2021.

But the Conference Board issued its base-case forecast (most likely) for 2021 that shows growth of 3.4% for next year (after contraction of 3.5% this year), which is similar to outlooks from the Congressional Budget Office, IMF, OECD, and others.   

Looking forward, here are some of the bigger items that could shape the US economy.

  • Unemployment: Sometimes we forget Economics 101 and overlook critical elements of the US economic picture. Unemployment is still relatively high on a historic basis with the U3 sitting at 6.9% and U6 coming in at 12.1%.  Although these have been cut nearly in half from their April highs, they are still higher than any unemployment rates seen since 2013. Labor conditions have started to plateau, and non-seasonal layoffs were beginning to creep up in October.  This could be temporary, and many believe that a vaccine being readily available will open up tens of thousands (if not millions) of jobs across the services sector (airlines, travel and tourism, accommodation and food service, etc.). But that might not kick-in until mid-2021, forcing the economy to weather another six-month storm of risk.
  • US Consumer Remains Strong.  Despite some of these unemployment worries, the US consumer continues to spend on products and consumption. On a year-over-year (Y/Y) basis, total retail sales were up 5.7% in October.  When stripping out food and fuel, retail sales were up 8.5% Y/Y. More specifically, auto sales (+10.7%), home improvement (+19.5%), food and beverage (+10.3%), sporting goods (+12.4%) and e-commerce (+29.1%) retail sectors were up sharply Y/Y.
    • Only four sectors in retail are down, and most are heavily impacted by the pandemic.  Gas stations (-14.0%), clothing (-12.6%), department stores (-11.9%), restaurants and bars (-14.2%), and electronics and appliance stores (-3.9%) were all down year-over-year in October.
    • This continues to reinforce the notion that when the nation is depressed, many of us go shopping! 
  • Housing: The residential housing market has returned to pre-pandemic levels with new housing starts rising by 4.9% year-over-year to an annualized rate of 1.53 million.  Single-family home starts were higher by 6.4% Y/Y; however, multi-family starts fell by more than 3.2%.  And new permits were flattening in October because the country is still facing a lumber and labor shortage (skilled workers) which have kept the industry performing weaker than demand would dictate. Lastly, the monthly supply of houses in the US are still sitting near all-time lows at 3.6 months of supply.  That will likely keep demand strong, and the thousands of fasteners, pipes, hinges, and materials that go into home construction will need to keep flowing. 
  • The US Dollar: This is a developing story because the dollar has lost nearly 10% of its value YTD. Some investment banks are building in another 20% drop into the dollar’s value next year when a vaccine is readily available. They speculate that there will be more attractive investments around the world when the pandemic is “in the rearview mirror” and heavy US debt burdens will push foreign investment into countries that have weathered the pandemic better.
  • Trade Agreements: New or enhanced trade agreements like the Regional Comprehensive Economic Partnership (RCEP) could push more investment toward emerging markets in Asia, especially if Mexico continues to face pandemic and geopolitical challenges and multi-national corporations seek tariff shelters.     
  • Manufacturing:  Although broader industrial production is still finding it difficult to return to 2019 levels of output, the sequential improvement month-over-month is positive. Industrial production was up 1.1% month-over-month but was still roughly 5% lower year-over-year.  Many manufacturers have stronger demand than is shown in these monthly figures, supply chain bottlenecks, and challenges in producing finished goods is keeping them depressed more than they should be.

The Federal Reserve has said (in simple terms) that the pandemic is likely to be the key to everything.  The global economy will ebb and flow based on the pandemic and how much of the global economy is forced back into lockdown.

Once the dust settles and the global economy begins to reopen post-pandemic (post-vaccinations), we can determine just how different the world’s economy will look and identify risks associated with the full unfurling of economic sails.  Fed Chairman Jerome Powell said this week that the economy will likely never look the same.  He didn’t say it was a bad thing, just a different look.

For instance, some estimates suggest that retail shifting market-share trends from brick-and-mortar to online (leading to the demise of shopping malls, department stores, etc.) could have been fast-forwarded as much as 5 years by the pandemic. Scenarios that we thought would hit by 2025 are playing out now.

Several estimates suggest that 30-35% of US shopping malls may close their retail operations by the end of the pandemic (those properties will shift to other types of operations like fulfillment centers, offices, health care, and medical facilities, etc.).  In addition, nearly 100,000 restaurants and bars have closed since the beginning of the pandemic, and it will take time to find new ownership and reopen in those vacant locations. Still, big sections of downtown urban centers could remain vacant for some time. 

And we don’t know fully what the work-from-home experiment (which was also fast-forwarded perhaps by as much as 10 years) will do to living and working arrangements. Estimates today suggest that 10-15% of corporate jobs may never return to the office.  There are benefits to this, as well as organizational challenges.

It should improve operating margins for some companies as they shed overhead and infrastructure that they don’t need.  It also opens them to talent anywhere in the world, and some companies have already reported a drop of 20-39% in individual salaries for employees that accept relocation offers to lower cost-of-living states. It also allows for more aggressive corporate headquarter relocations to states which could reduce operating costs and taxes. And lastly, reports are already showing up of companies that went on talent searches around the world, looking for the best talent they could find (allowing that talent to work anywhere).  It could change the work product across a host of professional and business services sectors.

The downside is that this helps fuel an exodus out of some geographic centers.  There are reportedly 17,000 empty apartments in New York City and rental prices on average are down 16%.  This is likely a near-term problem for many property owners, but a few younger renters are starting to move back into the city to take advantage of cheaper rents. Still, the problem of shifting demographics and populations will cause some risk for many different types of businesses.

In summary, some call it the “K” recovery in which some industries are booming while others struggle to survive. It is also the glass half full glass half empty scenario in which there are diametrically opposed sides to the economic condition.  Generally, global economic conditions are improving, and the recovery continues at a steady pace. 

Unfortunately, there’s a black cloud looming over it.  The pandemic and getting through the risks of broad-based lockdowns through the winter months (through February of 2021) is a risk factor that can’t be overlooked.


Mr. Keith Prather, MBA – is a Managing Director of Armada Corporate Intelligence and one of the companies’ co-founders. During his 18 years as Armada’s primary strategist, he has worked with Fortune 500 companies on everything from merger and acquisition strategy to key account management, strategic planning and corporate marketing efforts. He has pioneered the concept of the Continuous Situation Analysis that companies use in a fast-paced, aggressive modern business environment.

Mr. Prather has also developed a number of proprietary analytical tools that have been used by companies of all sizes. These include tools designed to position a company in its competitive market, forecasting of competitive movements in an industry sector, identification of the impact of competitive scenarios, and strategic optioning for high-level corporate strategy. He has worked with teams to understand supply chain and strategic business activities in key account programs with companies in the Fortune 100.

Keith is the chief editor and one of the two primary writers for the Black Owl Report, an Executive Intelligence Brief. Executives around the world read the Black Owl Report for insight, foresight, and risk intelligence. Keith is also a keynote speaker for industry associations. Keith has an MBA with a focused thesis on Corporate Intelligence. He is a former Chief Financial Officer and has an extensive background in data analysis.

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