Posted by & filed under Business Credit Journal, Economics.

Mar 19, 2020

Written by: Keith Prather, Managing Director, Armada Corporate Intelligence

It is far too easy to say that these are “unprecedented times simply” and “we’ve never seen this before.” Depending on what economic or societal metrics one looks at, we can point to any number of major ‘catastrophic’ times in the country’s history and make an argument that this is the first time since those events (Great Recession, Great Depression, 1918 Spanish Flu, 1987 stock market sell-off, etc.) that we’ve seen this or that happen.

For instance, the Empire State Manufacturing report for March had the largest month-over-month decline in the history of the metric. There has been any number of record-breaking single-day point swings in the stock market. And we could go on and on.

Just remember that this too shall pass. The question is when?

Many analysts liken the current situation to the second inning in a nine-inning baseball game. Interestingly, the country is in week 2 of the CDC’s guideline on eliminating gatherings of 50 or more people. That might be a great predictive metric to follow; at least it becomes a quasi ‘guideline for a timeline’. We’ll see if this timeline gets extended, but for now, mid-May is our target.

In the meantime, the country could still see another economic ‘leg down’ as testing capacity ramps up this week and incidences of COVID-19 become more commonplace across the country. As infection rates seemingly skyrocket (a function of better testing access – not necessarily an increase in transmission of the virus from one person to another), a greater tightening of human mobility will occur (the so-called “social distancing” that we have heard much about).

Many cities with a higher rate of infection incidence could see more aggressive shelter-in-place orders for a short period of time (15 days in most cases). Other than trips out for essential food, medicine, and supplies, most commerce will dramatically slow in these zones.

How do you measure the economic impact in a situation where changes in the marketplace are being measured in hours, not weeks? Throw a dart at a dartboard and use that for a forecast? Not necessarily.

In economic terms, this is a dramatic time. Prior to January 21st of this year, most of us were watching favorable improvements across a variety of economic metrics. Some of the inventory imbalance issues had disappeared, industrial production was showing green shoots of improvement, consumption remained strong, and business investment had started to tick up for the first time in 6 months. Within the span of just a few short weeks, everything has changed.

We don’t understand yet how deep the global economic impact will be. Some firms are making wild guestimates of what global growth could be, when there’s no way to know. Most of us believe that the global economy may have slightly managed to be flat in Q1 (because the virus was still largely a regional event through early March), likely could contract in Q2 and possibly Q3 before recovering in Q4.

All of it depends on the containment of the virus – and the virus itself. It is amazing how all of us in the economic forecasting world have suddenly become closet virologists and bad ones at that! When it comes to the virus itself, two factors could dramatically expedite the end of the economic shutdown. First, if the virus shows sensitivity to warm weather as other similar viruses do, then we might be able to gain some confidence in the mid-May CDC deadline for resuming large gatherings (like sporting events, casinos, theaters, etc.). In fact, early signs that this could be occurring may embolden businesses and consumers, lift some of the strict guidelines on travel and begin to restart the economy.

Second, there are many positive reports of therapeutic breakthroughs that could create a buffer between the virus and people ending up in the hospital with a severe case. Human testing of this approach will start in less than three weeks and if it proves to be positive, would mitigate the significant health risk that the US and other Governments are trying to avoid.

Therefore, these items will directly affect the duration of drastic containment efforts that are choking off economic growth and change the economic recovery timeline. The CDC’s barring of gatherings of 50 people or more for 8-weeks was likely set based on optimism that ‘warm weather matters.’

Until then, there are a few winners in this economic environment and a bunch of companies that will struggle.

The underlying fear of a shelter-in-place order has led millions of Americans to stockpile food, medicine, and other basic consumer staples. Equipment used to create efficient work at home environments (laptop computers, routers, modems, cabling, and even home office furniture) are in high demand as is the commercial equipment infrastructure and software to support that effort and maintain some level of business continuity. Companies in these sectors can’t produce products quickly enough to meet demand.

Defense contractors and those that support medical operations (ambulatory and hospitals) will continue to see steady demand through this crisis.

And there are many more hidden sectors of the economy that will have more demand than their ability to produce goods and keep customers stocked. Even pockets of transportation bottlenecks are developing as truck drivers, engineers, and other supply chain workers are running into quarantine issues and effectively get pulled out of the mix for two weeks or more.
On the other side of the economy, and unfortunately, the larger slice of the economic pie, the broad shutdown of many services firms (entertainment, hospitality, eateries, brick-and-mortar discretionary retail, etc.) will have a dramatic impact on the overall economy. US consumer spending accounts for as much as 70% of the US economy, slowing the discretionary spending portion of it hurts.

There are immediate impacts on auto sales, but new home sales are still being watched for positive reasons. With the Federal Reserve dropping interest rates dramatically and freeing up the banking system to encourage them to make new loans, many consumers are considering doing more than just refinancing their homes. Unfortunately, restricting movement also reduces the number of open houses and makes it difficult to sell homes – even when interested buyers are shopping.

The global economy is reeling against numerous factors. In this short piece, we couldn’t address the plummet of oil prices and what that means for countries and states that rely on oil income. We also couldn’t take the time to address sovereign default risk as many countries have seen their treasury rates rise as they try to attract buyers for these seemingly high-risk investments. And lastly, we didn’t address the potential inflationary risk that will certainly come as this situation unwinds itself later in the year.
Stay optimistic, stay healthy, and watch out for one another article soon.

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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