As states and local municipalities across our nation continue to relax their coronavirus restrictions and political pundits vigorously advocate for the need to restart the economy, the question that rational minds must ask is: Will reopening the economy actually work? Or, will the benefits of such actions fall short of offsetting the health risks? Because we operate in a demand economy, a fast economic recovery boils down to whether desire equals demand.
There is no doubt that there is a sincere desire on the part of most Americans to restart the economy and get back to life as normal. We all want to see the economy recover. Furthermore, very few enjoy or desire to continue living under draconian mitigation measures.
However, that desire is immaterial to answering the fundamental economic question of whether we can get back to normal any time soon. Answering that question depends almost exclusively on the level of demand that can be generated.
We can lift restrictions; however, only genuine demand can put folks back to work and resurrect our economy. We are of the opinion that the Covid-19 crisis has triggered a paradigm shift—one that has ushered in permanent, structural changes to our economic landscape. This will make it nearly impossible to return to things as they were and will require all of us to both embrace change and forge a new path forward.
Let’s briefly set aside the health side of the equation and focus on the economic ramifications. Can we quickly reboot the economy? Can we really return to a pre-Covid level of normalcy? Is it really just as simple as relaxing mitigation measures?
Economic Recovery Reality Check #1: Understanding Our Demand Economy
As we have discussed at length on many of our live streams (e.g., see below), the American economy is a chimera—a combination of a house of cards and a patient on Fed life support.
It is dependent on ever-increasing debt levels—especially consumer debt. For the Ponzi scheme to continue, consumers must continue to borrow more and more money—living further and further beyond their means.
As the above chart demonstrates, it is an unsustainable system. Our gross domestic product (GDP) historically averages between 2 and 4 percent, while our degree of leverage continues to increase exponentially.
That economic system will collapse and reset if consumer spending—specifically debt-financed spending—does not continue to grow.
Thus, if consumer demand reduces even a small bit for a prolonged period, we are headed for a contraction (if not all out collapse) that will make the great depression look like a child’s game!
Will our attempts to rapidly restart the economy work? Only if we can fully recapture pre-Covid levels of consumer demand.
Economic Recovery Reality Check #2: Consumer Sentiment in the Wake of Coronavirus
Consumer sentiment lies at the core of our demand system. Make no mistake: as the consumer goes, so will go our economy.
As we saw in the above section, our system is entirely dependent on the consumer spending money—preferably far more money than they actually have. Normalcy—if you want to call it that—requires that consumers behave the same way (viz., living beyond their means and returning to their pre-Covid spending behaviors).
Does the data suggest this will happen any time soon? The answer—at least for now—is a resounding no.
Recent surveys performed by Ipsos find that 86% of Americans are concerned about the coronavirus. Furthermore 64% of individuals prefer a gradual opening of the economy and believe there is a large or moderate risk to returning to their pre-Covid lifestyle.
This is further supported by data indicating that only 44% are likely to return to eating at dine-in restaurants, 21% to bars, and roughly 30% to gyms, hotels, movie theaters and air travel.
Additionally, their ongoing surveys find that most Americans are capable of maintaining their personal social-distancing measures and posture for a considerable amount of time.
All of this emphasizes the growing concern that consumer demand will be greatly reduced for a considerable length of time—greatly reducing the possibility of a fast recovery back to “normal.”
PYMNTS.com, which focuses on trends and factors impacting the payment and commerce industries, finds that an alarming 70% of consumers aren’t interested in leaving their homes any more than they currently are under their coronavirus practices—and 25% aren’t interested in venturing out at all.
Furthermore, their research indicated that:
“Most consumers are unlikely to return to their pre-pandemic routines anytime soon, in no small part because they have grown used to living life on lockdown, “ adding, “Consumers have gotten so used to managing life from home, in fact, that about half intend to continue working, shopping and ordering food from the web more often than they did before the outbreak.”
Finally, Barrons adds the fact that the savings rate among Americans was already rising heading into the pandemic, and economic data so far show consumers have pulled back meaningfully on spending in all but essential categories.
All of this supports the conclusion that, if our economic recovery depends on recapturing pre-Covid consumer demand levels, we are all going to be seriously disappointed!
Economic Reality Check #3: Deflation & Negative Feedback Loop
Finally, we need to examine how demand is impacting the broader economy.
We find that US prices fell rapidly in April due to a huge drop in demand, with the core consumer price index, which excludes food and energy, experiencing its largest drop since the government began tracking the data in 1957.
It’s critical to note that this excludes food & energy. That’s important because food prices jumped by the largest amount in 50 years—driven by supply chain disruptions. This means the average consumer is facing an increasing drain on discretionary spending due to an increasing grocery bill. That trend is expected to continue through the end of the year.
This will continue to place downward pressure on demand for other items, leading growing concerns among economists as to whether a harmful deflationary spiral could set in.
Julia Horowitz (CNN Business) correctly notes, “When prices fall because people aren’t buying things, companies sometimes can’t charge enough to make the product they’re trying to sell. That means they’ll stop making those products and lay off workers. That can start a vicious circle in which demand continues to fall as more people lose their jobs.”
All the economic data indicates the U.S. has entered a period of disinflation, potentially sparking a vicious downward spiral where businesses make less money and consumers save more and spend less.
David Rosenberg, chief economist at Rosenberg Research notes, “Considering that U.S. unemployment is likely to be above 10% by year’s end and given uncertainty around the timing of a Covid-19 vaccine, depression on the demand side will be with us for the next few years.”
This has led billionaire Barry Diller, the chairman of Expedia Group, EXPE, to scoff at suggestions the economy would recover this summer. He asserts, “Anyone who thinks this economy is going to bounce…it can’t. The damage that is being done is catastrophic.”
Steven Davis, economist with the University of Chicago Booth School, has surveyed firms to get their feel for how many of their “temporary” layoffs they anticipate actually recalling, as well as looking at historical numbers regarding recalls of what were thought to be temporary layoffs. He asserts that 42% of the job losses we have witnessed during the coronavirus crisis will become permanent.
This indicates that demand shifts will have a lasting impact on our economic landscape.
For example, business will utilize less travel. This will be cost driven (i.e., in response to decreasing margins) and a result of integrating far more web conferencing during the crisis—a trend that will continue to grow.
Furthermore, as a whole, air travel is down 90%. While we could expect that to rebound, we don’t know what the ultimate number will be. If we see 50% by the end of the year, that would be outstanding. Unfortunately, that would still be a massive (and long term) reduction in travel—impacting not only the airlines but the entire travel industry (a large component of our GDP).
Additionally, the trend from dine-in to takeout and delivery services will likely continue, as well as other structural demand changes, such as shifts in healthcare towards telemedicine.
Finally, efficiency will drive reductions in the labor force. Over the past decade of the bull cycle, most companies naturally grew their employee base (becoming bloated). As margins contract, we are likely to see a natural cycle of downsizing and the “temporary” layoffs and furloughs become low-hanging fruit.
The longer it takes to “recover,” the more permanent job losses will become as consumers will adjust their lifestyles and businesses will respond in kind.
Our intention is not to be a proverbial “Debbie Downer.” We all would love to see a quick and robust economic recovery. However, it is worth reminding ourselves that if wishes were horses, we’d all take a ride.
The growing body of economic evidence paints a very concerning picture—there are massive storm clouds building on the horizon. If you listen carefully, you can hear the Robot from Lost in Space warning, “Danger, Will Robinson!”
While politicians, financial institutions, and the media will—by and large—continue to highlight the upside potential and exclusively trumpet bright spots and pie-in-the-sky rumors (e.g., we’ll have a vaccine by the end of the year), it is important for us to brace for the very real possibility of a very slow recovery—one characterized by high unemployment and deflation.
Our economy broke during the 2007-2009 financial crisis. While the Fed has done an amazing job at plugging the holes and giving the appearance of health, this was only a temporary cure (though one could characterize it more as a sugar-pill placebo than a viable short-run solution).
The implosion that began in 2007 will continue to build. The only thing that remains to be seen is how quickly we will reach the unavoidable destination and final outcome. We have leveraged our future via an unsustainable thirst for debt—borrowing from tomorrow to live beyond our means today. The reaper will come to claim his pound of flesh. We can delay the natural consequences, but we cannot avoid them. And delays only serve to increase the pain and final cost we will all face.
The point is that we must avoid the growing euphoria that is driven by denial and false belief that we will quickly return to “normal.” It is a well-established sentiment cycle and we are in a classic bull trap. Yet, the masses will fall for it as they always do—never learning from history.
We may ultimately prevail… but there will be dark days ahead. Our advice is simple: Continue to prepare, live conservatively, and build your reserves—meaning food, supplies, and money.
This is not a time to squander resources or let off the prepping gas pedal. It is a lull in the storm—a temporary pause-ex in the larger battle. Use it wisely. Position yourself well for the coming struggles.