Posted by & filed under Business Credit Journal, COVID-19, Economics.

May 21, 2020

As we speak with hundreds of business executives, there are two primary thoughts that seem to be on the top of their minds. They want to know what the economic recovery curve looks like for the next year and what the prospects of a worse, Wave 2 of the virus this fall are. Of course, these go hand in hand.

Almost laughingly, there are so many different types of recovery curves being mentioned. We have the V, delayed V, U, elongated U, hockey stick, W, M, Swoosh, and just this week, the Z (although that was largely a joke). When we compile economist’s viewpoints from around the world coupled with virologist predictions, we can see a predominant leading scenario jumping to the forefront.

It appears as though the US is in for a U shaped recovery with a few caveats. First, there is fairly clear evidence that warmer summer months will provide the mechanism for a more complete reopening of the US economy (as well as most global economies) prior to the fall. Even without strict adherence to prevention steps, warm temperatures are likely to help reduce the spread of the virus over the summer.

Reopening doesn’t necessarily fix everything.

In early examples of communities around the world that have reopened, there is a fairly common trend. Consumers remain mixed on how they approach loose restrictions on movement and their newfound freedom to engage in all types of activities. There is still a tremendous amount of caution being shown even after some countries have completely lifted stay-at-home orders. Work attendance appears to have returned to “normal” and are nearly at pre-pandemic levels, but large percentages of populations just aren’t going back out and engaging in discretionary activities. In other words, they are working but not playing at levels that many had expected.

Even if the US completely reopened with very few restrictions, we wouldn’t likely get the sharp V-shaped recovery and return to 2019 levels of output that most thought would happen; because there is still a tremendous amount of fear out there. Too many consumers now know somebody that had a bad case of the virus, and it has become a serious matter for people of all ages. They could remain cautious.

And yet, a percentage of the population believes it is not severe and they will be among those trailblazers that venture back out, travel, play, and take advantage of uncongested environments.

Most forecasts show the US economy contracting at 6% in 2020. The second quarter will experience a sharp contraction of nearly 38% on an annualized basis and then begin a sharper recovery in Q3 and continue that momentum into Q4.

In simple terms, the US economy will clip along at rates that feel more like 2017 until we hit the second half of 2021, at which point we begin to feel volumes seemingly return to 2019 levels. And yet, most forecasts show the global economy taking until nearly 2022 before we get back in-stride and feel a full recovery from the global pandemic.

Here are a few more forecast highlights for 2020 and 2021:

  • Unemployment rate is expected to be at 11.5% by the end of the year and only reduces to 9.3% by the end of 2021. Full employment could remain elusive for the next two years.
  • Nonresidential fixed investment (machinery, fixtures, structures, etc.) will contract at a 12.8% rate in 2020 and then expand by 3.7% in 2021.
  • Residential fixed investment will contract at a rate of 7.4% this year followed by expansion of 5.4% in 2021.
  • Exports are expected to recover more sharply than imports. Both will contract by 11.1% and 13.5% respectively in 2020 followed by recovery of 8.4% and 5.7% in 2021.
  • Interest rates will remain flat and near historic lows through 2021 according to the Congressional Budget Office. They expect the Federal Funds Rate to fall to .4% in 2020 and dip further to .1% in 2021. The 10-Year Treasury will fall to .9% for the full year in 2020 and remain steady at 1% in 2021.

Summarizing, conditions will feel strong based on our recent experience (nearly the entire economy being shut down for 12 weeks). Psychologically, it might feel like the economy is humming along stronger than ever.

However, when we dive into the data, it will stun many of us to know that full recovery (a return to pre-pandemic levels) might not be felt for another 12-16 months. Still, the talk of an “economic crisis” will likely stop within the next 8 weeks as states reopen and moderate economic activity can resume. It’s the fallout from the virus of business closures, change in investment rates, unwinding heavier debt burdens, and trying to recover from a record number of layoffs that will create a longer-term drag on recovery.

All of this is fragile talk. There is an opportunity for the economy to outpace these growth estimates and create what some believe to be a late summer V. That’s entirely possible. Parts of the economy will be active for the first time in more than a year. Many segments of manufacturing will be playing catch-up for many quarters, trying to rebuild depleted inventories with finished goods well into 2021. That scramble to get inventories rebuilt will be good for everything from commodity demand to services, hiring, transportation, and other key components of the supply chain.

And some of the new trends created as a result of the pandemic will yield some economic growth benefits. Consumers are likely to drive more. Early experiences with used and new car sales as the economy emerge suggest that we could see the automotive supply chain surge, and the tens of thousands of tier 1, 2, and 3 suppliers that feed it will be working diligently to keep up.

Housing is also showing signs of picking up and historically low-interest rates and record volumes of refinancing will create more discretionary spending capacity for many households. Consumerism should improve as soon as the unemployment rate starts to drop upon states reopening.

Can this optimism continue? It really depends on one factor: the virus.

The big question on everyone’s minds is: what happens this fall and will there be a repeat of the 1918 viral cycle with a Wave 2 that is worse than Wave 1? There is a race between the production of an effective vaccine and distribution of that vaccine to a majority of the population vs. the re-emergence of the virus this fall in cooler temperatures.

Many economic forecasts are predicated on children returning to schools, universities reopening, and an increase in travel that boosts leisure and entertainment activity, these are key elements of a recovery. A fearful consumer is a negative headwind for that outlook.

But, with the volume of vaccine trials underway around the world and some of the positive reports that are emerging from those trials, sentiment and insights from health authorities, and research reviews, it appears as though there will be a vaccine at some point. And many believe that the vaccine will be ahead of schedule with the possibility of millions of doses being distributed somewhat early in the fall (even if still on a trial and testing basis) – which would help reduce the risk of a severe Wave 2 outbreak. And remember, it’s a global pandemic. Vaccinations in other countries can reduce the incidence of viral outbreak risk in the US and many countries have loose restrictions on testing and use of drugs. Some countries will release vaccines into their populations perhaps much quicker than we see in a few of the most developed nations.

Knowing this, most economic forecasts at this stage assume that a vaccine or some type of preventative measure should be able to help the country (and the world for that matter) avoid a severe Wave 2 outbreak. That will allow us to focus more on a sharper recovery rate for the economy in the second half of the year and further reduction of financial risk overall.

This situation started with a virus, and it will conclude with an end to that virus (or at least the risk from it goes away).

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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