The stimulus has ended; what does that mean for the economy?

The stimulus has ended; what does that mean for the economy?

The stimulus from the CARES Act has ended, and so far, Congress cannot find a way to replace it. Democrats in the House have passed a bill, but Senate Republicans, lacking a unified approach, have waited until the end of the summer to propose a plan. Currently, Secretary Steven Mnuchin is negotiating with House Speaker Nancy Pelosi to find a compromise. So, what?

Well, without the stimulus, unemployment is expected to rise. Last week’s Bureau of Labor’s jobs report showed that the job gains from April slowed dramatically, adding just 661,000 jobs. The unemployment rate now stands at 7.9%, down from 14.7% in April. Currently, approximately 25 million people rely on jobless benefits to get by, and the outlook is worse. Last week, the Walt Disney Co. said it would lay off 28,000 people, and American Airlines Group Inc. and United Airlines Holdings Inc. announced 32,000 job cuts. These are just the massive layoffs; however, lots of smaller companies are laying off workers.

So far, most of the damage has been to low-income workers, but the pain is moving up the wage scale. A recent Wall Street Journal article pointed to a couple in New York who earned about $175,000, enough to cover the mortgage, two car leases, student loans, credit cards, and assorted costs of raising two daughters in the New York City suburbs. However, since COVID hit shutting down the courts, one of them, a lawyer, is unable to work, and the family is running low on savings. They can’t keep up with $9,000 in monthly debt payments, including mortgage installments.

In the U.S., consumer spending accounts for about two-thirds of gross domestic product, and as more people are unemployed, many will deplete their saving and stop spending. A fall in consumer spending affects everyone as we are all linked in this economy. If consumer spending falls, B2C companies suffer and lay off more people and stop buying from B2B companies, so the cycle continues. No one is immune.

While many have pointed to fall credit card debt levels during COVID, more worrying is the number of people behind on their mortgages, rent, and utilities. As we head into winter, with many facing evictions, no heat or water, the prospects are even worse. As some might recall from their economics class, the marginal propensity to consume is greater for those in lower-income brackets. Therefore, to boost the economy, middle- and lower-income Americans need to be able to consume. While the wealthy will spend some of the benefits they receive, they will spend far less, so the positive impact on the economy is limited.

Many fiscal conservatives have said that they are now concerned about the deficit and deterring people from working. It is nice to see they have finally found some courage; however, it seems more that they object to anyone they believe doesn’t deserve a benefit getting one. There was a deafening silence from this crowd with the passage of The Tax Cuts and Jobs Act (TCJA) in December 2017, which provided benefits to companies and the wealthy. Many in the Administration and other conservatives claimed that the TCJA would pay for itself. Unfortunately, not! The deficit increased since its passing, and Bloomberg’s analysis showed that most corporate tax cuts went for buy back shares. In my opinion, this spending on buyback is the leading cause of the stock market’s continued rise.

While some will claim that increases income for everyone, only about 10% of the population owns shares outside of a retirement plan. So, the impact of the rising market does little for overall consumption and the economy.

During the Great Recession, Congress failed to provide enough stimulus for a full recovery. It is in danger of doing the same again, and this time I fear the consequences will be far worse. I would advise all CEOs to what cash levels and liquidity, but at the same time, we need people spending to grow out of this hole.

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Sunk Costs Are Just That, Sunk!

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The Underpaid and Under-Employed Need Protections Too

The Underpaid and Under-Employed Need Protections Too

COVID caused Congress to respond a few months ago, but now as the CARES Act and other protections expire, Congressional action is missing. What form of stimulus emerges, who knows. For the moment, it looks like the additional $600 in unemployment is out, to the cheers of many, who see it as a work disincentive.

As usual, those who are pushing for its demise are loathed to let facts get in the way of a convenient theory. A recent survey of economists, who usually disagree on everything, found 0% disagreed with the idea that “employment growth is currently constrained more by firms’ lack of interest in hiring than people’s willingness to work at prevailing wages.”

There are several arguments why.

  1. Benefits. For many Americans, their jobs provide health care and retirement benefits, so it makes no sense to reject a position with potential lifetime benefits to receive a few more unemployment checks. However, many of the workers benefiting from the additional payments do not receive such benefits, so I am convinced how much weight this argument carries.
  2. No unemployment if workers don’t return. Some states require employers to report employees who decide not to return to work, and if the refusal is for anything other than health concerns, the benefits stop. However, given that most states’ unemployment offices are overwhelmed, how effective this is at present is questionable.
  3. Job Vacancies. If companies could not fill job openings, the number of vacancies would be high. However, in April, the U.S. recorded the lowest level of job vacancies since 2014. Vacancies have risen slightly since then. Also, Homebase data shows that applicants per job doubled in early April, suggesting that laid-off workers were seeking new employment. Here is evidence that the additional payment is not stopping people from looking for work.
  4. Rising wages. If companies could not fill job openings, the laws of supply and demand would expect wages to rise to such point that they could fill them. According to Goldman Sachs, average hourly earnings in Q2 2020 increased by about 7%, which initially would give weight to this idea. However, on inspection, this is primarily because low-paid workers have lost jobs in disproportionate numbers, dragging average wages upwards. Therefore either the market is failing, or there are just no jobs.

Thus it would appear that the additional benefit is not the detriment to work that many assume. However, there is no doubt that the removal of the additional support will drive more people back to work as they struggle to survive financially. This result may not be the panacea that many hope.

As I have said many times, this is a public health crisis, and until we address it, the economy will not recover. Well, looking at the data, it appears that the Gig economy and low paid workers may be compounding the health care problem. According to medical historian Frank Snowden in his new book, Epidemics, and Society, “Epidemic diseases are not random events that afflict societies capriciously and without warning. On the contrary, every society produces its specific vulnerabilities.” Thus, he wrote, a disease provides insight into a “society’s structure, its standard of living, and its political priorities.”

On inspection COVID’s destruction show one common factor, clusters of infection have been associated with those whose work is low-paid, insecure, and contingent. Researchers at the London School of Hygiene and Tropical Medicine, have found that nearly 80% of infections are traceable to:

  • food processing plants,
  • ships,
  • aged care homes,
  • grocery stores,
  • factories,
  • bars, restaurants,
  • shops and
  • worker dormitories.

All of which are associated with low pay and poor job security. While some office workers have contracted the disease, those infections are primarily the result of a business conference. In the U.K., the increasing number of outbreaks in care homes results from temporary staff, on zero-hours contracts, who get transferred between facilities.

This trend is not in the U.K. In the U.S., many of the most significant outbreaks were in with meatpacking plants, which are known for poor working conditions. Furthermore, the mortality rate is highest for African Americans and then Hispanics, people who have the majority of working-class service sector jobs associated with infection clusters. Besides, because these jobs often are considered essential workers, e.g., meeting packing plant employees, workers must be at the job site despite outbreaks in their communities. Furthermore, most such positions do not provide sick leave resulting in many working when they are sick.

Many of those who work in such positions, also meet other criteria the CDC has identified as a source of infections. They live in:

  • Densely populated areas and cannot practice social distancing.
  • Homes with a lack of complete plumbing making handwashing and disinfection harder.
  • Neighborhoods that are farther from grocery stores and medical facilities, making it harder to stay home and to receive care if sick.
  • Areas where they have to rely on public transportation, making it hard to practice social distancing.
  • Multigenerational households and multi-family households where older family members cannot be protected and the sick isolated.

While some front line health care workers have caught COVID, these infections are at a lower rate than medics less directly exposed. Thus straightforward precautions appear to be sufficient to reduce the risk of disease significantly.

So rather than pushing workers back into harm’s way and turning them into new sources of infections, we should seek to provide them the same protection that white-collar employees, who have been working from home for months, enjoy. With over 4 million infections and 140,000 deaths, helping those workers would help us all get the infections under control and the economy back on track. However, we show little regard for the underpaid and under-employed, and it is now killing us.

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M&A Deal Volume is Falling

M&A Deal Volume is Falling

COVID, as I predicted many months ago, is taking a toll on M&A. In the first half of 2020, the value of mergers and acquisitions fell 50% from the year-earlier period to the lowest level since the depths of the euro-zone debt crisis.

Source: Bloomberg
Data shows the value of pending and completed M&A applied to targets in each region. 2020 figures are through June 28.

The Americas have realized the sharpest fall with deals value down 67% in the first half. Every major industry has been hurt. However, the financial sector fared better than most because of Aon Plc’s $30 billion offer for Willis Towers Watson Plc and Morgan Stanley’s proposed $13 billion acquisition of E*Trade Financial Corp.

EMEA was down 31% and Asia Pacific was down 7%.

As has been said before, the COVID situation is a public health crisis. Until we deal with the public health issue, everything else will suffer. The M&A numbers reflect this with Asia Pacific currently leading with the best response. EMEA suffered initially but is recovering, while the Americas, with the U.S. and Brazil failing in their response, has fallen the most.

U.S M&A activity in Q2 2020 continued to decline as COVID remained an unrelenting problem in North America, especially in the US. North American M&A activity during this period was $336.8 billion across 2,025 transactions. Currently, the US recovery is more of a “W” than a “V”, which threatens to further drag down M&A activity.

Nevertheless, certain sectors, namely tech, and healthcare continue to have a stable deal volume, as many companies in these sectors have benefited from COVID and are opportunistically seeking M&A transactions. However, in areas such as oil & gas, many companies are completing deals just to survive. 

Due to COVID, buyers and sellers are struggling with a lack of accurate earnings and cash flow forecasts, causing parties to avoid deals. Further, cash is key, and survival is not running out of cash. Thus, unless companies have large cash piles or can use their paper, deals will be further limited.

While both the U.S. and Canada confirmed their economies entered recessions during Q1, Canada has since emerged from its shortest recession on record due to its effective COVID response. The prospects for the U.S. remain bleaker with rising COVID cases negatively impacting the country’s economic outlook. Furthermore, many of the states that opened up too early, e.g., Florida, Texas, Georgia, have seen dramatic increases in cases and are shut back down.

Currently, the International Monetary Fund is forecasting an 8% decline in GDP for the U.S. in 2020. With no end in sight for the pandemic in the U.S., which has the most cases and deaths from the virus globally, that may be optimistic.

The outlook for M&A thus remains dim.

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The Public Health Crisis Needs to be Solved Before the Economic Crisis

The accelerating increase in new Covid-19 cases is slowing the pace of the U.S. economy’s recovery from the pandemic. According to Bloomberg economist, Eliza Winger, “Most high-frequency indicators have shown signs of moderation. Consumers’ income and spending benefited from fiscal support and reopening efforts, both under renewed strains. The uncertainty was likely behind the latest deterioration in consumer sentiment, a key to the economic outlook.”

So, where do we stand?

  • Recent data shows that credit card spending has stalled.
  • OpenTable is showing a slowdown in restaurant reservations.
  • Initial jobless claims declined by the most in a month to 1.31 million in the week ended July 4, but they’re still double the highest level registered during the last recession. Furthermore, as states walk back their openings, these numbers are expected to increase.
  • A surge of layoffs are coming as company announce large layoffs to deal with COVID, e.g. American Airlines – 25,000; United Airlines – 36,000; Walgreens – 4,000;  Macy’s – 3,900; AT&T – 3,500; Hilton Hotels – 2,200; Chevron – 5,000; Boeing – 7,000; Uber – 3,700; Virgin Atlantic – 3,100; Wells Fargo – haven’t said but I am sure will exceed 20,000. This short list accounts for over 110,000, so the numbers will be large.
  • While many mortgage holders are refinancing to take advantage of the low rates, one in 10 households with a mortgage failed to make their last payment, and 16% of respondents in a U.S. Census survey said they fear they can’t cover the next one.
  • Federal Reserve Bank of Dallas President Robert Kaplan said that rising hospitalizations and death rates are having a “chilling effect on economic growth.”
  • With the eviction moratorium ending, the eviction of 20MM renters this month is possible. However, this has several ramifications, where will these people live and who will replace them as so many people would rent can’t make payments. Thus landlords will experience pain.
  • The $600 additional unemployment payments are ending.
  • The PPP program is about to end and those that took PPP funds have mostly spent them.
  • M&A volume is falling.

Thus, my take is that this is far from over. While I would argue that we are not in a second wave of the virus as we never exited the first, we are in an inverse square root recovery, but we could quickly move into a “W” recovery.

The key will be what will Congress do. The parties are wide apart at the moment, and to add to the problems, the Administration is pushing for a payroll tax cut (dubious effect), refusal to fund state COVID testing and tracking, and blocking billions of dollars that would go toward bolstering the Centers for Disease Control and Prevention, the Pentagon and the State Department to combat the pandemic. Somehow they haven’t yet accepted that this is a public health crisis and until that is solved, the economic crisis cannot be dealt with.

So, keep cash on hand and watch receivables and all leading indicators. It is going to be a rough second half, folks!

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COVID May Be Here for a While

COVID May Be Here for a While

I recently saw a comment from an old business colleague of mine on Facebook which effectively said that until we get back to selling face to face, the economy will not recover.

While that might be true, the failure to deal with COVID in the U.S. is leading to accelerating cases and deaths from COVID. While some steps to slow the virus are being instituted by various governments, the increasing caseload is bringing the disease closer to more and more people. As a result, more and more people are worried and not interacting with others more than absolutely necessary. This behavior is slowing down the potential recovery.

So the question is “How long will we live with this?

I said for some time that we will be like this until this time next year. However, a recent article quoted Ezekiel (Zeke) Emanuel, vice provost for global initiatives and chair of the Department of Medical Ethics and Health Policy at the University of Pennsylvania, saying that a full return to normal isn’t likely to happen until November 2021. While Emanuel says he is an optimistic person, he believes that the November date is how long it will take for an effective vaccine distributed widely enough to stop the spread of COVID-19.

Further, he expects the toll in the U.S. to reach 250,000 by the end of 2020. However, he also believes that non-pharmacological interventions i.e., social distancing, wearing masks, avoiding crowds and enclosed spaces, and staying away from people who are coughing, sneezing, singing, or yelling are working. Besides, Emanuel thinks it is almost inevitable the U.S. is going to have a second wave that pops up in October or November of this year when we’re all going inside. 

His advice is: 

Companies

Until we reach a point where there is a vaccine or herd immunity, corporate employees should continue to work from home as much as possible because enclosed spaces and prolonged exposure to other people increase the likelihood of transmission. For frontline workers and others who cannot work remotely, including employees at retail stores, a detailed protocol must be implemented to protect both workers and customers – such as mandatory masks, plexiglass dividers, and regular sanitizing of hands and surfaces. 

Stores

Stores have much to consider, e.g., can they put some of their merchandise outside to limit the number of shoppers inside? Can they open windows or doors to help air circulation?

Emanuel believes the use of face masks will be necessary, but he questioned the effectiveness of conducting temperature checks at the door. Instead, use symptom screening questions daily for employees, i.e., whether they are experiencing shortness of breath. Testing for COVID-19 more than once a week for asymptomatic employees is wasteful and creates a false sense of security. Instead, emphasizing good, routine personal hygiene – especially washing hands — and store cleaning is reassuring for both employees and customers. While more research is needed to determine whether clothing, shipping boxes, or store surfaces could transmit the virus, Emanuel said these are likely not the main modes of transmission.

Concerning a store closing its doors, the answer is dependant on so many factors; it is too abstract to say.

Public Transportation

No. Use your car, walk, or bike. Emanuel is an avid bike rider who rides his bike in the snow.

Air travel

Avoid it. Airplanes do have sound air filtration systems, but they cannot protect against sneezes or other exhalations from fellow passengers two rows away from you or in the aisle.

So what does this mean for most of us?

Whatever processes we have taken to manage in the current environment is going to be the way we operate for another 16 months. Thus we have look at these processes and rather hope for the “old” normal return, look at them through the lens of continuous improvement.

  • How do we become more effective in operating in this environment?
  • What can we expect from our sales team and can we meet any increase in demand?
  • If we were designing a system from scratch and with the luxury of time, would we do it this way?
  • How do we ensure that our employees remain healthy?
  • How do we ensure that our employees’ mental health is ok?
  • How are our customers and suppliers are doing? Should we be concerned?

It is key to take time during this period to think Upstream and work on these issues with your team. As I have said before, Darwin said that those who survive are best at adapting to their environments. If we don’t adapt we die. 

During a pandemic that applies to not only our business but ourselves.

Finally, Emanuel said that he relies on Trust for America’s Health, a nonpartisan policy, research, and advocacy organization for comprehensive information on the pandemic. I am heading there next.

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