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Economy in Brief

April Manufacturing PMIs- Early Responders
by Robert Brusca  May 1, 2020

The manufacturing PMI readings fell significantly everywhere globally. But in China where the gauge did lose standing it barely ticked below 50, indicating contraction. Japan showed the second most resilience with its manufacturing gauge falling by just 2.9 diffusion points month-to-month to stand at 41.9, a weak reading but the second highest reading in the table. For the most part, gauges fell between 10 and 16 diffusion points month-to-month, excepting Japan and China.

Everyone knows the chronology here, even if China is now disputing the facts as well as the chronology itself. The virus hit China in Wuhan and the authorities were slow to recognize and admit the danger so it escaped containment and spread globally. China used its extraordinary surveillance capabilities to enforce its lockdowns. And now seems to have escaped with less damage than is being reported in other countries, in Europe, in the Americas and even in Asia. China's 'big hit' has morphed to near normalcy faster than a speeding bullet and stands in marked contrast to the impact on and plans for Western economies. Just today the ECB announced that EMU-area GDP may not be back to end-2019 levels even by 2022. That's a very long and winding road.

In the U.S. and Europe, the epidemiologists talk about how life cannot get back to a pre-virus normal until about 60% of the population gets the virus and has antibodies (herd immunity). And even at that, the science of the antibodies and what they are and what sort of immunity they might confer and for how long is still an issue that has not been resolved. Science does not know. So then who does?

The PMIs show that manufacturing is hard hit and is wholly consistent with there being a recession developing. But PMIs are surveys of the breath of an effect, not of the depth of its impact. The two metrics tend to go hand in hand, but they are not the same thing. So far, China's instant recovery looks to be nothing short of miraculous and it has a number of onlookers suspicious of what China's real corona data might look like. China's relationship to WHO is suspect. For its part, China is not letting any inquiries into the country and it continues to assert that it has not misreported anything as it also asserts that there is no evidence that this virus began in China!

We do live in an age where the 'facts' seem to be more idiosyncratic that absolute. This reminds me a lot of one my favorite works of fiction, 'Alice in Wonderland' in which the following exchange takes place:

"When I use a word," Humpty Dumpty said, in rather a scornful tone, "it means just what I choose it to mean—neither more nor less." "The question is," said Alice, "whether you can make words mean so many different things." "The question is," said Humpty Dumpty, "which is to be master—that's all."

All this back and forth means that no one is quite sure that China can be a model or benchmark for anything happening in any other country. For the most part, epidemiologists see a very long slog and a risk of a second wave of infections because the first wave seems to have been shallow and that was by design. Most countries pushed the shelter-in-place-plan to 'flatten the curves' a euphemism for reducing the peak stress on hospitals and the medical professionals who were nonetheless stressed.

Flattening the curve also means that the infection spread was flattened out and that that curve was extended deeper into the future. The strategy is billed by some as saving lives, but actually all it has done is to spread out the period over which people will get infected. While it takes the hump in the curve lower so that current facilities are less stressed at the moment, it ensures that stress will be spread out in the future and by slowing the knock-on infections, it makes economies vulnerable to a second wave.

Sheltering everyone in place has no real positive effect on outcomes except reducing peak loads. And while everyone is happy for now that the peaks were not higher and the death tolls were not greater because of this 'pushing out' there will be more of both in the future. And because societal vulnerability continues, given the failure of herd immunity to develop more rapidly, the return to economic normalcy will be slower. And that is costly in a number of ways.

Some businesses may find that they are simply not ongoing economically solvent businesses in the new environment. There is talk of letting restaurants open at 75% of capacity or of flying planes with the 'middle seat empty.' Business leaders from these various sectors have basically argued that those economies do not work for them. In addition, there are questions about events with large crowds such as movie theaters, legitimate theaters, sporting events and large auditorium cultural performance events as well as trade shows… when will they be safe? Will sport initiate with no spectators?

When all points of view are considered, there are no unimpeachable solutions. But the shelter-in-place plan first followed does not seem like one that can be re-created: it is too economically devastating and too expensive.

In the U.S., I would say that open discourse has been discouraged. Two emergency room doctors from Bakersfield California issued a YouTube presentation that has been pulled off line; they have been rebuked by the AMA (American Medical Association) for presenting evidence/research that has not been peer-reviewed and that is against established orthodoxy. Who says we do not have 'thought police' in America?

A new suggestion is that countries should shelter-in-place those who are at the highest risk with preconditions that have been associated with high death rates. That approach would shelter a smaller proportion of the population and be less disruptive. It would alert them that they are at extra-risk and encourage them to be more careful. Meanwhile, the rest of a country could participate in the economy and experiment with ever less stringent social distancing in an attempt to get back to normal.

It is far from clear what will be done. What we can see is that the reaction to the virus has cased economic weakness to spread and growth to grind to an unprecedented low. What is unprecedented so far is not the drop in GDP (at least not yet…) but the speed and synchronicity of the drop in global activity. That is what makes this downturn engineered, synthetic. No natural economic process would do this. Perhaps the only event in history that smacked the global ecosystem equally creating instant problems everywhere was the meteor that struck the earth and was responsible for the end of the age of dinosaurs!

There is not much an economist can say to map out the future. One thing I do say is that we can't keep doing 'this.' The medical profession needs to come up with a Plan 'B' or to develop and manufacture rapidly a vaccine. But, of course, there really is no science of the process of discovery other than to try and throw lots of resources at a problem. Sometimes that still takes a lot of time to work and on the other hand maybe a real workable vaccine will never be developed. That, too, is science…

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