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The US economy’s hall of mirrors

ICIS, Uncategorised
By Jeremy Pafford on 04-Sep-2020

The US economic recovery from pandemic-induced shutdowns is about as disjointed an endeavour as I can recall.

Recent data releases and surveys paint a quite jumbled picture. Take this week’s Beige Book release from the Federal Reserve, which distils inputs from regional Reserve bank surveys into the following summation:

  • Employment – Up overall since falling into the abyss in March and April, but still mired with new announcements of layoffs and furloughs, including United Airlines’ announcement to furlough 16,000 workers and automaker Ford planning cuts to 1,400 salaried positions in North America. Those hiring are facing difficulties in finding labour on workers’ childcare concerns, with day-care availability and uncertainty surrounding the impending school year cited as key issues.
  • Wages – Basically flat, although reports of growth have come. Some companies have looked at discontinuing hazard pay for jobs with high-exposure potential to many people.
  • Prices – for goods are increasing faster than their selling prices, as demand at the retail level is muted or growing at a slower rate than raw material costs.
  • Logistics – Increased demand has led to increased prices for transportation of goods.
  • Manufacturing – Growing overall but still below levels seen at the beginning of the year.
  • Agriculture – Prices for many crops are below pre-pandemic levels, and while demand has been moderate, businesses say that they have not had the ability to pass on their increased costs to implement pandemic-related guidelines at processing centres and elsewhere in the supply chain.
  • Energy – Exploration and production activity is subdued, and refining margins are struggling.
  • Real estate – Running hot in parts of the country, with housing prices rising alongside demand that is being fueled by historically low mortgage rates.

So demand for homes is higher, pushing their prices higher, but wages used to pay for those higher home prices are stagnant. It costs more to do business, but demand for your business has not recovered to the point of where you can cover those increased costs. Meanwhile, the US stock markets have been pushing towards new highs, led in large part by technology stocks. And the jobs market is improving but still struggling mightily, as illustrated in this weeks’ unemployment claims numbers released by the US Department of Labor:

Forgive me thinking that a) this does not add up and thus b) something has got to give. In fact, there’s already talk about a recession within the current recession.

Trying to make sense of the current economic landscape feels like trying to navigate through a funhouse hall of mirrors, in which the use of the word “fun” is subjective. The above indicators are not symptoms of a healthy economy, but one in the throes of fighting off its pandemic-induced sickness with the possibility of relapsing downward.

Prices for homes cannot continue to go up if wages do not increase. Businesses cannot weather further margin tightening if cost increases cannot be passed on to customers. Customers cannot buy from said businesses without incomes and wages that allow them to shoulder some of those additional costs.

This makes planning for the days, weeks and months ahead difficult for those in the chemical supply chain. That is especially the case for businesses working at this moment on budgets for the next fiscal and calendar years, many of which need to be completed this month. How do you predict the business climate that awaits your company in 2021 without any certainty on:

  • when/if the pandemic ends
  • how the US elections will go
  • how consumers will act in a post-pandemic environment (we at ICIS have some thoughts on that here)

While everyone wants to get back to “normal”, what constitutes “normal” post-pandemic will likely not be what we knew it to be in  2019.

That is why it is imperative for sellers of raw materials, converters of raw materials, manufacturers, brand owners and others in the chemical supply chain to produce multiple scenarios that answer the above uncertainties in different ways, assess what that would create for them as a commercial environment, and how they would conduct business accordingly.

As it stands today, it is just as realistic to see the pandemic ending in mid-2021 under a Democrat-led federal government focused on green initiatives as it is the pandemic ending in early 2021 under President Donald Trump’s second term focused on further cutting regulations. To not plan for either scenario or other realistic ones is a not a setup for success.

With so many variables in play, scenario planning has never been more important. Those who fail to plan are planning to fail.

Disclaimer: The views in this blogpost should in no shape or form be taken as actual forecasts and are my personal views only.