Transcript
Speaker: 2020 was a year like no one had ever experienced and certainly no one could have projected. Is the worst behind us? Are there better things to come? Today we'll talk with one of the country's leading economists to get a recap of the crazy year that was 2020 and a forecast as to what 2021 will hold.
Speaker: Welcome to The Market That Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid -sized companies and help you take advantage of new opportunities.
Speaker: The U .S. middle market has been battered in the past year, just like most of the economy. What started as a nearly complete fallout, then transitioning to a slow return to work, has now become the stark reality of a potentially longer recovery. How long will it last? Welcome to the Market That Moves America podcast. I'm Doug Farin, managing director of the National Center for the Middle Market at the Ohio State University Fisher College of Business.
Speaker: We are the nation's leading research organization studying mid -sized companies, which account for a third of private sector employment in GDP, the lion's share of economic growth. It is the market that moves America.
Speaker: The National Center for the Middle Market is a partnership between Ohio State and Chubb. And today I'm happy to welcome back Dan North. Dan is the chief economist at Euler Hermes, an insurance company specializing in trade finance. Dan's been with us each of the past few years to talk about the economy. And we're delighted, Dan, to have you back on our podcast, Market That Moves America. Thank you so much. Very pleased to be here.
Speaker: So, Dan, any economic discussion that we would have is going to start with the COVID pandemic. Can you kind of take us through maybe a recap of the year, the strange year that was 2020 and the things that you're looking at most closely as we head into what hopefully is a much better year in 2021? Yeah. Yeah. So you're absolutely right. Right from the beginning,
Speaker: COVID has driven everything and is still going to drive things going forward. But as you mentioned 2020, I think it's important to go back just for a minute to really see how bad it was and I think how lucky we were to escape. So let me just throw out a few numbers from last year.
Speaker: Two weeks after the shutdowns, weekly jobless claims rose to a level that was 20 times the long -term average, 20 times. Continuing claims right now, that is the number of people who are still on the unemployment rolls, remain at a seven times the long -term average. Now 7 % is a big number in economics. This is seven times.
Speaker: We lost 10 years of job creation since the Great Recession in just five weeks. We lost 21 million jobs in April, and that was 26 times the worst month in the Great Recession and 11 times the previous record. Personal consumption, which drives 70 % of the economy.
Speaker: fell by 12 .3 % in April, five times the previous record. And of course, GDP, the broadest measure we have of the economy fell 30 % in the second quarter.
Speaker: three times the previous record and nine times the Great Recession. The point of all those numbers is that I'm using times and not percent. And this is something that is not just unprecedented. I'd call it something structurally different, something really unimaginable before. Now, fortunately, the CARES Act came along and it was big and it was fast.
Speaker: It was put together and passed in just two weeks, which is remarkable. If we go back and look at the Great Recession by comparison, there are a couple of different programs. One was the TARP program. That didn't start until 11 months after the Great Recession started.
Speaker: The next one, the ARRA Act, that was the fiscal stimulus. That didn't start until 15 months after the Great Recession. CARES was in place in two weeks. And we also had the Fed with monetary policy basically saying, broadcasting, we're here with as much as it will take for as long as it will take. In other words, they created
Speaker: I think eight new lending programs provided tremendous liquidity to the financial markets, basically kept credit flowing, which was a big problem in the Great Recession. Really, with the Federal Reserve in place and the CARES Act in place, that's what rescued us. We were lucky to get out, I think, because we really took tremendous, tremendous hits.
Speaker: Now, as we look into 2021, most importantly, we've only recovered 56 % of the jobs lost, meaning there are still 10 million people who had jobs last February who don't now. And part of the problem was is a lot of those job losses are now permanent. They're not coming back. And as we saw in December, we're now losing jobs because of more shutdowns. We're going backwards.
Speaker: And as a result, I think we do need more income support. I'm not a big fan of government spending, but now is the time because of those 10 million people, I think it'll be better to have that income support more targeted that is to maintain those unemployment benefits as opposed to the stimulus checks.
Speaker: And we need to continue this rent support as millions of Americans are facing eviction at the end of January. Now, it's also important that landlords have been, you know, have been holding the bag for a year now. Landlords are going to get need to bailed out to their businesses with bills and employees as well. But we can't just have millions of people thrown out on the street.
Speaker: So, throughout the fall, I heard several economists say, as the vaccines were being developed and eventually approved, that there would be no recovery without the vaccine. What is your kind of view on this, especially now that we've seen it start to roll out and somewhat stumble a little bit, quite honestly? But do you agree with that statement? And what is going to be ultimately the
Speaker: the benefit of getting this vaccine into more people? Right. Well, first of all, I am squarely in that camp or was squarely in that camp that there would be no recovery unless we had a vaccine. Because if we didn't have a vaccine, it would mean that COVID would not become under control and we would have a continued continuous shutdown of the economy and we obviously couldn't recover.
Speaker: Now, so the problem with the first shutdown again was this permanent job loss. And if we had to go through that again without the vaccine, it would make an even bigger hole for us to dig out of. But, but we now have three vaccines. It's important to remember that we didn't have that two months ago. Now we have that hope. I mean, that was just two months ago that things weren't looking great because it was going to take
Speaker: well into 2021 to get a vaccine? No, we have them now. It took 11 months, just 11 months to develop them. In the long term, historically,
Speaker: It's taken five to 10 years to develop a vaccine. For instance, chickenpox took 34 years to develop a vaccine. The fastest one was months, was four years, not 11 months. So there really is a miracle here that we should be grateful for. It's light at the end of the tunnel, but we're not at the end of the tunnel yet.
Speaker: As you mentioned, the actual rollout has become a mess. We have delivered lots of vaccines, but only 35 % of them have actually been used. At the current rate, we're actually inoculating people of 630 ,000 per day. It's going to take us
Speaker: Over two years to reach herd immunity, if we think 75 % of people have to be inoculated and each have to get two shots, that's two years.
Speaker: the administration's administration of the vaccines ramping up really rapidly. We have to get up to 2 million per day to reach herd immunity this year. I'm not an expert and I'm not usually an optimist, but I believe we can do this. I believe we can ramp up to 2 million a year. The problems we've had so far I think can all be solved.
Speaker: First, we have to recognize this rollout's only four weeks old and it included Christmas and New Year's. So, of course it's starting to, it's running slowly. Another problem is the distribution and administration plans vary across states. They're very complicated state regulations, including monetary policies for non -compliance.
Speaker: California, for instance, has a 60 -member advisory committee. Well, that's a committee that is destined to slow things down. A big problem has been in a state like New York where it has a use it or lose it policy, which basically means
Speaker: until all the priority groups are vaccinated, such as frontline health care workers, until all of them get it, no one else can. And of course, that means we've actually had cases where we've had to throw vaccines away. This is an insane case, and I think it's come under scrutiny and is now going to be changed quite a lot.
Speaker: And many states want to get the doses into nursing homes, and that takes a while. Many states, unlike the flu vaccine, you have to sign up to be vaccinated, and that's gum things up. And there's a lack of staff to administer shots. For instance, here in Baltimore, in one of the hospitals, plenty of vaccines available, but you have to sign up.
Speaker: You can only do it in the morning. That is, that's when they administer the vaccine. And there are only six nurses to do it. We've got the vaccine, but we're not getting it to people. And we have a lack of federal funding as well. All these things can be solved. They can all be solved. And I see the administration of vaccines ramping up really, really quickly. In the last five days, it ramped up 86%. So I'm very hopeful we can reach herd immunity this year.
Speaker: And what would be the economic activity that we would look at to kind of gauge the effectiveness? Is it going to be consumers getting more comfortable going back out to restaurants, traveling, hospitality, these type of industries? Where would be the place to look for that?
Speaker: Right. You're absolutely right. The services industries in general are the ones that have been hit the worst because those are face to face goods manufacturing by comparisons done reasonably well. So the biggest industry which has been hurt the most is restaurant and bars that is, you know, leisure industries. You've had to shut down restaurants or put them at 50 % capacity, something like that. Well, if we get control
Speaker: COVID under control, and we can open up those even more. The industry, which I think is going to continue to suffer a little bit, which will improve, but will still have a hard time getting back to where we were, is travel. I think that even though we will have pent up demand unleashed later this year,
Speaker: I think people are still going to be a little bit reticent to get on airplanes and to get on cruise ships and travel much. So there will be some improvement there, but not nearly as much as you would see in bars and hotels.
Speaker: Bars and restaurants and we do expect obviously to see residential construction Continue to soar because people want to get out of the city have their own house So that's going to be very much a positive as well. Those are the things we expect to be looking for So another
Speaker: influence will be. We had a very messy election, but we will have a new incoming administration here shortly. What are your expectations or things to be looking for? You mentioned continued stimulus, unemployment benefits, relief for renters. What are some of your expectations for the new administration?
Speaker: Right, so we do expect to see yet another fiscal stimulus relief package pretty soon after Biden gets inaugurated, which of course is next week. So we expect to see that in the next month maybe.
Speaker: because it's still going to be needed, number one. And number two, Republicans like to spend money just as much as Democrats do. So that's I think is definitely going to happen. The other things we're going to see in general in this administration
Speaker: is higher spending in general, higher taxes, and rolling back regulations, rolling back deregulations. That is putting more regulations back in place after the Trump administration rolled them back so much. Those aren't particularly business friendlies, but that's what I would expect to see. What is business friendly is I expect to see an improvement in trade relations.
Speaker: Let's not forget, before COVID came along, the phase one trade agreement was the biggest topic in all of economics because it was starting to reduce this trade war with China. But it didn't get very far. We're still in a trade war with China. So I think those things will get peeled back and we'll have a more trade friendly administration.
Speaker: And I think we'll see more focus on green initiatives and social issues. But I'm sorry to say, I don't think we're going to see a lot more bipartisanship. I think that that's kind of entrenched for a while.
Speaker: And that's, that's a good segue. Um, we should probably remind the listeners that kind of the vantage point at which you're looking at these things. So Euler Hermes ensures trade receivables. Uh, you mentioned, you know, increase, uh, or improvement, I should say in trade relations. What are the kinds of insights that, you know, trade specifically the things that Euler Hermes does as a company is giving you about the state of the economy. What are you seeing there?
Speaker: Well, we're still seeing a lot of risk of non -payment. I mean, obviously, you've had big shutdowns for non -essential businesses. And when they've come back online, it's been at limited capacity. So there's a large segment of businesses that are still having very big cash flow problems. And we're seeing
Speaker: Small businesses are particularly at risk and we've seen depending on how you define it, perhaps maybe as many as 50 % small businesses are now closed permanently. Part of the reason is small businesses
Speaker: have on average 27 days of cash to live. In other words, if the doors close and revenues stop coming in, the average small business only has 27 days of cash on hand. So we're expecting to see a big increase in bankruptcies. And another reason is
Speaker: we've seen a huge increase in the percentage of zombie companies in our corporate structure. And a zombie company basically is a company that took on too much debt, and as a result, now can only make interest payments. After they make the interest payments, they have zero profits. So they're skating right along the edge of the bankruptcies. And we're going to have a change in bankruptcies laws in February that is going to be more credit or friendly.
Speaker: And for those reasons, we expect to see bankruptcies, which is our business, protecting against bankruptcies rise as much or more than 30 % in 2021. Wow. Interesting.
Speaker: So what are some of the levers that companies can pull when they're in that situation? I mean, are you seeing negotiation on payment terms or is there a willingness to kind of extend payment terms or really if it's a zombie company, there's not much else they can do because of their cashflow problem?
Speaker: Right. Extending payment terms, what I would call forbearance is really how companies are surviving because if you're a business,
Speaker: You want the people that are buying from you to stay afloat. So you're helping them stay afloat, giving them forbearance. So for instance, I'm company A and I sell to Joe at company B. Joe's paid me back on time for 20 years. Now Joe is calling me and saying, you know how it is. Things are really tough. I want to pay you back. I've always paid you back, but I can only pay you back this month, this much.
Speaker: Can you deal with that? Can you live with that for a while?
Speaker: Again, Joe's one of my best customers. I'm going to say, sure, I want you to survive. I know things are tough. Things are tough for me too. So we're seeing basically an extension of forbearance, of credit lines, people not closing down on them quite so much. And this is the way we're going to get through. But eventually,
Speaker: there's only so much of that that businesses will be able to do. And unless we get COVID and the vaccines working, this is one of the reasons we expect to see a pretty big ramp up in solvencies. Yeah, sure. So if things do progress and we can accelerate vaccinations, what are you seeing or what would be your thoughts on the latter half of 2021? I mean, what do you think that looks like?
Speaker: Well, we actually have a pretty good outlook. The first quarter, I think, is still a little bit shaky because we still haven't gotten that first round of stimulus cash into people's hands. And there's still not enough consumer confidence. And there's still some political instability. So Q1 could be a little bumpy, but overall,
Speaker: we think there's a reasonably good outlook for this year. We think GDP growth will be about 3 .6%. And there are a couple reasons why. One is obviously we're coming off a low base, so that makes it easier to grow.
Speaker: But we have some other things that are working for us. For instance, again, that residential real estate, the appliance industry to fill those new residences, electronics and telecoms to do more online work, and of course, pharmaceuticals.
Speaker: Um, but, uh, we think it's, it's pretty, pretty decent outlook. And there's some other reasons why one is, um, if you look at, for instance, leading indicators, like my favorite is the treasury yield curve. Every time it goes positive, it forecasts out a recovery for the next three to five quarters. Well, it's quite positive right now and it's been a virtually perfect indicator.
Speaker: If you look at the index of leading economic indicators, well, it just posted its three biggest months ever. That forecasts out the next six to nine months. And we have high business confidence. Corporate profits have recovered after the worst two consecutive quarters ever. Profits are good. Profits mean that corporations can employ people.
Speaker: So overall, and of course we have the vaccine, the hope of the vaccines and bringing COVID back under control. And in addition, we've got the warm weather coming, which would help. So there's this tremendous amount of pent up demand that we think could be unleashed later in the year. And it's, you know, I think overall right now,
Speaker: It's not great as we're losing jobs. We have COVID on the rampage. Vaccine's not getting out fast enough. Those are shorter term problems in the intermediate term over the rest of this year. It's actually a reasonably good outlook.
Speaker: That sounds great. I'll just kind of wrap up with, you know, we here at the center focus on mid -sized companies, which are a little bigger than those small businesses you had noted, but they're not quite yet at the scale of, say, the
Speaker: the Russell 2000 or the Fortune 1000. So we always kind of wrap up with what are the things, if I'm a middle market CEO or CFO, are there things that I should be looking at that might provide either some opportunity or some upside momentum as I plan for this year? Right. Well, I would say the first thing to look out for, and it should be obvious by now, is COVID, COVID and COVID.
Speaker: and the vaccines because that's the key to our recovery. We're seeing states actually increase restrictions because the COVID cases are rising very, very sharply. We have to reverse that. So that's the thing we really need to look out for. Another topic that always comes up when we see peaks or troughs in the economy is employment because businesses, when times are good,
Speaker: want to expand while they can, so they tend to employ, tend to ramp up employment. And when things turn down, it's very hard for those businesses to cut employment. You know, businesses really don't want to cut employees until they absolutely have to, but that's a cost. And it should be that when things ramp back up for those reasons,
Speaker: Unfortunately, a business practice ought to be maybe being a little bit more careful about aggressively hiring. Of course, credit lines we talked about. We have to keep our business partners afloat. But generally speaking, in better times, it's important to keep an eye on what our customers want. Sometimes they ask for a credit line, a bigger credit line.
Speaker: They're actually saying, can you give me a bigger credit line now while I can because things maybe aren't as good as they look.
Speaker: Of course, businesses now, when it's possible, when we get to that place, need to build up cash reserves again. 27 days for small businesses, maybe more for the intermediate market, but cash reserves will need to be put back up. I'd also want to make one observation. We are expecting to see a good economy this year
Speaker: But it's not going to affect everybody in every industry the same way. And this is this K -shaped recovery you start hearing about. It's a K on its side, if you will. It just basically means that some sectors are going to do better than others. And if we look, for instance, at individuals, higher income individuals, employees are going to recover more rapidly. Those with higher educations will recover more rapidly.
Speaker: females, not so much, because now we're seeing that they're having to stay at home more to provide childcare. And we have a bifurcation, a K, in industries like we talked about before, tough industries, travel, tourism,
Speaker: Air flight, commercial real estate I think is going to change dramatically forever. You get vacancy rates in big cities in office spaces of 70, 80 % and people working at home. Commercial real estate I think is due for a reckoning. Restaurants, services in general, but
Speaker: We're going to have good ones too. Like we talked about residential real estate appliances electronics and telecoms and of course pharma So those are the things that I think some of the middle market companies may be keeping an eye for and of course Hoping so much to have that consumer confidence unleash that pent -up demand Yeah, great
Speaker: Well, Dan, I want to thank you for your time again. This has been a terrific discussion as always, and we appreciate you sharing some of your insights about the economy and things to look for with all of our listeners. My pleasure. I'm very, very happy to talk to you again this year. For more about Dan, he posts some great blog content and analysis on the Euler Hermes website, which is www .eulerhermes .com.
Speaker: I want to thank you for listening to The Market That Moves America. Never miss a new episode. You can subscribe to the podcast on iTunes, Stitcher, Google Play, or wherever podcasts are found. Or you can also subscribe and learn more about the NCMM at our website, which is middlemarketcenter .org. Thanks again.
