Macroeconomic Trends During COVID-19: A Talk with The Freedonia Group's Chief Economist

market forecasting during COVID-19The Freedonia Group recently shared a video featuring Tom Bowne, Freedonia’s long-time chief economist, who discusses the challenges of market forecasting during the COVID-19 crisis. Sign up to watch the 14-minute video or read the full transcript below to learn noteworthy effects of the pandemic on the economy and tips for how to think through available data.

Jennifer Mapes-Christ: Welcome! I’m Jennifer Mapes-Christ, the head of Freedonia Group’s Consumer and Commercial Research Group.

Today, I’m talking with Tom Bowne, Freedonia’s chief economist and the head of our in-house economics group for more than 20 years. Tom and his team develop the macroeconomic indicators that underpin all Freedonia research so that our products tell a consistent story.

Since the COVID-19 health crisis has hit the US shores, the Freedonia Group has made available some slide decks produced by your economics group that highlight the changing effects of the coronavirus on the US and global economies. Today, we’re going to talk about the challenges of forecasting and some of the effects of this crisis on the economy.

Tom, it seems like we have changing conditions every day as shelter-at-home programs evolve and supply chains are altered in light of what products are truly in demand and which production and distribution facilities are able to operate. What is the biggest challenge about forecasting during this crisis?

Tom Bowne: Well, I think one thing is that there’s no clear analogy that we can look back historically and say, ‘We’re going through the same thing here.’ I mean, there was the 1919 influenza case. We don’t have a lot of detailed economic information to see how that played out to compare that. It’s also that a lot of the effect is something that’s been self-inflicted in that we’re putting these restrictions in place: we don’t know how long they’re going to last; we don’t know what’s going to happen on the other side in terms of how effective they’re going to be, or whether we’re going to start seeing a rise in infections — a large rise in infections — once the restrictions have weakened.

There’s a lot we don’t know about the virus itself. We don’t know — you know, we only have rough ideas right now about what the infection rates are, because depending on what country you’re looking at, there’s a limited amount of testing that’s been done, so we don’t know who in the general population has been infected. We don’t know things about exposure and the generation of antibodies. Does that generate immunity from subsequent infections? We don’t really know that.

We don’t really have great testing right now [for] the antibody presence. There’s just a lot of things, a lot of moving parts that we don’t know about now, and that’s what makes the forecasting very difficult. And also it’s why you can see forecasts have changed in significant amounts in a short period of time, because we’re trying to get some understanding of what’s going on.

Jennifer Mapes-Christ: Right, right. Well now, “unprecedented” is a word we hear all the time… but it’s true, right? How do you try to estimate the effect of this economic standstill and social distancing?

Tom Bowne: Well, one of the things that I was trying in the beginning is if you sit down and you look at what’s the effect going to be on consumer spending. So, one way to try to get some idea of the magnitude is say, ‘OK, let’s look at the detailed consumer spending in 2019’ and we’ll go through the different spending by type and then just try to make some estimate or some best guess as to how to these different spending components are going to be changed.

So, you know, if you’re looking at something like casinos or other gaming or live entertainment — that kind of spending is going to go down to a very low level. You know, if it’s spending on health equipment or medical in a pandemic that may be going up. So you can see that during the period of time when these restrictions are in place, maybe consumer spending is only going to be 75% or 80% of what it is normally.

And then you start to try to make some guess: how long will these restrictions going to be in place? And when they’re lifted, how long is it going to take for things to bounce back to the pre-COVID-19 levels? And so you’re just trying to make some estimates on those things.

Jennifer Mapes-Christ: Right. And that’s part of the challenge. We’ve been talking a lot around the company about what countries are ahead and behind in the life cycle of the virus… what can we learn from the experience of these countries that faced the virus earlier?

I mean, particularly China… how much can we learn from them and how much confidence do we have in the numbers being released via their official channels?

Tom Bowne: Well, actually that brings up another thing that makes this a difficult thing to look at, and that’s things are happening very quickly. Most of the information that we get for statistics — even if it’s on a monthly basis, you know released two weeks after the end of the month that it’s referring to. So we, certainly in the US, we’ve seen huge changes in a two to three week period. A lot of the stuff is not showing up in the statistics at all.

And even in places like China where you know they have a half-decent economic information gathering system that’s in place, people are trying to look at things like traffic congestion that is giving a better real-time estimate of how much work has been coming back, or those things. So, you know that’s why people are looking at lot in the US at things like the initial unemployment, weekly unemployment claims. It is a least giving some idea: here’s what going to happen to unemployment levels going forward because we see people lining up for claims.

But even there, if someone is laid off or furloughed and they're trying to apply for unemployment benefits for the first time, if the state or local agency is overwhelmed and can’t process, they don’t show up in the statistics, but they’re certainly unemployed in that time.

Jennifer Mapes-Christ: Sure. Now those are some of the short-term effects, but knowing all this and understanding that the closure of various parts of the economy won’t last forever, what are the medium- and long-term effects on consumer and business behavior? What going to happen with consumer spending?

Tom Bowne: Well, you know there’s some of the things where I think we just had some loss that we’re not going to be getting back in a lot of service businesses. For example, you have haircuts or beauty salons — and you can see by the length of my hair this is longer that I would usually go without a haircut.

Jennifer Mapes-Christ: [Laughing] Me, too.

Tom Bowne: When the restrictions are lifted, I’m not going to go get two haircuts to make up for that. I’m just going to get one.

Jennifer Mapes-Christ: Right.

Tom Bowne: So the business that are running this are not going to be making up that lost revenue. But I think, to get to your question on the longer term, it’s hard to know what timeframe we’re going to see consumer behavior get back entirely. Right? I mean, people aren’t — I would think even when things are opened up, for a large part of the public they’re not going to be rushing out to go to large sporting or entertainment events and say, ‘Geez, here’s a chance where I can be with a whole crowd of people that I don’t know anything about and maybe contract this disease.’

So, some of that stuff might have to wait. You won’t see returns to normal levels until a successful vaccine is developed and deployed and people have more confidence to go back to that. But you think of some other things — I mean, looking further into the future, things like autonomous vehicles, shared vehicles. Maybe this doesn’t look quite as attractive a business plan in the medium and longer term, until we see how people are behaving. Do people want to go get in something where other person has been there and then trust, ‘Oh, well we’ve disinfected in the meantime, and you’re not going to get some scary disease.’

Jennifer Mapes-Christ: Right. So for looking at the longer term effects, though, on inventory management and supply chains, considering how this challenge was exacerbated by heavy reliance on production in particular regions and the long-running plan of lean inventories and just-in-time-delivery, how much of that do you think is open to change?

Tom Bowne: I think a lot of that is open to change. I think people are going to look to try to diversify some of their supply relationships. You have to balance that. The advantage of working with one supplier is that they get to know exactly what your specifications are and how to fulfill it, and you can build up some trust, but there might be people looking at that and say, ‘That’s putting too many eggs in one basket now. We need to spread this stuff out and we’ll have to deal dealing with multiple suppliers.’

And maybe Supplier A is not providing things a quite the level of things that Supplier B is, but if something causes a disruption in A, we still have B to fall back on. And you probably are going to see businesses move to try to maintain higher levels of inventory and in-stock at the end of production areas going forward, until people are comfortable again or their memories of the disruption have faded enough that the mode will be enticed back to try to minimize the amount of inventory because that’s just sunk costs, and it’s not helping you in the short term.

Jennifer Mapes-Christ: That is one of the issues, often, isn’t it? How long is the business memory of a particular crisis? How much are things going to get a long term effect vs a short term reminding? So, right now, along those lines, we’ve got a lot of business hoarding cash because of the uncertainty around [the length of the] downturn… how do you think this plays out through 2020 and 2021?

Tom Bowne: That’s going to depend a lot on when restrictions are lifted and people can start going back and getting their normal cash flow coming in. Because you can hoard cash all you want, but at some point you’re going to run out of it if you still have expenses going on and you’re not pulling in any revenue.

You know, in some cases what we’re looking at now is that we know, at least in the short term, some assets have lost value. Pretty much now, we’re fighting on how we’re sharing those losses. Say it’s a small business that’s a small service business that’s not able to maintain any operations right now. They have no revenue coming in. They’re looking to delay paying their rent. The landlord is not crazy about that because that’s income that they're expecting — they don’t want to lose that.

On the other hand, the landlord, if what they have is retail, it’s real estate that’s designed for retail uses, that’s not as valuable as it was in 2019 because there aren’t going to be a lot, at least in the short term, there may not be a lot of businesses clamoring to get that retail space so that they can not sell much to the few customers that are going out. So, there’s a loss right now. The asset they have isn’t quite as valuable. And they’re trying to see how they’re sharing that with their tenants.

Jennifer Mapes-Christ: Sure, sure. It’s the old saying: may we live in interesting times, right? The Freedonia Group’s team of analysts and economist will continue to track the ongoing effects of this crisis and other challenges and opportunities in the global economy.

Need more insights? Check out Freedonia's COVID-19 Economic Impact Tracker, which features ongoing updates across a wide array of industry categories. For more in-depth information, explore Freedonia's COVID-19 Impact Reports to learn how the COVID-19 outbreak is impacting particular industries across US and global markets.