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Imperfect social distancing efforts may suffice to save the U.S. economy -- and our 401(k) accounts, says hard data from China's bout with COVID-19

The nation of 1.4 billion people is statistically pretty unscathed -- and its data not so fishy -- suggesting U.S. investors might lean toward optimism

Friday, March 27, 2020 – 10:09 PM by Jeffrey Young Guest Columnist
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Jeffrey Young: The control of the disease does not have to be perfect to get the economy going.

Brooke's Note: Yes, on one level, I can hardly believe we are publishing this glass-half-full column. Headlines around the world are blaring bad news about coronavirus. But the ones in the United States are, perhaps, especially discouraging. We are in shutdown. That's a problem. Some states are only casually shut down -- potentially an even bigger problem. Confirmed virus victims are now world beating in the United States, despite Asia and Italy getting hit sooner -- and despite our radical shortage of testing kits. The Fed has pulled almost every lever. And the market is still not overly impressed. But we are running this column because -- unlike all that I just listed -- it has a fresh contrarian take. Its author, Jeffrey Young, has spent his career looking at macroeconomic data and gathering it from conventional and unconventional sources. He is no stranger to analyzing China and can speak with authority about the trustworthiness of its data. He has the means to corroborate it through social media, weather satellites and so on. Like you and me, the CEO of DeepMacro is locked at home -- in his case taking refuge in a house in  suburban New York. In preparing this piece, Young has sent me pictures of the local beavers building dams on the streams running near his property -- a welcome respite to a world that just wants to get rid of the pandemic.

Social media in China shows motorists who have tried to run police barricades getting scooped up by long-handled butterfly nets, efficiently wrapped up (following sterile protocol), and taken somewhere off camera. 

In Taiwan, a person whose mobile phone battery died had police teams swarming his apartment in minutes to confirm his location. (And the tweet about it got 26.5K likes!)

Hysterical scenes like these tell us something about essential national traits in China (even if they are theatrical exaggerations).

Americans may not experience these same hysterics, but we have others that theatrically express the extreme circumstances and emotional state that the COVID-19 pandemic has imposed upon us all, including the markets. 


Goldman Sachs sees an unprecedented halt in economic activity, with 2nd quarter GDP contracting 24%.  How about  30%? I haven’t seen a 40% yet, but it’s probably coming. Some forecasts say China’s GDP will fall by 40%, and if the best case is that we control the virus as well as China did, then our GDP will probably fall as much. 

Really? Models are tuned to pick up very fine vibrations in the economy, and they adjust forecasts by a few tenths of a percent at a time--not by many tenths of a percent. 

DeepMacro’s big data are available in real time, so we can see the damage without waiting a quarter for the GDP report. These data have already helped ballpark the likely hit to China’s GDP at about a 5% to 10% loss. US GDP might decline by more than China's, but not be nearly as cataclysmic as current forecasts say.

If we learned anything in macro strokes from China about the outcome of a massive economy running headlong into a pandemic and shutting down, it goes something like this:

Forget 'perfect'

You don't have to be perfect at mass distancing to control the disease. The control of the disease does not have to be perfect to get the economy going, and the economy does not have to be perfect for markets to discount a return to normalcy. That’s what the experience of other Asian countries tells us, too.

The epidemic hit the US after we had watched it unfold in several other countries in Asia and Europe, each of which responded with different controls -- both in terms of timeliness and severity.

The course of the virus in China, Japan and Italy may tell much about three courses the virus may take in the United States, and how its fallout impacts the economy and the markets.

The beaver in question near Jeff Young's home where he is sheltering.

China was late, but very strict. By "late," I mean the contagion was allowed to spread unchecked for weeks until cases soared into the thousands. Reported new infections rose rapidly for three weeks from lock-down, then fell to below 500 per day in two more weeks.

Japan was late, and it has not been very strict. Reported infections have continued to increase, but at a slow pace. Italy was late, and it has been less strict than Japan, but not by much.

In Japan, offices, subways, bars and restaurants have remained open. Japan’s cities are very crowded, and its population is very old.

Every picture of a packed restaurant in Italy could be matched by a picture of a packed restaurant in Japan. Yet, Japan has (fingers crossed) controlled the virus, and Italy has not.

The strictness of social distancing alone cannot explain success in controlling infections (almost everyone wears a mask in China, Japan and the other countries that have controlled the virus, however!)

Where is the United States on the China-Japan-Italy scale?

It’s quite different by locality. In Kirkland, Wash., where distancing started in early March, the number of people who have stayed at home all day is up by 78% versus pre-virus norms (based on mobile phone visits to places outside home).

In Washington state, reported infections and reported deaths are rising, but at a steady growth rate, not an accelerating growth rate. Washington is looking like major cities in China when they were near their turning points.

This is about three weeks after the start of social distancing practices that we would call “moderate."

Lateness counts

In New York City, stay-at-homes are up by the same amount, 79%. But the city was late imposing restrictions, and infections and deaths are rising at an exponential rate, more like Italy.

At this stage, the hope is that a late but strict lockdown can control the virus more like Korea, as a Japan-like outcome seems impossible.

Also, Washington state and New York City are not typical of the rest of the country. Distancing in most places has not been as strict. For example, in Oregon, only 34% of people have stayed at home; in Mississippi, 40%, in Connecticut, 55%, and in New Jersey, 85%. 

The differences are also striking by income. In low-income zip codes, 28% of the people are at home all day; in middle-income zip codes, it’s 50%, and in high-income zip codes, far more people are staying at home.

There will be great variation in infection and death rates by state. We hope many more will  be Washingtons (i.e. Japan) rather than New Yorks (i.e.Italy). It’s in the Washingtons where the debate between easing restrictions and ensuring public health will play out.

Real time big data and the US economy

US GDP will not fall as much as the race-to-the-bottom forecast game suggests. Here is what some real-time indicators of the US economy, from alternative “big data” sources DeepMacro has been collecting, are saying.

Fear: People are dying, and that is the biggest difference between this crisis and the 2008-09 financial crisis. Machine learning can measure the “fear” level of media headlines. It is still off the charts. The stock market has strongly correlated with our Fear Index.

Retail: Visits are down about 15% nationally from a pre-virus baseline. By region, the West coast has seen the greatest relative decline. New York and most of the Northeast are not far behind. We see less of an impact in most of the southern states. 

Spending is not down as much, because the extra spend at the visit to a warehouse store is larger than the meal you didn’t have at the restaurant. But this bump will fade within a week or two.

Jobs: Jobs on offer at company websites are down by 32% from last year. Google searches for “unemployment insurance” point to more layoffs. But at the same time, Google searches for “starting salary” are also up.

The American jobs machine is doing what it can to move workers where they need to be.

Pollution: Economic activity produces pollutants. NASA data show that pollution levels are down by 25% versus last year. This dive reflects the stoppage of the economy (on top of the long-term downtrend).

What did big data say about China?

No sugar coat

The Chinese government is not sugar-coating its data. Retail sales were down 20% in January and February combined. There was essentially no difference between these data and the signals we received from DeepMacro’s big data on China, which the government never touches.

By late February, activity had begun to resume if we look at the big data on a day-by-day basis. The critical indicator was the movement of people. About one month after the quarantine of Wuhan City, people began returning to their residences from their hometowns, where they were stuck by quarantines during the Lunar New Year holidays.

As of today, movement has retraced about 50% of the shortfall when everyone was quarantined. Pollution has increased. Demand for condos is better than it was in February. The “fear” of the virus on social media has faded. When we put these big data sources together, the level of economic activity so far in March has been slightly better than in February.

The revival began in manufacturing, which is easier to restart because there is less person-to-person interaction. But it’s not just a simple story of the proletariat returning to their factories. Manufacturing is embedded in complex supply chains. These chains still work. 

To take one example: the Hong Kong-based company JLCPCB.com produces fully customized circuit boards for global customers, based on supply chains in mainland China – a perfect microcosm of global supply chains. Since March 2, its website banner has been “We’re Back to Normal." This could only have happened because the company’s large number of suppliers in the mainland came back online. That would be a short two weeks after workers began to return to work.

Global supply chains are not broken. Put it this way: After a disruptive event, can anyone think of a critical industry that has not come back online earlier than expected?

In total, we would say China’s GDP will be down  5% to  10% in the first quarter, with most of the decline front-loaded in late January to early March. 
That’s one reason why we doubt that the US economy will go full stop and stay there. Restrictions will be lifted before the virus is perfectly controlled. 

Let markets speak

Markets have rewarded fast action to stop the virus, even at the cost of a short-term economic plunge.

China was first in, first out, and its market (Shanghai Composite) is down 10% from its peak on Jan. 20. That’s ugly, but it is not nearly as bad as the 27% decline in the S&P 500 from its peak, or the 30% average decline in the “Big Four” euro area countries, Germany, France, Italy and Spain.

But is a severe economic lockdown the only route? And how will policymakers know when to lift restrictions?

The United States cannot match the command-and-control aspects of a centralized economy like China's, and this “essential trait” is mirrored in our volatile markets.

But market forces can send powerful signals to policymakers. Could the Fed have got the message louder, if the equity market had not gut-punched Chairman Powell’s “the-US-economy-is-fine” performance last Monday (Mar. 23), before he was even done speaking?

Markets should have a strong voice when the debate over easing social distancing begins.

Jeffrey Young is CEO and co-founder of DeepMacro LLC, a company that provides early, independent assessment of economic conditions across the developed and emerging world. His career includes stints as global head of FX Research and Strategy at Citigroup, and Economist for Japan at Salomon Brothers and its successors, based in Tokyo (for 12 years). Experience in both systematic and discretionary economic and FX and FI analysis, and long-standing focus on the Asia region.

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