The man who routinely surveys manufacturers, suppliers and others in the West Michigan Industrial Economy has issued his thoughts regarding a recession in the region. Dr. Brian Long, Director of Supply Chain Management Research at Grand Valley State University is in monthly contact with the manufacturing and supply chain sectors across West Michigan and closely watches all of the numbers, actions, and various index measurements on the health of the region. Here is his commentary, posted today:
The 2020 West Michigan Recession
Are we in a recession? One of the characters in a current hotel commercial goes by the name of “Captain Obvious.” With the rapid spread of the coronavirus number 19 or abbreviated Covid-19 and the ensuing national and international panic, there remains almost no doubt. The official definition of recession calls for “two successive quarters of negative economic growth as determined by GDP.” Why GDP? Because that’s how we’ve defined a recession for the past 70 years. That’s another topic for debate. Generally, the first quarter of 2020 is almost over, and will probably come in marginally positive. However, the second quarter, i.e., April-June of 2020 will probably be one of the worst in the postwar United States history. At the present pace, the third quarter is likely to remain very negative but partially recover. The fourth quarter? Well, to quote another cliché, we are in uncharted territory. If the chips fall right, the fourth quarter could be the beginning of the recovery.
Where will the impact fall hardest on West Michigan? Our cyclical industries, of course. Unfortunately, almost all of these industries were already topping out. Of course, the biggest employers on the “cyclical industry” list are automotive. We do not assemble automobiles in West Michigan, but a large percentage of our industrial workforce is employed by auto parts producers. In fact, a significant LARGE percentage of our industrial employment GROWTH in the past ten years has come from these auto parts fabricators. Although auto sales have been declining in an orderly fashion for the past year, that “orderly decline” is now over. Effective immediately, we can now expect to see some of the worst monthly sale declines in history. Right now, auto showrooms are empty, and the dealer inventories are already high for some models. Although some auto assembly plants are closing to help control the virus, they will soon be forced to close or reduce schedules because of sharply declining orders from dealers. Very soon, our local auto parts producers will begin serious layoffs.
Other industries in trouble include office furniture. This industry has two drivers: First, new construction or new build-outs. It seems logical that most new office space is usually graced with new office furniture. Projects already in progress will probably ship on time, but plans for new office expansions will be put on indefinite hold. The industry’s other major segment, replacement furniture, will also be stopped in its tracks. The segment that will grow rapidly as a result of this crisis is the expanding home office market. Unfortunately, most of our local office furniture firms have apparently ceded this market to the low-cost producers. Google Ikea.com.
Like automotive, we obviously do not assemble aircraft in West Michigan, but we still employ many aircraft component manufacturers. The aerospace industry has been shaky ever since the beginning of the 737-Max debacle. With air travel now a small fraction of what it was a few weeks ago, almost all commercial aircraft orders will now be cancelled or pushed back.
Last, but not least, are the capital equipment manufacturers. It almost goes without saying that the purchase of new capital equipment in any recession will be delayed by most firms. Unfortunately, because of sharp discounting, some of our survey respondents were already turning cautious about the future of some types of capital equipment.
How long with this crisis last? Again, we are in uncharted territory. We have not had a pandemic of this nature in anyone’s memory. Over 100 years ago, my dad’s family suffered the 1918 (aka, Spanish) flu. Like the current pandemic, this flu was HIGHLY contagious, and my dad and his sisters apparently carried the virus home from school. Within a couple of days, the entire family was deathly ill. My aunt told of running a temperature of 105 degrees, but my dad was able to keep his temperature a little lower with a relatively new drug called aspirin. Although aspirin did nothing to attack the virus itself, it kept the body temperature lower and somewhat eased the pain. Unfortunately, little was known about dosages for this new drug, and many people, especially children, actually died from aspirin poisoning.
With the SARS virus of 2003, China reported 8,098 reported cases and 774 deaths. But we only had 8 cases in the whole U.S. and no deaths. This virus was much more lethal, but NOT as contagious. The SARS virus was successfully contained, and we didn’t find it necessary to lock down the whole country. The spread was stopped, and by late 2004, the threat was gone. Unfortunately, the 2003 SARS and the current Coronavirus are two very different viruses. Again, the new virus is somewhat less lethal but spreads MUCH easier. For the 2003 SARS, the quick lockdown worked. Today’s lockdown is therefore not intended to corral the virus but to slow the spread. Otherwise, the hospital beds and pulmonary ventilators would soon be overrun, and many more people would die. It also buys time for the CDC and the medical industry to concoct a vaccine.
As a technicality, this virus is not influenza; the COVID version 19 is a category by itself. The basic problem for this virus: Communicability. Most cold viruses can last on a “door knob” or other flat surfaces for just 2-5 hours. Most ordinary flu viruses last a day or two. But the Coronavirus version number 19, or COVID-19, Is far, far, FAR more easily spread. The big problem in many industrial plants is that workers tend to pass components between each other all over the plant. In the case of “doorknob” contamination, the consensus reports are that the new virus CAN last on SOME surfaces for up to 8 days. One study puts that number at 24 days. That’s probably extreme, or put differently, mis-information. If it were true, an Amazon worker sneezing on a plastic label could infect the recipient who was unfortunate enough to receive the box many days later. Two days? Eight days? 24 days? Unlikely, but as yet, we just don’t know. Hence, the panic. What’s worse, some people who are infected never show symptoms, while others show no symptoms for many days before breaking out. Again, this is not typical of most viruses.
Endgame. Washington is going to throw money at the problem, which will do SOME good for the financial pain of those people getting unexpectedly furloughed. Money will also go for additional medical support. With all the lockdowns, new cases will soon probably begin to decrease. We have recently learned that the French medical people are experimenting with a concoction of existing anti-viral drugs that MAY attack the COVID-19. If it works, this will eventually help reduce the mortality rate and curtail the dispersion. Like most viruses, the upcoming summer weather will also help. But the virus will not go away, and we will need to watch for a resurgence in the fall, not unlike the pattern of the 1918 flu. Bottom line: This pandemic is probably not going to go completely away until we actually have a vaccine. Current optimistic estimates: Mid to late summer. Current pessimistic estimate: May 2021. Reality: Probably somewhere in between.
