On this week’s episode, Inside Outside’s Susan Stibal sits down with RSM’s Deputy Chief Economist Kevin Depew. This episode was recorded live at the IO2020 New Innovators’ Summit on Oct. 22, 2020. Susan talks to Kevin about actionable insights for a turbulent economy.
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Interview Transcript with Kevin Depew, RSM
Susan Stibal: I want to introduce Kevin Depew. Economic trends have been on a roller coaster ride and Kevin will provide actionable insights to help you plan for the future. He is the Deputy Chief Economist and Industry Eminence Program Leader at RSM. Kevin provides RSM’s clients with macro economic and industry perspectives and insights they need to successfully manage their middle market businesses.
He is also an Emmy-award winning writer and producer. So we look forward to hearing more about that. Prior to joining RSM, Kevin worked in economics for Bloomberg, Dorsey Wright & Associates, and PaineWebber and A.G. Edwards. So thanks for being here, Kevin.
Kevin Depew: Thanks very much, Susan. Just so you know, the Emmy was not anything to do with economics. We did have a show on Fox that ran. It was a little bit like the daily show of finance. We had about 18 episodes and then it was canceled the day before we were nominated for the Emmy. That kind of derailed those aspirations right out the gate.
So I’m going to share just a couple of slides, then go through and talk about where we are. When we talk about the economy recovering and I see in some of the Q & A there, some of you had similar ideas to what we have at RSM about so much being depends on the pandemic.
But when we’re talking about recovery, I thought it would be useful to go back before the pandemic and talk about what kind of economy we are recovering into. So, this is a slide from, I think we were doing road shows in February last time I was out somewhere. I think maybe it was in Nashville in late February. And so we had just started to see the appearance of COVID-19 on the West Coast and had not really moved at that point to, at least as far as we knew, to the East coast.
But these were our forecast, what we were anticipating for 2020, pre-pandemic sub 2% growth in 2019, so that’s suboptimal. Anytime you’re below 2% growth, then it doesn’t take very much to teeter the economy into a recession. So that’s one of the reasons, that’s kind of the threshold we look at for being a positive economy versus one that’s not really firing on all cylinders.
Our forecast for 2020, prior to the pandemic was for continued deceleration to one and a half percent. And really the economy has been characterized for much of the past decade by a couple of things. The first an economy that’s being propped up by the consumer. So what we mean by that, the consumer of course accounts for about 70% of economic growth, but we’ve really seen weak fixed business investment. Capital expenditures being a drag on the economy, something that was really restraining growth. So everything was sort of in the hands of the consumer.
The good news about that is we had 3.6% unemployment at that point. So we had a lot of people in the workforce nearing probably full employment. Of course, things have changed now. Just a couple of risks to note, at the time we saw the potential for fiscal policy or administrative policy error, so if the administration re-escalated the trade war with China or migrated the trade war to the European Union or the UK, that was a potential risk. And also a potential error on the part of the Federal Reserve. So for example, if they raise interest rates too quickly.
At that point, based on what we do, we viewed the COVID-19 epidemic at that point, not quite a pandemic, as really a liquidity event. So something that could have the potential to derail the economy in the short term, but once we get past it, then we’d go back to where we were before. Even though it is a pandemic it’s been far worse than what any of us anticipated.
There still is the potential that we return to the same type of economy we had prior to the pandemic. But as you can see, the forecast for that type of economy was not quite robust. And the longer this persists, the more we have the potential for long-term economic damage to happen. It’s why fiscal policy is so critical right now.
So just a couple of things to talk about in terms of the recovery. You know, we really had a supply shock, a demand shock, and a financial shock all occurring at the same time. So any one of those in a sub 2% economy, would be enough to turn the economy into recession.
We had all three at the same time. So we had what were essentially depression like shocks. You see the first quarter minus 5% growth. The second quarter astonishingly horrible, minus 31% growth. And then our forecast for the third quarter, a sharp rebound at 33.5% and then moderating in the fourth quarter at 2.25%.
And I’ll talk about that moderation just a moment, the reasons for that household consumption remains risk due to the lack of fiscal policy support and we’ll get into those numbers in just a moment. The major risk to the economy is, as some of you noted in the chat portion for this, is a second wave of the pandemic, which we seem to be on the cusp of right now. If we look around the globe and we see what’s happening in Europe, then I think it’s very likely that we will see something that looks more like a second way in coming weeks.
In terms of policy response, the initial response and a catastrophic economic shutdown, was very robust. You had the Federal Reserve learned their mistakes from the great recession and acted very quickly. And even with the polarization that we have in DC, the fiscal policy, the Paycheck Protection Program, the pandemic unemployment, those things happened relatively quickly when you consider where we are now. Where we’re past the stop gap measures that were designed to move the economy through very dire circumstances.
And so now we’re at the point where fiscal policy is needed to provide economic stimulus. So going back to the spring, that was really crisis management, making sure that people who suddenly lost all income had the ability to purchase food, the ability to take care of their families, even though you’ve had since horrific labor market numbers. Now we’re at the point where through partial recovery, we need stimulus to get over the hump to keep the long-term damage from impacting the economy.
The reality, and I think that you probably all are aware of this based on what you were posting in the chat prior, is that until there’s a vaccine or multiple major therapeutic breakthroughs, we just cannot anticipate the whole problem.
You hear a lot these days about the shape of the recovery. Will it be a V-shape, will it be a W or an L? The most recent one that has been making the rounds has been a K shape recovery. And what’s meant by that is in line with some of the things that you’ve probably been talking about the past couple of days at the Innovation Summit. There are people and businesses on that upper K path that have largely gone through the pandemic relatively unscathed.
So you think all of the things that make this event possible, for example, the technology behind it, the innovation behind it, those businesses, people employed in those industries are on that upper K shape path. The people in the consumer facing industries – hospitality, leisure, all those dining, all those industries that remain impaired, those folks are on that lower K path.
But what we would say is we would go back a little bit further. And so prior to the great recession, I think that what we were really dealing wiht and what we will have to continue to do with longer term is in fact, a K-shaped economy. And so the recovery is just a mirror image or a reflection of what has essentially been, for more than a decade now, a K-shaped economy. Where you have people who are in major cities prior to the pandemic faring very well. You go outside of a major city, and for much of the past decade, if you asked anybody on the economy is doing, they will tell you that it’s terrible.
And so that’s really how we end up at this place with high polarization, all of those issues that we’re dealing with as we get into the final stretch of the election. The reality is that the economy and the recoveries would be elongated and very frustrating in some industries. It’s going to take some time to be able to heal and get past this. What’s been really some dire economic straights.
To put some real numbers to this. We’ve had more than 62 million. I haven’t updated this in a week. So we saw new unemployment figures this morning and initial jobless claims. So it’s really closer to about 64 million people have experienced some form of unemployment and loss of income as a result of the campaign. Right now we have 7.9% unemployment and 12.8% underemployment. So people who have taken jobs because they need the income, but are probably overqualified for those jobs.
The real unemployment rate is likely about three percentage points higher. So it’s probably closer to about 11%. High savings rate, part of that related to just as a result of the stoppage in business. There are fewer places to spend money, but this is also indicative of, we think some risk aversion. Upper income earners, those who are on that upper K shaped path. They’ve actually pulled back spending by more than 7% since January, predating the pandemic. And right now that cohort are net savers.
Low income earners, their spending is up 0.3% since January. Those tend to be the net spenders because those are households where almost every dollar that goes in has to go to some form of payment, whether it’s food, shelter, insurance, car maintenance, bills, those types of things. They’re the ones that tend to be net spenders. And the increase there is reflective of some of the pandemic assistance that has since expired.
You know right now, $15 billion per week in lost government income support due to the policy impass, that is going to start showing up in the economy very soon. We’ve had only about three or four weeks or so, where that has ended. And so the longer we spend negotiating for some type of fiscal aid in DC, the more a risk the economy becomes. And so that’s the sense of urgency from an economics perspective that we talk about with making sure there is some kind of fiscal aid that is on the horizon.
I think the worst case scenario would be we have an election that may be contested or may be not clear. I don’t think that’s a likely scenario, but I think that is probably the worst case scenario. And in that case, I think you would have to say if there’s not an agreement soon that we may not get this glade until well into January, possibly February.
So looking at some of these random abstract numbers in context, every Thursday, you get the initial jobless claims reported at 8:30 Eastern Time. This morning, we had almost 780,000 new initial jobsless claims. In the entire history of this data, the first peak that we had the largest claim for one single week occurred in September of 1982, with 656,000 initial jobless claims.
And then you can see on the line here where those quickly moderated before 500,000. After 1982, the single largest week we had of initial claims occurred in March, 2009. The heart of the great recession when 665,000 individuals filed for initial jobless claims, those then slowly receded over a couple of years to below 400,000.
And so here’s where we are today. So I think it’s very important to put this in context because while you have policymakers in DC, sometimes talking about the robust employment reports we’ve seen on a monthly basis. These are still crisis level initial jobless claims on a week by week basis, more than 31 weeks since it began.
And so the four week average 866,000, is still not even at the two prior peaks, which were indicative of extreme stress and extreme crisis in the labor market economy. So we’re not out of the woods. And this I think is a good way of visualizing how extreme the pandemic that we’re dealing with continues to be this long into the pandemic.
The real question, how long before the U.S. Is back to a full functioning economy? I think we can take scenario one, probably off the table. What has occurred in the Sunbelt in the summer and the South and is now appearing as another wave, the virus, what looks like another wave in the upper Midwest, we would really characterize that as essentially the first-wave extension.
So spreaders from the Northeast and from the West were largely responsible for taking the virus out to the Sunbelt, taking the virus to the South, and then you have the large event in Sturgis. 250 some thousand people in the summer. And that seems to be related to the spread of the virus in the upper Midwest.
In fact, I read a study, I think from several Harvard economists recently that said that the public healthcare costs of the Sturgis rally. If we had paid everyone $25,000 roughly to stay home, it would be about what the public health cost is for that event. About 250,000 people attending largely not engaging in social distancing, not wearing masks, engaging in behavior that is directly that we know scientifically helps suppress the virus in the States.
I think the most likely scenario is either scenario two and possibly scenario three, where we have some regionalized lockdowns, likely not to be as severe as what we endured in the spring. But either way, we’re looking at a recovery probably in the second half of next year. If we do not get an effective vaccine, or if we have difficulty in getting people to take the vaccine.
So you may have seen some of the surveys I’ve seen from various outlets, that show as many as 30 to 50% of people in the United States would not take the vaccine, even if it were available today. So all of those things put the economy in jeopardy and would likely prolong the pandemic. And delay the recovery until 2022.
So here, just to wrap up the opening comments, I don’t want to leave everything with such dire straits. This too is a slide that we presented back before the pandemic. And all I did was go through and just color coded from red, the ones we can kind of take off the table and green, the ones that are happening actively and yellow, the ones where we’re not quite sure about yet, but these are the things that could actually go right.
The first one that innovation takes off and that hopefully you’ve had some experience over the past couple of days, seeing all of the different areas where that is already happening and where this type of innovation, helping the pandemic really re-incentivize innovation that goes directly to quality of life. Those are really exciting things to be happening.
Unfortunately, sometimes it takes something like a pandemic to incentivize that type of innovation. Otherwise, Well, we typically get the cycle of innovation where the low-hanging fruit. So consumer-facing innovation that translates directly into app purchases or consumption. Those are the ones that businesses are mostly incentivized to work on in the immediate.
Longer-term innovation, the types that make meaningful changes to quality of life, those are typically precipitated by crisis. And we saw this not only with say the great resession and some of the policies that emerged from that. But throughout history, even going back to the 1918 pandemic, a lot of the public health innovations that were made in America were a direct result of innovations that were forced to be created as a result of that 1918 Spanish flu pandemic.
The other thing that I would point to is for much of the past decade, the recovery was really isolated in those major urban areas. So if you think about the high-tech urban areas and the San Francisco, San Jose. Even if you look at places like Atlanta or Austin, Texas, Boston, there was really a very strong divide between the fortunes of those who lived in those urban areas. And if you go even 60 miles outside of a major urban area in rural America, you saw the perception of the economy and their experience of the economy being radically different.
And that in our view is indicative of that K shaped economy. So what has happened as a result of the pen is you have a different incentive to move away from high density, urban areas. You have technology that has enabled people to work from home indefinitely, sometimes permanently from different areas.
And then this creates new demand in those areas where things like 5g that could enable a significant quality of life differences. So if you think about something as normal and everyday as dealing with diabetes or high blood pressure to keep it in the health realm, that if you’re 90 miles from a quality medical institution, your access to that care requires significant investment in your time.
Whereas, if you live in a high density urban area, then you may be 10 or 20 minutes from high quality healthcare. So 5g enabling that type of telehealth and telemedicine to be monitored from afar in high quality days, that could be a game changer and could be incentivize businesses to locate to areas where prior to the pandemic, you might never considered.
The other thing that I would note that I think is optimistic is at about a week and a half or so, less than a week and a half, we’ll have another election and regardless of the outcome, I think that we’ll be able to look back at 2016 to 2020 as really being the peak period of polarization in the United States. So at least in our lifetime.
And so as baby boomers begin to age out of policy-making roles and you have millennials and Gen Z aging into those policy-making roles, I think that will bring with it a new view on collaboration, which is likely to find the coming decades and just-in-time, because we do have some significant policy challenges that’ll have to be addressed.
So if you think about the labor enabling technology, things are enabling this conference for example. Migrating now towards use of technology that is ultimately labor replacing. That’s going to pose a significant policy challenge. AI and robots don’t pay payroll tax. They don’t consume. And so the more that labor replacing technology starts to take away some of those jobs. And some of the incomes that many people have relied on, there has to be a safety net to be able to get past that type of real policy crisis. As well as addressing the unbalanced growth we have in that K-shaped economy.
Questions From the Audience
So I’m going to stop sharing here, get your comments, find out what your thoughts are. It looks like Jeff is requesting the mic. There you go. Hi Jeff.
Jeff: I just reached out to you on LinkedIn. I’m interested in tapping your expertise at another time, but I’m curious if you have any sense of the kind of pushback. I represent a technology platform that to a certain extent is replacing jobs within database administration, things like that. And I’m wondering if people can be pivoted and excited towards new opportunities. Or if there’s going to be like serious pushback and fear and Oh, no, I don’t want to have anything to do with that. Or how would you best suggest to like, get people excited about the positive aspects of change and not losing job stuff?
Kevin Depew: That’s a great question. And that’s what we mean by a policy challenge. We’ve talked about infrastructure investment for four years now and regardless of the outcome of the election, there likely will be some infrastructure investment. And what sometimes gets lost, people think of bridges, roads, tunnels, and it’s infrastructure, but infrastructure is also education and provide the ability for people to skill up, to meet new labor challenges.
So I’m optimistic that type of labor replacing technology will create new jobs, but in the near term, it’s not going to create jobs that the people who need jobs are qualified for. And so that’s calls for some infrastructure investment. Longer term, I think the pushback you anticipate is similar to what has been announced recently with anti trust, of Google breaking up big tech and figuring out how do we generate tax revenue by focusing on technology companies that are engaged in those labor replacing technologies.
It’s going to be a serious discussion. I don’t think it’s going to be a smooth road. And even if you go back to the industrial revolution, you have long periods where governments actively suppressed technology because of the fact that it was labor replacing. You think of textiles. One of the first areas where that occurred, there was significant pushback.
In some cases, outright banning the use of technology because of the social unrest that will be created if you reach a certain scale where people just did not have any access to info. Like even in New York City, you had the Lamplighters Union that persisted long after it was possible to just flip a switch and light up all the streets, they would literally go around and turn the lights.
We can anticipate some of that, but I think that what I’m optimistic about, the Luddites, I see that in the chat. What I’m optimistic about is in a period of increasing collaboration that we’re able to work together to meet that type of challenge, so it’s not oppressive of technology and not keeping it at bay when it could really provide significant quality of life enhancements.
Jeff: I’m thinking on a policy level that it might move the government to offer some kind of incentives to retrain employees or somehow so that they can retrain employees without it being like another painpoint on their books.
Kevin Depew: I’m optimistic too. There are a number of cities and areas around the country that are experimenting with universal basic income. I read a great story in Compton about someone that it wasn’t a major amount. It was like $1,500, I believe per month. But what it enabled was for somebody to skill up without the stress of just buying shelter and food for the family.
And so I think those types of policy decisions can go a long way towards smoothing this out. And so we can have an economy that’s functioning, that’s taking advantage of innovation and technology, but at the same time, providing people with at least a safety net so that they can pursue different skillsets, longer term.
Susan Stibal: That was a great question. And we have one more question from Greg Christensen. Do you see the opportunities for rural areas to leverage this new dynamic? Or do you see it as accelerating the decline in the population?
Kevin Depew: This is already happening? I think it’s a little bit akin to the old frog up out of boiling water that you wake up one day and you notice that, Oh my God, the water is boiling. That when you start to look around rural America and travel around, which I used to be able to do, you would see this already happening.
5G investment, for example, and you dealt with the technology company that was in the rural part of Western New Jersey. And they went in and had a conversation because they wanted to open a business there, but they didn’t have the infrastructure from high-speed internet to be able to do it successfully. And they were able to create an incentive program that benefited not just the company, but the entire rural area.
So I’m optimistic that those types of out of the box thoughts and collaborations will be something that makes rural America more attractive and also reduce some of the stress that you have in major urban overcrowded areas. There’s not enough housing. So thinking specifically of places like New York City and San Francisco, where prior to the pandemic you had outrageous housing costs, nobody could afford to live there.
So I think it also reduces the stress and has the two full benefit of making rural area more attractive and then urban areas, a little more livable.
Susan Stibal: Kevin, thanks so much. That was one of the best economic presentations I’ve seen in years. So thank you.
Brian Ardinger: That’s it for another episode of Inside Outside Innovation. If you want to learn more about our team, our content, our services, check out InsideOutside.io or follow us on Twitter @theIOpodcast or @Ardinger. Until next time, go out and innovate.
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