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Tags: Coronavirus | trump | economy | reopening | consumers | virus

Trump's Early Reopening of Economy Hinges on Consumers to Be a Winner

Trump's Early Reopening of Economy Hinges on Consumers to Be a Winner

By    |   Wednesday, 06 May 2020 11:29 AM

During a visit to a mask-manufacturing factory in Arizona on Tuesday, President Donald Trump said: “Mike Pence and the task force have done a great job, but we're now looking at a little bit of a different form, and that form is safety and opening. And we'll have a different group probably set up for that.” 

When journalists asked him was asked if this was “mission accomplished,” he said: “No, not at all. The mission accomplished is when it's over.”

Trump acknowledged there will be a human cost to the plans: "I'm not saying anything is perfect, and yes, will some people be affected? Yes. “Will some people be affected badly? Yes. But we have to get our country open and we have to get it open soon,” the BBC reported.

Trump appears to assume an early opening will in some way be positive for the U.S. economy.

In my opinion, this is not necessarily true.

The “bounce back phase” depends critically on the confidence of the consumer. Confident consumers will spend their delayed consumption. Confident consumers will spend any forced savings that they have accumulated during the lockdown period, but that confidence depends on a couple of things:

  • First, confidence that jobs are safe. This will be harder in the United States where the furlough scheme is a temporary layoff, an involuntary leave or another modification of normal working hours without pay for a specified duration. Businesses use furloughs for a variety of reasons, such as plant shutdowns, or when a broad reorganization makes it unclear which employees will be retained.
  • Second, consumers need confidence that they are safe to go outside. With the death toll outside of New York continuing to rise, ending the lockdown too early may do further damage to consumer confidence.

If that happens, then the economic downturn will take on a life of its own and becomes independent of the policy response to the coronavirus. That’s because the businesses would fail as a result of “fear” rather than as a direct result of lockdown policies.

Currently, more than two-thirds of Americans are reporting that they are worried about contracting the virus, Axios reports.

Meanwhile in Europe, the German Constitutional Court appeared to overrule the European Court of Justice and said that Germany must not participate in the European Central Bank (ECB) bond buying program as related to the last crisis within 3 months unless clear conditions are met.

The panel of lawyers seem to be trying to decide what “economic policy” is and what “central bank policy” is. It is not necessarily their field of expertise.

Effectively, this creates an obstacle to the ECB conducting policy, but it shouldn’t prevent the ECB from doing its job. There was a pointed reference to the European Court of Justice’s support that dates from December 2018, in the ECB’s response to the ruling. The ECB should be able to meet the conditions set, or at least convince a group of lawyers that they have met the conditions set.

We’ll see what comes out. Anyway, this is not a positive for investors who have or intend to have euro-linked investments.

While the euro and Euro Area bonds weakened somewhat in the wake of the decision, the response has been, for now at least, relatively modest.

Finally, we got German new manufacturing orders that tumbled 15.6 percent month-over-month in March, compared with market expectations of a 10 percent fall and after a downwardly revised 1.2 percent drop in April. This was the steepest decline in factory orders since at least 1991, reflecting severe damage caused by the coronavirus crisis. Foreign orders plunged 16.1 percent, due to lower demand from both the Euro Area (-17.9 percent) and other countries (-15 percent). Also, domestic orders plummeted 14.8 percent.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Trump appears to assume an early opening will in some way be positive for the U.S. economy. In my opinion, this is not necessarily true.
trump, economy, reopening, consumers, virus
Wednesday, 06 May 2020 11:29 AM
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