Growing Pains

Friday Reflection | March 19, 2021

“The course of true love never did run smooth.”

-William Shakespeare, A Midsummer’s Night Dream

Shakespeare had a special talent for seeing not only the tragedy but also the humor in the typical range of life’s mix-ups, and the way that a single action could trigger a wide net of unexpected consequences. The communities and families he characterized were completely transformed by the end of a multi-act play. With the pandemic, we are probably getting into the second act now, and can’t now see clearly forward to the possible twists in the plot that will set us down in an entirely new landscape in 2023 or 2024. Like Shakespeare’s characters, though, we continue to accommodate to circumstance.

In the financial world, the Fed continues to keep short-term interest rates at a historic low point, recognizing the weak data on economic recovery, such as last month’s decline in retail sales. Schools and families struggle to identify a version of learning everyone can agree is productive and safe. And the supply chain that underlies our global economy, in the technical term of a Wall Street Journal headline, is currently “a mess” while circumstances are still in flux. The course is not smooth, but progress is being made.

What many anticipated to be a three-week shutdown is now likely a multi-year transformation of just about every industry. The same stimulus package that is buoying the stock market and pushing interest rates higher on recovery optimism has also prompting hectic and novel efforts to re-design everything from education and parks to event planning and in-person office collaboration. Rapidly changing policy adds another layer of difficulty to returning to stability; just this week we heard both that the IRS has extended the tax deadline,¹ and that the CDC has reduced needed school distancing for K-12 school children to three feet.²The latter point will be welcome in the Oakland Unified School District. They have received $127 million additional funding from the American Rescue Plan, and are running fast to figure out how to strategically and effectively spend that money to restore children to classrooms, and recover both mental health and academic progress.³

The huge deluge of cash that the stimulus delivered is projected to increase GDP in the US by an additional +3.8% in 2021, primarily in the first three quarters of the year. Consumers in the US are expected to continue buying heavily from abroad, where other governments have not provided nearly as much fiscal support. The global economic diaspora is expected to increase GDP in 2021 by 1% overall, as a follow on the effect of the US stimulus.⁴

The market has responded to those expectations of growth, with all three major stock indices in positive territory for 2021, despite moving slightly lower this week. Tech stocks continue to cool, with the Nasdaq index down -10% from its recent all-time high level. The more broadly diversified S&P 500 and Dow Jones indices, with more exposure to recovering consumer and industrial sectors, remain near their highs.

Re-opening the economy is messy and complicated – just like shutting it down last year. Bottlenecks have developed as some areas of demand surge (consumer electronics) and others struggle to ramp up to pre-pandemic rates of activity (ports). The challenges of restarting are compounded by the winter storms in recent weeks that have disrupted supply chains, from plastics to clothing to semiconductors.

Shortage of raw materials for plastic products from Dow’s petrochemical plants in Texas is slowing down event tent production in Indiana and pushing prices up in Asia and Europe. Dow’s CFO estimated it would take more than six months to correct the market imbalances caused by the February storms.⁵ Demand for event tents is up as a surge of weddings is expected in the summer, and businesses adapt to outdoor accommodation. The shortage of petrochemicals also led Toyota to cut production at a Kentucky factory, as well as another facility in Mexico, while demand for new auto sales is increasing. Shortages in semiconductor chips have also led GM, Ford, and Nissan to cut production or temporarily close production facilities. These examples illustrate the complications of rebuilding a functioning supply chain.

Discussion of global re-opening is happening against a backdrop of mixed data on pandemic progress. Vaccinations are progressing in many countries, but concerns are mounting as a third wave is already rippling through Europe, and new variants are spreading rapidly in Brazil. This asymmetric recovery is to be expected but makes planning a specific path out of the pandemic more difficult. Vaccines may make 2021 a year of exuberance, or just be another factor out of many in a second year of dramatic change

This week the media hummed with one-year retrospectives on the pandemic, featuring anecdotes about the extraordinary changes and experiences we’ve had. They emphasize our current frame of mind, in that we are experiencing ourselves personally and economically in a moment out of the normal flow of time. We continue to measure the well-being of our economy – as well as our personal well-being – in comparison with the imagined normality of life before the pandemic. Looking forward, we talk of a return to normality because we long for the sense again that our day-to-day activity is in a settled and understood range.

Meanwhile, we live with ongoing change. The initial disruptions in the market in the spring of 2020 were disorienting and scary. Today, looking back in our own one-year retrospective, we know that remaining invested while finding our feet again in our day-to-day lives was the right way to go. In a way, our clients are working through their own Shakespearean multi-act play, and we’re here to help with the continuity – as well as the change – whenever a new act begins.

¹ Tax Day for individuals extended to May 17: Treasury, IRS extend filing and payment deadline. IRS Website

² CDC Eases Physical-Distancing Recommendation for Schoolchildren. WSJ.com

³ How Oakland Unified could spend millions in COVID relief funds. Oaklandside

⁴ The Global Recovery Is Made in the U.S.A. We’re Better Off for It. Barron’s

⁵ Everywhere You Look, the Global Supply Chain Is a Mess. WSJ.com