Ep. 232 - Kevin Depew, RSM's Deputy Chief Economist on Actionable Insights for a Turbulent Economy

Inside Outside Innovation

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 ...