Thursday, April 30, 2020

GDP Prediction

Simple math problem, perhaps. To predict GDP for the 2nd quarter of 2020, a full 13 weeks of economic lockdown, with minimal easing as of this date.

GDP for the 4th quarter 2019 might mimic the first 10 weeks of 1Q2020. That had growth of 2.1%. The last 3 weeks of the 1st quarter was low enough to drag the whole quarter into a 4.8 decrease. (By the way, the Fed Reserve of Atlanta estimated a 1.0% drop. These GDP estimates are often revised as more detailed info is input. But we’re using BEA numbers.)

Simply solving for x, we can predict what GDP might be for the 2nd quarter assuming our experience throughout the April - June timeframe is similar to the last half of March:

((10*.021)+(3*x))/13 = -.048

Therefore, based on available info, 2nd quarter of 2020 GDP will be -27.8%.

Fortune magazine reported that the range would be -8% to -15%. Morgan Stanley projects a -38%. As reported in Business Insider, the Bloomberg organization predicts -25%.

Since you’re living the 2nd quarter as this is written (we’re one-third through it), you know the impact on your business. And anyone’s prediction needs to be a broad range as to when the whole economy will rebound and you can have confidence that your customers will have financial security enough to spend.

Friday, March 27, 2020

Cure and Cost

The President made a lot of news and there was a lot of backlash at his expression of hope that we'd be back to 'normal' by Easter this year (April 12) and no longer social distancing, imposing 'shelter in place' quarantines, shutting down non-critical/non-essential businesses, etc. He quoted some pundits opining that the cure would be worse than the cost. Others noted, and (insincerely) declared that they as older Americans would sacrifice themselves so the country would 'reopen'.

I'm not an expert in epidemiology nor economics nor actuarial science. However, I can do some 'envelope' calculations for my company. Let's say it's 100 employees and $6M in sales, for a (gross) productivity number of $60,000/employee. Let's also presume that prior to March 1 of 2020 I've had trouble finding employees to hire, and that I have no extraneous, superfluous positions in the company. Those positions were eliminated in the financial crisis of 2008-2009 and I've been careful before adding any positions. My employees also have typical efficiency and effectiveness and productive capacity to those in your company. Total PTO averages 3 weeks/employee, or capacity/employee is 49 weeks. Weekly productivity/employee is just over $1,200.

As of this date, from some of the best data I could find, the positive test rate is roughly 14%, a lot higher than an earlier worldwide rate of 3%. That is, 86% of people being tested, presumably most with upper respiratory symptoms--cough, fever--are not sick with COVID-19 but another ailment such as one of the influenza types, another upper respiratory problem. The expected hospitalization rate is 14% of those testing positive and the current death rate has been steady at about 1.5%. As reported, the death rate is higher in older people; the rate is 0.5%-3% for working age people therefore I'll stick with 1.5%. Hospitalization rate is also higher in retirement age persons but is consistent at 17-20% for working age persons.

Current estimates of total infection rate is 40-80% of the population. Let's start with 40%. If my employees continue to work as normal, this may be a low estimate but we'll stick with it.

  • Number of employees infected: 40
  • Number of employees with infected family members (avg. 2 other family members): 64 (40%x2-40%^2 i.e. 80%-16%).
  • Time lost per infection without hospitalization: 2 weeks
  • Time lost with hospitalization of employee: 6 weeks
  • Time lost with hospitalization of family member: 3 weeks
  • Time lost for death of family member: 1 week
  • Potential deaths of employee: <1 li="" x1.5="">
  • Potential death of employee's family member: 1
  • Potential hospitalized employees: 5 employees (40x12%)
Total time lost: 293 weeks or 6% of total capacity
Total productivity loss: Just over $350K, 6% of sales

This doesn't sound like much and it certainly is conservative. Depending on the net margin of the company, a drop in 5% in sales or profitability can mean a drastic overhaul of how the company operates and is structured. We haven't accounted for loss of productivity when people operate in times of stress, anxiety, fear inside and outside of work. Nor when their teams are decimated and there are delays, gaps, errors by fill-ins, etc. We have accounted for any hiring and training/education costs if we can find candidates to apply to our company. We haven't considered any loss due to customers resourcing their business elsewhere. Nor have we considered losses due to supply/service disruptions due to our own missing personnel and communication omissions and errors.

There are still too many unknowns in this estimate. This can be worse if the 40% infection rate is low. It might be too high an estimate if a vaccine is quickly created. It could be worse if an infected-and-recovered individual is not immune and subject to re-infection contrary to most other viral infections.

So then what? It just seems the best path is that I do whatever I can to keep my employees and their families as healthy as possible. There might be schedule modifications, personal protective equipment provisions, self-quarantine options. What are your ideas?