Last month, I entitled June’s post “The Approaching Light Before the Dawn.” Much of the economic data at that time was extremely negative, with record declines in employment (U.S. BLS employment data) and consumer spending (U.S. BEA). The speed of the decline had no modern precedent.
With government-imposed lockdowns and business closures, companies furloughed employees at a furious and painful pace. It is difficult to express in words, but it has been disheartening to see friends and family members sidelined from the workforce.
We are now in a recession, according to the National Bureau of Economic Research. The NBER is the official arbiter of recessions and expansions. The prior expansion, which began in 2009, officially peaked in February, having lasted a record 128 months.
In making its determination, the NBER concluded, “The unprecedented magnitude of the decline in employment and production…warrants the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions.”
The shortest recession on record lasted just six months and occurred in 1980. Second place: a seven-month recession in 1918-19, which was tied to the Spanish flu pandemic. There are five recessions that lasted eight months, including the 1957-58 recession that coincided the Asian flu pandemic.
While the economy is much different today, the recovery from the short, but steep 1957-58 recession was robust (St. Louis Federal Reserve).
That brings us back to last month’s title, “The Approaching Light Before the Dawn.”
Given surprisingly strong data in May, April may mark the bottom of the economic cycle. If so, it will be the shortest recession on record. Let’s also acknowledge that the speed and depth of the decline have no modern parallels.
The U.S. gained 4.8 million jobs in June (better than expected). Meanwhile, the unemployment rate headed lower to 11.1% form 13.3% in the month prior.
Consumer spending, which fell a record 6.6% in March and a record 12.6% in April, rebounded by a record 8.2% in May (St. Louis Federal Reserve). Pent-up demand, stimulus checks, generous unemployment benefits, a rise in employment, and reopened businesses supported sales.
Consumer confidence is also improving per the Conference Board’s Consumer Confidence Index. It remains well below pre-coronavirus levels, but rising confidence and re-openings are supportive of economic activity.
Still, not all is rosy. And a strong recovery is not assured, as visibility remains incredibly limited.
Layoffs, as measured by first-time jobless claims (Department of Labor), are slowing but remain at unusually high levels. The weekly layoff numbers have been more than double what we saw at the peak of the 2007-09 recession.
Forecasting in today’s environment
In his testimony before House committee on June 30, Fed Chief Powell said, “Many businesses are opening their doors, hiring is picking up, and spending is increasing. Employment moved higher, and consumer spending rebounded strongly in May. We have entered an important new phase and have done so sooner than expected.”
But he also recognized the need to keep the virus in check. “The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus. A full recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities,” Powell added.
We are seeing a spike in Covid-19 cases in many states, which is creating a new round of uncertainty. It has fueled choppier day-to-day activity in the market. Yet, at least so far, the bull market seems to be coexisting with the rise in cases.
Despite higher infection rates, deaths continue to trend lower. This reduces fear somewhat and in turn reduces odds of new lockdowns.
U.S. Treasury Secretary Steven Mnuchin took a more optimistic tone in his testimony with Powell. “The Blue Chip Report is forecasting that our GDP will grow by 17% annualized in the third quarter, and by 9% in the fourth quarter,” which follows what is expected to be record contraction in Q2. Mnuchin also expects significant progress on the employment front.
V-, U-, L- or W-shaped recovery
Economists give economic recoveries what might be called a letter grade when discussing possible paths. It’s not the traditional A through F scale. Instead, the letter intuitively describes the shape of the recovery.
A V-shaped recovery would be ideal, as it would represent a robust bounce. Might we get a V? Data in May was unexpectedly strong and cautiously encouraging. However, even during what we might consider more normal times, forecasting is difficult. Today, there’s no playbook and no framework to model outcomes.
I could give you several reasons to see a strong rebound unfolding. I could also give you several reasons why a sluggish recovery might take place.
The strong rebound in stocks since the late-March low is astounding, especially given the economic damage. It suggests the collective wisdom of investors is more optimistic.
Fed support, rock bottom interest rates, the reopening trade, and stronger economic data have helped. I also believe investors are looking past this year’s hit to corporate profits and are expecting an upturn in 2021.
The jump in daily cases has created some renewed volatility, and it bears watching, but it has yet to knock the bulls off course.
Ultimately, the path of the virus will play the biggest role in how the economic outlook unfolds.
Some folks are itching to get back to normal, while others remain on guard against the disease and are taking a more cautious approach. It may take time for some businesses to fully recovery. Some never will.
Last month I said, “Don’t expect a return to a pre-Covid jobless rate anytime soon. But investors are betting that an economic bottom is in sight.”
Try to look past continued volatility. However, based on recent economic reports, I think we may have hit that bottom in April.
As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.