“The two most important days in your life are the day you are born and the day you find out why.” ~Mark Twain
Question: When will the U.S. economy fully recover from the recent economic contraction due to Coronavirus/COVID-19?
Answer: Given the recent rally in financial markets, it’s hard not to hope for the same sharp rebound in the economy. But we know that the economy isn’t the same as equity markets. Answering your question reminds me of road trips with the kids and the common cry of “Are we there yet?” from the backseat. The answer is that it will likely be a long time before the economy returns to pre-COVID-19 growth levels.
Pessimism, Skepticism and Optimism
Similar to stages of grief, we’re experiencing emotional phases with COVID-19. Optimism surrounding the expected eventual U.S. economic rebound as led to positive market activity. In fact, the Citi Economic Surprise Index, which measures the extent to which data is coming in versus expectations, spiked approximately 30 points above its previous record high in 2011. However, it is important to realize that this rate of acceleration from the bottom and magnitude is likely not sustainable, it is more of a reflection of a quicker than expected bounce off of severely depressed levels. Due to the suddenness and rigidness of the shutdowns, the full recovery from the significant virus-induced decline in economic activity (~-23%) isn’t likely to fully occur until the end of 2021.
If we looked at the expected recovery as a road–trip, the labor market may need some roadside assistance. Although the June 5 jobs report reported a gain of just over 2.5 million jobs rather than the expected loss of 8 million, it does not alone erase the 45.7 million unemployment claims that have been filed since mid-March (as reported by the Bureau of Labor Statistics). With the gradual reopening of the economy, we hope these workers will be rehired once employers reopen their doors, but some may still need assistance over the near-term. Employment conditions are expected to slowly improve, the unemployment rate remains significantly higher, expected to be near 9% at year-end, than at the beginning of the year according to the BLS.
Not There Quite Yet
Based on data supplied by the U.S. Census Bureau, May retail sales more than doubled, yet are still down 6.1% on a year-over-year basis according to the U.S. Census Bureau report. While sales are expected to rebound, especially via e-commerce and online, it will probably take us well into next year to fully recover consumer spending. Consumer confidence, and indicator of future spending, remains near multi-year lows and the percentage of people who expect to see an increase in income over the next six months declined to the lowest levels since 2013. This uncertainty is evident in big-ticket items like motor vehicles with sales down 30% year-over-year, and not expected to rebound to pre-COVID-19 levels until the unemployment rate falls in a meaningful way.
Road Open Ahead
It has been over 100 days since the World Health Organization declared COVID-19 a global pandemic, and it is remarkable how far the U.S. has come during this time. The hope is that we are on the right route to phased reopening without too many unexpected detours. The discoveries made on the therapeutic front continue to provide hope, although we still need more evidence, that we can combat the outbreak as we open the economy. A Second Wave of COVID-19 outbreaks, especially those requiring hospitalization, continues to be the biggest downside risk to the economy and markets. In addition, the risk of geopolitical flare-ups remains with China. The answer to the question “Are we there yet?” is “Not quite.” Stay focused and plan accordingly.
Past performance may not be indicative of future results. There is no assurance these trends will continue. All investments are subject to risk. The opinions expressed are those of the writer as of June 19, 2020, but not necessarily those of Raymond James and Associates, and subject to change at any time. There is no assurance that any investment strategy will be successful. Asset allocation does not guarantee a profit nor protect against loss. Information obtained from outside sources is believed to be reliable but cannot be guaranteed as such. This information should not be construed as a recommendation. Economic and market conditions are subject to change.
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