The COVID-19 recession and high frequency economic indicators

COVID-19 ECONOMICS

The shape of things to come

The worldwide pandemic has cratered the U.S. economy in such a short amount of time that normal metrics are unable to provide a timely description. How and if the economy will reclaim its previous stature is something economists are watching closely and trying to analyze by sifting through more frequently released indicators.

Gross domestic product is a broad measure of everything U.S. workers and capital produce. In 2019 that came to about $19.2 trillion. The U.S. is currently thought to be in a recession, broadly meaning that GDP is actually becoming smaller over time rather than growing. The pace of that decline is historic.

Some project that if the current levels of activity lasted a full year, the economy might contract more than 20%. But it is quite likely growth will resume in coming weeks — in fact all 50 states have started relaxing restrictions on business as the perceived threat from the virus eases. The actual loss over the course of the year may end up being more on the order of 5% or 6%. How fast that rebound might be, and when it might start, is a matter of dispute.

POSSIBLE RECESSIONS

Economists have adopted a sort of shorthand using letters and symbols to describe recovery from recession. The shape of the letter traces the path of growth mapped on a chart, with an emphasis on the depth of the decline and how long it takes to return to the prior level.

The probabilities and descriptions below are adapted from a paper by investment insight firm Ned Davis Research and based on data from the monthly Reuters poll on the U.S. long-term economic outlook.

Real GDP

A U-shaped recovery involves a steep decline in output and employment for the first half of 2020, which is already under way. In this scenario, things stabilize in the second half of the year, but the recovery doesn’t strengthen until late 2020 or early 2021. The economy takes a year or more to regain lost output. It is given a 35% chance by Ned Davis Research, while a majority of economists polled by Reuters expect this outcome.

Real GDP

A V-shaped recovery is growing less likely. In this best possible scenario, steep declines in output and employment in the first half of the year would be followed by a sharp rebound beginning in the summer. The economy would recover lost output by the end of 2020. Monetary and fiscal stimulus fuel strong growth after that.

Real GDP

An L-shaped recovery is the worst-case scenario. Steep declines in output and employment in the first half of 2020 don’t go away. The spread of the virus and recession persist. Social distancing is prolonged. Policy failures do not provide adequate economic support. Stagnation sets in.

REAL GDP
GDP
Projection
Recession
SHAPED RECOVERY

A U-shaped recovery involves a steep decline in output and employment for the first half of 2020, which is already under way. In this scenario, things stabilize in the second half of the year, but the recovery doesn’t strengthen until late 2020 or early 2021. The economy takes a year or more to regain lost output. It is given a 35% chance by Ned Davis Research, while a majority of economists polled by Reuters expect this outcome.

A V-shaped recovery is growing less likely. In this best possible scenario, steep declines in output and employment in the first half of the year would be followed by a sharp rebound beginning in the summer. The economy would recover lost output by the end of 2020. Monetary and fiscal stimulus fuel strong growth after that.

An L-shaped recovery is the worst-case scenario. Steep declines in output and employment in the first half of 2020 don’t go away. The spread of the virus and recession persist. Social distancing is prolonged. Policy failures do not provide adequate economic support. Stagnation sets in.

HIGH FREQUENCY ECONOMIC INDICATORS

Important economic data is often backward looking. The unemployment rate is updated monthly, for example. The downturn associated with the coronavirus pandemic has developed so quickly, analysts have looked to other data types and data sources to track the depth of the downturn and to look for signs of a possible rebound. Here are a few of those indicators that provide a more granular look into the economy.

Note: The V-shaped recovery graph is derived from the median forecast from the Reuters poll of economists, while the U uses the low point of the poll, assumes no growth for two quarters, then rebounds in 2021. The L finds the low point and assumes that as of Q3 2020, the economy simply resumes trend growth of 2% annually.

Sources

Refinitiv Datastream; Ned Davis Research; Goldman Sachs; Homebase; James Stock, Harvard University; Unacast

Edited by Leslie Adler