Green shoots are starting to appear in the economic landscape, but my outlook for a slow and painful recovery remains in place. Third-quarter GDP will enjoy a healthy rebound after second quarter’s revised 31.7% fall at an annualized rate but returning to our pre-crisis trend level of growth will not occur until 2023 at the earliest.
Figure 1 shows the incidence of COVID cases in some of the most populous states. States like Florida and Texas that had been hotspots four to six weeks ago have seen their caseloads head in the right direction, but the number of cases remains elevated. Whether we see an additional spike in cases due to cooler temperatures or as students return to classrooms remains to be seen. Fortunately, six different vaccines are in Phase-III clinical trials, and many government officials are hopeful that some will be widely available before the end of the year. Only after vaccines have been released and a majority of the population has received them will the economic recovery gain stronger footing.
Consumer sentiments remain in the doldrums as shown in Figure 2, but there are some glimmers of optimism. For example, Figure 3 shows that the housing market remains hot thanks to record low mortgage rates.
Moreover, as Figure 4 shows, retail sales aside from restaurants and bars have recovered completely, thanks in part due to strong sales at home improvement stores and large merchants like Walmart and Amazon. States have begun relaxing some restrictions on eating establishments. For example, here in Pennsylvania sit-down restaurants have been open about two months, but with most dining being outdoors and with tables spaced far apart. Whether these restaurants can afford to operate at such a reduced capacity remains to be seen, though.
Third-quarter GDP will expand rapidly. The Atlanta Federal’s GDPNow model predicts GDP to grow by 25.6% at an annualized rate. The New York Federal’s nowcasting model predicts 14.6% growth. However, that rate of growth cannot be sustained for more than one quarter. I like to think of there being a pecking order that determines when businesses return to pre-crisis levels. Now in the third quarter, strong firms that had cut production or hours worked can relatively easily restart their engines. As we go down the pecking order the rate at which firms can restart must slow down; and some firms will never restart. For example, many retailers, restaurants, and other small businesses have been shut for good, and it will likely take years before new entrepreneurs have the confidence to start new businesses and fill the vacuum.
Supposing the more optimistic GDPNow model for third-quarter GDP is correct, GDP would have to grow at an annualized rate of 7.9% for each of the following five quarters in order to reach its pre-crisis trend by the end of 2021; such a rate of growth is far beyond anything we have ever experienced. To reach the pre-crisis trend by the end of 2022 would require a growth of 5% annualized in each of the next nine quarters. Now you know why I think it will take years to recover.
Figure 6 shows investment has fallen by about 14% from its peak at the end of last year, and consumption is down about 11%. Earlier we looked at improving retail sales, but retail sales are only about a third of total consumption. Moreover, more dollars are spent on services than on goods, and services spending has borne the brunt of the decline in consumption; see Figure 7. We can order stuff on Amazon to use at home, but many services are simply forgone thanks to COVID.
Figure 8 shows that orders for durable goods have rebounded sharply and are within spitting distance of their pre-crisis trend, a sign of optimism about the future. However, travel and leisure and hospitality spending, here as measured by the number of passengers boarding airplanes, will not recover until we are vaccinated against COVID. American Airlines just this week announced plans to lay off as many as 19,000 employees just as soon as funds from the airline bailout package passed as part of an earlier stimulus bill run out.
Firms can best be described as uncertain. Most publicly traded firms have ceased issuing forecasts for future sales and earnings given the lack of visibility. The ISM non-manufacturing index is above its neutral threshold of 50, but Moody’s Analytics’ survey of business confidence remains in recession territory. The ISM covers U.S. firms, while Moody’s Analytics’ survey is worldwide; and that could account for some of the discrepancies. That said, our hunch is that the ISM index is too optimistic regarding growth beyond the third quarter.
Given the uncertainty surrounding the economic outlook, banks are reluctant to extend credit. According to the Federal Reserve’s Senior Lending Officer survey, more than half of banks have tightened credit standards for consumer, CRE, and C&I loans. The recovery will remain subdued as long as access to credit is constrained. Of course, large, publicly traded firms have had success in tapping the bond market, but smaller firms and individuals need access to credit as well.
Finally, Figure 11 updates the unemployment insurance chart we have been showing. New data released this morning shows initial claims still a whisker over 1 million in the week ended last Saturday, and I remind you that prior to COVID we had not seen 1 million people claim unemployment in a single week even at the depths of the Great Recession and even after adjusting for a growing population. We have also added the cumulative number of people who have applied for the federal government’s supplemental pandemic assistance program that kicks in after a worker’s state-level unemployment insurance benefits have run out. All told, 30 million Americans are currently receiving some sort of unemployment insurance.
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