June 26, 2020
In retrospect, the lockdown and initial reopening were relatively swift. A full recovery will not be.

Key Takeaways:

  • We still see a ‘swoosh’-shaped recovery path, which equates to a shorter but much deeper-than-average recession with an average length recovery, taking until early 2022 to regain the lost ground.
  • Further COVID-19 infections will not derail the recovery, though it will certainly impact the pace.
  • Reopening has been sluggish and uneven—both by industries and regions, which will persist for quite some time.

Taking the Stairs with Our Swoosh

Roughly a month ago, we rolled out our view for the shape of the recovery resembling Nike’s iconic ‘swoosh’ logo. We anticipate a shorter but much deeper-than-average recession with an average length recovery, which will take until early 2022 to regain the lost ground. This view has been further reinforced in the past month based on the incoming data.

Richmond Fed President Tom Barkin recently said, “The economy took the elevator down to the basement, but is taking the stairs back up.” We believe this analogy encapsulates the rapid, compressed timeframe of the recession, and the longer recovery we expect. Indeed, there will be a lot of huffing and puffing, and it will feel like a much longer journey on the way back up.

There are several reasons for optimism. Chiefly, the size and speed of the support programs from the Federal Reserve and the federal government have helped markets function properly and provided temporary income support for eligible households, respectively. These support programs are allowing many people to tread water rather than be swamped by the sudden loss of income. And this is a global phenomenon, not just in the US. Moreover, unlike a typical recession, private lenders and landlords have offered accommodations such as payment forbearance and rent relief. Combined, these actions are staving off delinquencies and bankruptcies.

Conversely, the pandemic is not conquered yet. While the world better understands how to deal with COVID-19, it is still a highly contagious virus. The world needs one of three remedies to move forward: a vaccine, an effective treatment or herd immunity, which is a sufficiently high proportion of the population that becomes immune to the coronavirus.

Additionally, typical recessionary forces have taken hold, which is readily apparent in the employment data. The trend is improving, but extremely painful to witness. Initial jobless claims are increasing at a 1.4 million-per-week clip, which is down from the 6.9 million claims at the peak in the last week of March, but would still be a pre-COVID record.

COVID-19 Infections Will Not Derail the Recovery

The premise of the lockdowns was to flatten the curve such that the number of COVID-19 cases did not overwhelm the healthcare system, which was largely accomplished here in the US. It also bought time to implement response strategies to limit the spread of the virus, including ramping up the production, sourcing and use of personal protective equipment like masks, gloves, etc. But, as Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, has repeatedly said, “the virus will not just ‘go away.’” Alas, the world cannot immediately resume all prior activities upon reopening.

In the intervening four months, the medical world has learned quite a bit about COVID-19, including how the virus is spread and a more accurate mortality rate. While COVID-19 is highly contagious, it is not nearly as deadly as initially feared. That does not permit the world to throw caution to the wind. On the contrary, we should maintain social distancing, and continue diligent public and personal hygiene measures, which should help reduce the spread.

More infections are inevitable, especially without a vaccine. While there are several treatment drugs and vaccines in early-stage clinical trials, it is too early to factor those in. A medical breakthrough would accelerate reopenings. Nonetheless, we expected subsequent infection waves, albeit smaller than the first, as has been the case globally. Yet, improved and widespread testing along with contact tracing should help mitigate the size of subsequent waves.

Accordingly, just as the lockdowns were not entirely predicated on eliminating COVID-19 infections, neither is the economic recovery, though substantially increased inflections will certainly impact the pace. Case in point, Texas halted its phased reopening plan due to a surge in infections. Such setbacks are to be expected, but we anticipate similar localized or regional pauses rather than widespread lockdowns. Meanwhile, areas that were hardest hit with the initial onset, such as New York City and parts of California, are only now in their earliest phase of reopening. Both of these trends will run concurrently as we move forward.

Reopening Has Been Uneven

There have been stark contrasts by industry and region. Incoming economic data has been mixed generally; most activity-based indicators are showing a sharp rebound off of their lows, but remain well below pre-COVID levels.

Quick-Service Restaurants and Housing Remain Strong

On the industry front, some activities have ramped up quickly. The most prominent have been restaurants, primarily quick-service restaurants. Their drive-thru windows have allowed service to continue while respecting social distancing guidelines. All of the regional manufacturing surveys indicate a sharp rebound in June from their lows in April and May. Housing has also been surprisingly strong, though it has been plagued by very limited supply for better than a decade. The pandemic has only exacerbated the lack of supply, especially for existing homes, which have seen listings plunge nearly 20% through May. Similarly, auto sales have rebounded but new vehicle supply is severely limited due to nearly two months without production. That low supply has backed up into the used car market as trade-ins from new sales become inventory for used vehicles.

Routine Health Care Gradually Reopening

Routine health care, such as general wellness, dental, dermatologic and optical appointments, have slowly begun to restart. Besides being necessary for long-term health, routine health care is a big part of the US economy. The decline in healthcare services carved off 2.04 percentage points from overall gross domestic product (GDP) during the first quarter, which declined 5.0% overall.

Travel-Related Activities Still Hampered

Other activities appear hampered in the near term, especially those dependent on long-distance travel or requiring crowds. Of course, cruise ships remain docked, while US airline passenger traffic remains down about 80% year over year. Hotel occupancy remains under 45%, which is down more than 40% from a year earlier. Full-service/fine dining restaurants remain significantly disrupted, particularly since nearly all states are currently restricting seating capacity and most fine dining food does not travel as well (by delivery) as quick-service foods. Ditto for movie theatres and live performances, concerts, sporting events, amusement/theme parks, museums, etc.

Movement Varies Widely by and within Regions

On a regional basis, most states in the south/southeast generally appear ahead of the rest of the US in terms of activity based on mobility data from Apple, Google and TomTom Traffic Data. The Midwest is mixed, while both the east and west coasts remain hampered by the initial wave of infections. That said, the aforementioned surge in new cases in Texas has been mirrored in Arizona and Florida. Such setbacks will likely reoccur going forward.

Even within regions, there are differences. For instance, Norfolk/Virginia Beach is the only major market with hotel occupancy above 50% (54%), while several remain under 30%, such as Orlando (28.2%), Boston (26.1%) and Oahu Island (13.7%). Moreover, ridership on public transportation remains below 50% of pre-COVID levels.

Bottom Line

While the lockdown and initial reopening were relatively swift in retrospect, the recovery will not be quite as simple. Unlike shutting down, which was a fairly straightforward process, there are a myriad of details that must be worked through for reopening. We were encouraged on some fronts and disappointed by others. Overall, we are generally optimistic about the recovery path, which should resemble a swoosh. More importantly, the recovery will take time and will feel like a much longer journey. In keeping with Richmond Fed President Barkin’s analogy, the US will take the stairs on the way back up.


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