May 28, 2020
Understanding this US recession, why it’s different this time, and the shape of the coming economic recovery

Executive Summary:

We anticipate a shorter but much deeper than average recession with an average recovery, which will take until early 2022 to regain the lost ground. The shape of the recovery will more than likely resemble Nike’s iconic ‘swoosh’ logo rather than the U-shape we previously expected.

US Recession and Recovery Shape: Nike ‘Swoosh’

We believe that the recession, which began in the first quarter of 2020, will be a brief but painful contraction that lasts for two quarters. We now anticipate that second quarter gross domestic product (GDP) will decline nearly 40% on a seasonally-adjusted annualized rate. The second quarter will also mark the trough of the contraction, the end of the declining phase and the start of the

expansion phase of the business cycle. Note that some lagging indicators, such as monthly jobs (nonfarm payrolls), will likely continue to deteriorate well beyond the trough. The trough denotes a point in time when the tide has turned for the economy rather than when most things are repaired economically, which will likely take until early 2022.

We previously anticipated a U-shaped recovery path; however, it appears that the recession and recovery will not be symmetrical. The shape of the economic recovery we expect now will resemble a Nike ‘swoosh’, characterized by the rapid collapse in activity due to the government-mandated COVID-19 lockdowns and a rather robust upturn, albeit longer in terms of months than the collapse.

The Typical Recession-Recovery Timeline

The average recession since World War II has lasted 11.1 months from the prior peak to the trough, according the National Bureau of Economic Research.

The subsequent recovery—the time needed to exceed the prior peak in GDP—has taken 19.4 months on average, or just over a year and a half. Following the last recession, the so-called Great Financial Crisis, the recovery took 45 months or nearly four years to exceed the prior peak. However, we believe that this time is different.

Quicker Recession, Average Recovery Length: Why This Time Is Different

There are three key reasons why we believe that the recession will be shorter than average, while the coming recovery span will likely be average.
First, the collapse in activity was caused by mandatory government lockdowns rather than shuttered voluntarily due to a weakening economy or business conditions. The US economy was doing fairly well prior to COVID-19. Hence, the impediment to growth is easier to repair, as opposed to the typical recession instigated by a banking or housing crisis, an asset bubble, trade imbalances or policy mistake. That said, a quick recovery is not in the cards given the sheer amount of damage to the economy (over 20 million jobs lost in March and April alone). It will take more than a few months to repair such damage.

Secondly, government aid, which was done through the CARES Act and three related supplemental bills, has helped individuals and businesses stay afloat. More than a third of the $2.1 trillion CARES Act, which was passed in late March, was structured as income transfers and tax deferrals. Those income transfers include $301 billion for the CARES Act checks as well as $250 billion for unemployment benefits, which were expanded to more job categories, enhanced an extra $600-a-week through July 31 and extended to 39 weeks from 26 available in most states. Another $221 billion were federal tax deferrals and extended deadlines. Just these three measure are nearly as large as the entire American Recovery and Reinvestment Act of 2009 (ARRA).

Lastly, the speed of the government aid this time has been nearly concurrent with the onset of the recession. Comparatively, it took Congress more than a year after the recession began in December 2007 to pass the ARRA.

We do not expect all of the current economic damage to be repaired in just a couple of months. It will take months for states to reopen completely. We expect that it will take seven quarters to fully recover from this recession, or about 21 months, which is roughly in-line with the average of 19.4 months for recoveries since 1945.

In the meantime, we would recommend ignoring much of the March and April economic data, most of which only highlights the government-mandated COVID-19 lockdowns instead of the health of underlying economy. We are focused on the real-time data. For instance, TSA checkpoint data for airport passengers, shows that people are SLOWLY starting to fly again, although it is down 80% year-over-year. OpenTable reservations data, which is similarly down about 80% from a year ago, indicates more people are once again making dinner reservations. Apple Mobility Trends show that people are quickly getting back to prior levels of walking and driving activity, but not taking public transit.

Bottom Line

At roughly five months, we expect that this recession will be the shortest and deepest since 1945. The coming recovery, though, will take a bit longer and resemble a Nike ‘swoosh’ rather than the U-shape we previously expected. It will likely take until early 2022 to recoup the lost ground, which is about the average length of a recovery.

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CN2020-1170 EXP12-2020