Weekly Economic Commentary

The Expansion is Dead, Long Live the Recovery

Chief Economist Scott Brown discusses current economic conditions.

The National Bureau of Economic Research (NBER) has formally declared that a recession began in February. The expansion lasted 128 months, the longest on record (at least back to 1854). Economic data reports should suggest that the downturn may have ended in April. That doesn’t mean everything is okay. Rather, the economy appears to have begun growing again (granted from a lower base). Fiscal support and an aggressive response from the Federal Reserve have helped to lessen the damage, but much will depend on the virus and the unwinding of social distancing. Downside risks remain. Following an initial sharp bounce off the bottom as state economies re-open, it will take many quarters to get back to where we were at the beginning of the year.

The NBER defines a recession as “a significant decline in economic activity spread across the economy, normally visible in production, employment, and other indicators.” A recession begins (and an expansion ends) when the economy reaches a peak of economic activity and ends (as another expansion begins) when the economy reaches a trough and starts growing again. The NBER does look at Gross Domestic Product (GDP), but that is only available on a quarterly basis. Monthly figures play a key role in the determination, including nonfarm payrolls, industrial production, real (inflation-adjusted) business sales, and real personal income. These are the same four components in the Conference Board’s Index of Coincident Economic Indicators.

In declaring beginning and ending dates for recessions, the NBER’s job is to be definitive, not timely. For example, the start of the 2007-2009 recession, which ran from December 2007 to June 2009, was not declared until December 2008, while the ending date was declared in September 2010, more than a year after the recession had ended. The declaration of a recession normally depends on the duration of the downturn. One negative quarter has never been enough. However, the NBER noted that “the unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy, warrants the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions.”

Nothing recedes like recession. Economic data reports are fuzzier than usual because of collection problems related to the coronavirus, and figures will be revised, perhaps a lot. However, at face value, the improvement in payrolls, along with expected rebounds in retail sales and industrial production (to be reported June 16), suggests that the recession may have ended in April. Obviously, that will depend on whether we see a further relapse in economic activity. A second wave of infections could lead to a more stringent and extended period of social distancing (although it’s been noted that you can’t really have a second wave if you never completed the first). Most likely, activity will continue to improve as social distancing guidelines are relaxed, but enough people will continue to self-isolate to keep the recovery at a gradual pace.

The Federal Open Market Committee (FOMC) meets eight times per year to set monetary policy. At every other meeting, senior officials (the five Fed governors and 12 district bank presidents) put together their projections of growth, inflation, and unemployment, as well as what each thinks the appropriate federal funds target rates should be over the next few years (the dot plot). The outlook was so uncertain in March that the Fed refrained from issuing forecasts. In June, the outlook had shifted dramatically from December. GDP is now expected to fall sharply in 2020 (4Q/4Q), with a strong but partial rebound in 2021, leaving the unemployment rate elevated (a 9.3% average for 4Q20, 6.5% for 4Q21). Nearly all officials expect short-term interest rates to remain low at least through 2022.

None of the central bank’s projections should have been a surprise, as they were in line with expectations of most private-sector economists. However, stock market participants were apparently hoping for a rosier outlook.

Judging by the news reports last weekend (including 60 Minutes). There is still a lot of confusion about the classification issue with the unemployment rate. In the household survey, furloughed employees should be classified as “unemployed on temporary layoff,” but many were tallied as “employed.” This reduced the unemployment rate by a full percentage point in February (it should have been about 5.4%, vs. the reported 4.4%), five percentage points in April (19.7% vs. 14.7%), and three percentage points in May (16.3%, vs 13.3%). There is nothing sinister here. The administration is not cooking the books. Since the Bureau of Labor Statistics can’t generate accurate estimates of the impact, it will leave the data as reported. This may not seem to matter much, as many furloughed individuals will eventually return to work, but many won’t. Note that the unemployment rate understates the weakness in the labor market during tough times, as many individuals drop out of the labor force and are no longer considered “unemployed.” As a general rule, one should take economic data with a grain of salt. (M20-3125078)


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