Before the recession was even officially proclaimed, top of everyone’s mind was when will the economy recover. And now that it has officially been declared to have begun in March 2020, we are even more focused on the recovery. While our state governors and President Trump put together committees to work on how to re-open the economy safely and get the recovery underway, I’ll just be over here tracking the data that tells us how we are progressing. No one can say with certainty when exactly the economy will turn around or when the virus will be contained… but by tracking these indicators, we can gain insights into the progress being made and find signs of hope for the recovery along the way.
Note: UPDATED 10/9/2020. I will be updating this post monthly to track progress, so be sure to check back at the end of each month for updated data points.
8 Indicators to Watch For When Will The Economy Recover
Earlier this year, I put together a series of posts on economic indicators to track to find where we were in the economic cycle. It may come as no surprise that these same leading major economic indicators and lagging indicators are what you track to see how we are progressing during the downturn. I have also added a few more data points that report data more frequently to give more real-time insights into the rapidly, changing environment.
If you follow my Instagram stories or are a part of our private Facebook group, Family Finance Moms, you have also been getting the below snapshot with an explanation each Monday as a Monday Market Update. Think of this regularly updated blog post as the Monday Market Update on steroids. Seeing how these indicators track overtime, how they are trending, and how they are moving together are the best way to get a feel for when the economy will recover.
What Does the Stock Market Say About When the Economy Will Recover
The stock market gives us the most real-time data of any economic indicator out there, with investor sentiment and headlines being priced in on a minute by minute basis. But it is also the most volatile…
And in economic times like these, volatility increases dramatically. The market tends to trade more on overall economic news, than individual business performance, making great buying opportunities in individual names who get overly penalized.
The stock market peaked on February 19, 2020, before entering into an extremely rapid decline. In just a month, it lost 34%, $10 trillion of market value. Through early June, it had almost entirely bounced back, and reached within 5% from its February highs… and in August, it finally hit new highs. However, rising case counts and political uncertainty have seen it fall again in recent weeks.
It’s important to note as well, that’s there’s a bit of a tale of two markets happening right now. While year to date, the S&P 500, representing the 500 largest market cap stocks in the US, is up just +4.1% since year-end, the DJIA, representing the 30 largest market cap stocks is down -2.7%, while the NASDAQ, fueled by technology and biotech stocks, is up +24% since year-end. This divergence in performance is even more dramatic when you look at the components of what many refer to as FANG – Facebook, Amazon, Netflix and Google. Amazon and Netflix are up 50% or more year to date as big beneficiaries of stay at home orders and quarantine.
I continue to warn investors to be cautiously optimistic. Relative to past recessions, this has been an extremely fast market recovery – one which while it has manifested in the stock market, isn’t yet supported by company’s actual underlying earnings in many cases. Historically, market drawdowns have lasted the better part of a year, and this one only started in February, just 7 months ago. The market remains volatile and highly sensitive to less of the current economic reality, and more the health data and future expectations for recovery.
While April data was telling of the true economic toll of the shutdown, data for May showed signs of the beginning of recovery, with all 50 states re-opening, at least in part. June and July were plagued with a spike in cases across new regions of the country, and in the latter half of July, that translated into increased weekly jobless claims. August seems to have shown a stabilization both in terms of the virus and the jobs market. But the Fall has seen a resurgence in cases, and tremendous political uncertainty and division, creating a drag on the market.
What Does the Health Data Say About When the Economy Will Recover
While economic recessions are in fact a normal part of the economic cycle, what initially triggers them often varies and isn’t always normal or predictable.
Today’s economic downturn was brought on by an abrupt shutdown of businesses imposed state by state, and in some cases county by county, due to recommended social distancing measures as a result of Covid 19. As such, tracking what is happening in terms of the virus – how many new cases and lives lost – is relevant as our state and federal leaders make decisions about re-opening the economy.
Note: I have changed the data source for these charts given the state data breakdown is available through the Covid Tracking Project, and I wanted to use the same data source across them all. The numbers vary slightly, but tell the same story.
While the spike which began in June has subsided, the Fall and return to school has caused a new increase in cases. The severity of outbreaks and elevated case levels still varies significantly by state. Here in Connecticut, which spiked in March and April and has since kept new cases at among the lowest level in the country, our Governor has instituted a travel quarantine for anyone entering from now more than 35 states, based on any state with a greater than 5% positive test rate (number of positive tests relative to the total tests given daily).
Some medical experts are optimistic the virus may be weakening, with those infected not becoming as sick, fewer patients needing ventilators, and as the data shows, while cases have increased, deaths were continuing to decline… though are beginning to increase again. Others are skeptical and don’t believe there is enough evidence to reach that conclusion, and that deaths lag increased cases. However, that theory looks to be playing out through the increases this summer and fall. This is also likely to better treatment protocols, as well as infections impacting younger segments of the population. You should continue to closely monitor health data, particularly in your local area to take health precautions as necessary.
While some point to increased testing as the source of the increase in cases, medical professionals indicate we should pay attention to the percentage of positive cases as critical to containing outbreaks, and strive for less than 5% of tests resulting in positive diagnoses. As of October 13th, only 19 US states meet this positivity level, which has deteriorated in the last month.
What Does the Yield Curve Say About When the Economy Will Recover
Most of you are familiar with what the stock market is… but what about the yield curve? A yield curve plots the interest rate of a single credit issuer at varying maturities: in this case, the credit issuer, or debt borrower, is the US government. And they have lots of bonds outstanding at all different maturity dates.
In normal, economic times, yield curves slope up and to the right, with higher interest rates associated with longer-dated maturities given the greater risk associated with more time. When investors start to get nervous about the economic outlook, they sell out of equities in favor of safer, securities, like US treasuries. This pushes the price of the bonds up, and the yields down, while short-term securities, which are more closely linked to the Federal Funds rate stay elevated, resulting in an inverted, or downward sloping curve. This makes the yield curve a good leading indicator for recessions.
In the Q2 2019, the yield curve inverted – signaling that many investors thought the economy was weakening and headed for a slowdown. The Fed responded by cutting rates in July (from 2.5% to 2.25%), and again in October (to 1.75%).
Then, on March 15, 2020, to aid the with the economic impact of the social distancing shutdown, the Fed held an emergency session and dropped the target rate to effectively 0%.
We have been in a low-interest-rate environment for a very long time, historically speaking, which gives the Fed little room to maneuver rates to help stimulate the economy. Fed policy basically dictates the short-term yield portion of the curve. Longer-term rates are set by bond market investors.
The actions of the Fed in March, restored the yield curve to a more normal, upward sloping curve, but we need to see spreads (difference between short and long-term rates) expand more and the slope increase further for true signs of economic recovery. In early June, we saw Treasury yields rise to their highest levels since the Fed cut rates, as the stock market rallied. This pushed the curve up, increasing the slope and the start of semblance of normal! However, with rising cases and prolonged expectations for the recovery, we saw yields drop, with mid-term yields (2-10 years) hit their lowest levels ever recorded in early August.
This Fall, we have again started to see the yield curve increase its slope, a hopeful sign of a more sustained economic recovery. However, it is important to note that the Fed has repeatedly said they do not plan to raise short-term lending rates for the foreseeable future.
What Does the Unemployment Rate Say About When the Economy Will Recover
Unemployment is a lagging economic indicator. It spikes dramatically during recessions, effectively confirming the start of a recession before a recession is even officially declared by the National Bureau of Economic Analysis.
The official national Unemployment Rate is released monthly by the US Bureau of Labor Statistics. The September Employment Situation was released on Friday, October 2. Total nonfarm payroll employment increased by just 661,000 in September, marking a significant slowdown in the labor market recovery, while the unemployment rate dropped to 7.9%.
Unemployment declined for all groups in September, though this recession continues to disproportionately impact women and people of color:
- Adult men 7.7% (down from peak of 13.5% in April)
- Adult women 8.0% (peak of 15.5% in April)
- Teenagers 15.9% (peak of 31.9% in April)
- Whites 7.0% (14.2% in April)
- Blacks 12.1% (peak of 16.8% in May)
- Hispanics 10.3% (peak of 18.9% in April)
- Asians 8.9% (peak of 15.0% in May)
We can get a more real-time view of the employment market through Initial Weekly Jobless Claims, reported by the US Department of Labor, on just a one week lag.
The Department of Labor has reported unprecedented initial jobless claims weekly since March, dwarfing any previously reported highs by as much as 5-10x. However, new claims had consistently been declining… until late July, when they reversed the trend. However, declines in new claims resumed in August but have remained relatively flat for the last month. For the week ending October 3rd, the Department of Labor reported 840,000 new jobless claims, a decrease of 9,000 from the previous week.
It is however extremely important to recognize this is still extremely elevated. Before March, the single highest week was 695,000 initial claims experienced during the 1980s. The nearly complete and total shutdown of the economy in the second half of March has created more job losses and more insured unemployment than has ever been seen, even in the peak of previous recessions. We had weeks with more jobless claims than total insured unemployment reached in total during past recessions.
The unemployment rate declines as the economy begins to recover… albeit far more slowly than its rapid ascent. The good news??? We are continuing to see that happen. There have been fewer initial jobless claims in each of successive week, throughout the summer, and we have also started to see the insured unemployed, the cumulative total, start to subside, and the insured unemployment rate fall, finally falling below 10% in mid August. But the rate of improvement is definitely slowing.
It should be noted that this does not fully capture all those who have lost jobs or income, as not all are eligible for unemployment.
What Consumer Spending Says About When the Economy Will Recover
If you recall from our past discussions of GDP, 70% of it is based on consumer spending – that’s you and me out there in the economy buying food, clothes, cars, you name it, and services.
In March, when the entire country basically closed all but essential businesses, retail sales came to a screeching halt. In most recessions, it typically takes longer for retail sales to so significantly drop. The US Department of Labor reported April 2020 retail sales down 16.4% from the month prior. However, we have seen a strong bounce-back through the summer and fall. In August, retail sales were up again +0.6% from July, and even up +2.5% from August 2019, recovering to $538 billion.
Like unemployment, the complete and total shutdown of non-essential businesses dramatically impacted retail sales. After two months of dramatic declines in March and April, summer months saw sales bounce back in all previously impacted categories, with Auto and Restaurants seeing the most significant recovery. However, in July, more durable categories, like Auto, faltered and key categories, like restaurants and clothing, still remain down double-digits from prior-year levels.
Going forward, retail sales may continue to be impacted by the loss of jobs and income. It remains to be seen if this bounce-back continues through year-end, absent stimulus checks and extra federal unemployment benefits.
The increase in retail sales in June was consistent with bounceback in Personal Consumption Expenditures (PCE), up +1.0% for August. Disposable Personal Income, however, was down 3.2% for August, as additional federal unemployment benefits came to an end in July. Savings rates remain elevated in the face of continued economic uncertainty, but declined along with the decline in income.
What Does Inflation Say About When the Economy Will Recover
I’ve gotten many questions about whether inflation is a concern right now given how much money is being pumped into the economy by the government and Fed right now.
Typically, in a recession, we see inflation, as measured by the change in the Consumer Price Index (CPI) slow down and even decline, particularly when there are asset bubbles, like we had in 2008. The exception to this was the 1970s when stagflation (rising inflation and unemployment) was rampant due to bad actions by the Federal Reserve.
The Fed, as a result of the 1970s, now not only uses policy to target unemployment, but also inflation, and will closely monitor changes in the CPI. This will determine how quickly they raise the Fed Funds rate, and even begin selling the debt securities they are currently purchasing in order to stimulate the economy, to reduce the money supply and combat any signs of excessive inflation.
August continued to see below-normal CPI growth of 1.3%, below the 2% Fed inflation target. However, this continues to be driven largely by a marked decline in energy prices, led by the underlying energy commodities which declined double digits, while food prices continue to escalate.
Watch moves in the CPI for signs of rising inflation, which can force the Fed’s hand at raising interest rates, hampering growth and the economic recovery. However, the Fed has also tempered these concerns by saying they will allow inflation to run above 2% in the short-term to achieve a long-term average in line with its 2% target.
What the Housing Market Says About When the Economy Will Recover
Historically, the housing market slows during recessions – fewer new homes are built and housing inventory builds, with homes taking longer to sell. Home prices hold up fairly well except during financial crises, like 2008 and the 1991 savings and loan crisis.
The US Census Bureau via the Department of Housing and Urban Development reports a series of metrics around new construction, including permits (granted before construction begins), starts (once ground is actually broken), and completions. Starts often fall before a recession officially begins, and bottom out at the end of the recession before gradually recovering. New housing starts dropped by 30% in April 2020, following a 19% decline in March, as quarantine brought construction to a halt in many areas.
The housing market is booming. August starts fell slightly relative to July massive growth, but is still up 2.4% relative to the year prior, while inventory has dropped to the lowest levels ever recorded relative to sales (just 3.3 months). This shortage continues to drive price increases.
Historically, home prices have suffered more in periods of financial crises, like the Great Recession of 2008. So far, through April, home prices are continuing to rise, according to the Case-Shiller Index.
The National Association of Realtors now also publishes Median Sales Prices and Existing Home Sales, monthly. The number of existing homes sold continues to soar, up +2.4% on a seasonally adjusted basis for August 2020, as transactions continue to rebound from their steep drop off in April and May, and are now up double digits vs. 2019. Pricing also continues to increase, with the median existing-home price up +11.4% year over year, with price increases in every region nationwide.
The NAR continues to indicate that a general shortage in housing supply is driving price increases, while demand remains robust due to low-interest rates. Since the 2008 Great Recession, new construction has failed to keep pace with household growth, driving a housing shortage and pushing prices up. Properties sold in June were on the market on average for just 24 days, and 62% of properties sold were on the market for less than a month!
Related Post: Is This a Good Time to Buy a House?
In a downturn, the housing market is often aided by the low-interest-rate environment, which makes mortgages more affordable than ever. However, in the current environment, I am hearing directly from followers who are struggling to get mortgage approvals, even with good credit, solid jobs and down payments, as banks are inundated with small business loan applications or are limited in their ability to extend new mortgages while so many existing mortgages have been put into forbearance.
What Real GDP Says About When the Economy Will Recover
A recession is unofficially defined as 2 consecutive quarters of negative GDP growth. It is officially declared by the National Bureau of Economic Research, who also will declare the peak month, and as things progress, the trough and when recovery begins as well.
So Real GDP is what truly confirms the state of the economy – but it takes a long time for the data to be announced. For Q1 2020, real GDP decreased at an annual rate of 5.0%. For Q2 2020, spanning 3 full months of quarantine, real GDP decreased at an annual rate of 31.4% – our economy was nearly cut by a third – the worst decline ever recorded since quarterly data began to be reported in the late 1940s.
This decline was driven by a 34.6% decline in personal consumption (what we spend on goods and services), a 49.0% decline in investment, and a 64.1% decline in exports, partially offset by a 17.4% increase in Federal government spending (stimulus checks and CARES Act). It should be noted that state and local government spending was down 5.6%.
Take those numbers in for a minute. They are massive, representing a nearly $2 trillion decline in GDP. The worst single quarter of economic decline in our nation’s history. And we are all still standing on the other side.
Coming Up Next…
Below is a schedule of all the data points we are tracking to see when the economy will recover, along with their release schedule. Note the upcoming dates for major indicators as these releases will have the greatest impact on the stock market performance over the coming months.
Coming up this week? Look for weekly reports on Initial Jobless Claims and 30-Year Mortgage Rates every week. Big data points to watch for October? Unemployment, inflation, and what happens to virus cases as colder temperatures force people indoors and flu season sets in. Also, everyone is watching what the polls say about the election and what that will mean for future economic policy and additional stimulus measures.
Hopefully, these data points, along with their historical trajectory, paint a clearer picture for you of exactly how the current pandemic is impacting our economy. And you now know what to watch for signs of when will the economy recover as well. Be sure to save this post and check back each Monday for updates as new data is released.
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