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 7/29/2020. I will be updating this post weekly to track progress, so be sure to check back each Monday 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 last week, it finally broke that within 5% limit, before falling again after an increase in new jobless claims were announced on Thursday.
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 basically now flat, down just 0.5%, the DJIA, representing the 30 largest market cap stocks is down 7.3%, while the NASDAQ, fueled by technology and biotech stocks, is up 15.5% 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, we could still be in the early days of the market drawdown. Historically, market drawdowns have lasted the better part of a year, and this one only started in February, just 5 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 as of this week, we are now seeing a decline in employment numbers as a result, at least in the weekly jobless claims.
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 this week 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.
Some potentially good news here. It appears we may be flattening the curve again finally, after the troubling increases we have been observing since early June. However, outbreaks and cases remain at elevated levels in many states. Here in Connecticut, which looks much like New York in terms of our early spike and now flattened curve, our Governor has instituted a travel quarantine for anyone entering from now more than 34 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. And in recent weeks, that theory looks to be playing out. 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 July 29th, only 19 out of 50 US states meet this positivity level, which has improved by 1 state in the last week.
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 have seen yields fall again. Last week, mid-term rates hit their lowest yields ever.
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 June Employment Situation was released on Thursday, July 2. Total nonfarm payroll employment increased by 4.8 million in June, the second month of gains (after falling by more than 20 million in April), and the unemployment rate dropped to 11.1 percent.
Unemployment declined for all groups in June, though this recession continues to disproportionately impact women and people of color:
- Adult men 10.2% (down from peak of 13.5% in April)
- Adult women 11.2% (peak of 15.5% in April)
- Teenagers 23.2% (peak of 31.9% in April)
- Whites 10.1% (14.2% in April)
- Blacks 15.4% (peak of 16.8% in May)
- Hispanics 14.5% (peak of 18.9% in April)
- Asians 13.8% (peak of 15.0% in May)
The report also indicated that they believe the misclassification errors that occurred in prior months have been greatly reduced.
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 for each of the last 18 weeks, dwarfing any previously reported highs by 5-10x. However, new claims had consistently been declining for the last 15 weeks straight… until last week. For the week ending July 18th, the Department of Labor reported 1,416,000 new jobless claims, up 109,000 from the previous week. 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 the successive last 15 weeks, and throughout May, June, and July, we have started to see the insured unemployed, the cumulative total, start to subside, and the insured unemployment rate fall. However, the reversal of this trend last week is definitely concerning and gave investors pause as well.
It should also be noted that this does not fully capture all those who have lost jobs or income, as not all are eligible for unemployment. Also, we are now seeing states reinstate shutdowns which may result in more unemployment in the coming weeks.
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 over the last two months. In June, retail sales were up +7.5% from May, and even up +1.1% from June 2019, recovering to $524 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, May and June saw sales bounce back in all previously impacted categories, with Auto and Restaurants seeing the most significant recovery.
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 the summer, absent stimulus checks and if the federal unemployment benefits are not extended.
The increase in retail sales in May was consistent with bounceback in Personal Consumption Expenditures (PCE), up +8.2% for May. Disposable Personal Income, however, was down 4.9% for May, against the elevated income levels in April due to stimulus checks. Savings rates remain elevated in the face of continued economic uncertainty.
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.
June saw minimal CPI growth of 0.6%, well below the 2% Fed inflation target. However, this was driven largely by a marked decline in energy prices, led by the underlying energy commodities which declined more than 20%, 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.
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.
Starts ticked up slightly in May, increasing by 4.3%, and increased even more in June, up +17.3%. However, it is important to note that housing starts still remain significantly below the long-term median, contributing to an ongoing housing shortage, which is driving up housing prices in the current sellers’ market.
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 was up +20.7% on a seasonally adjusted basis for June 2020, as transactions rebounded from their steep drop off in April and May, though still down from the year prior. However, pricing remained strong, with the median existing-home price up +3.5% 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. Q1 2020 was revised downward. Real GDP decreased at an annual rate of 5.0% (vs. original release of -4.8%).
This decline was driven by a 7.6% decline in personal consumption (what we spend on goods and services), a 5.6% decline in investment, and a 8.7% decline in exports.
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. This week, we will also get the first estimate for Q2 GDP, and just how badly the shutdown really impacted the overall economic output of the country. Lastly, I continue to closely watch the news coming out of Congress on the next round of stimulus. Under debate, it will likely address the extension of Federal unemployment benefits, additional stimulus checks, aid for state and local governments, as well as limitations on liability for corporations, schools, and non-profits related to Coronavirus. People expect a bill to be passed and signed before the next recess, which beings August 10th.
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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