While the recession has not even officially been proclaimed, top of everyone’s mind is already when will the economy recover. 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… 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 6/1/2020. 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. In April, it bounced back, regaining $5.6 trillion in value and emerging from bear market territory, but the recovery has since stalled as the market remained relatively flat through May… until last week.
The market was up over 3% last week, to finish the month up 4.5%. The market rallied as restrictions continue to be reduced nationwide, allowing businesses to reopen and their employees to get back to work. The weekly jobless claims reported the insuranced unemployment rate declined from 17.1% to 14.5%, the first time it has fallen since mid-March.
Many economists continue to support the belief that the economy will recover in the second half of the year. However, there is still much disagreement as to how long it will take to rebound to pre-pandemic levels… though the stock market is now pretty close!
I continue to warn investors to be cautiously optimistic. Relative to past recessions, we are likely in the early days of the market drawdown. This becomes even more likely given the tremendous levels of unemployment we have reached and will likely take months to years to recover from. Historically, market drawdowns have lasted the better part of a year. The market remains volatile and highly sensitive to less of the current economic reality, and more the health data and future expectations for recovery.
Most expect April data continues to be more telling of the true economic toll of the shutdown. However, all 50 states are now re-open at least in part, though restrictions remain and some municipalities remain in lockdown. Watch the health data for any signs of virus resurgence to impact the market as well.
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.
The very good news is the curve on new cases, on a national level, seems to definitely be flattening, and new deaths also seem to be falling sharply. However, it is important to make decisions about re-opening the economy based on this data at a more granular state and local level. As previously discussed, while cases appear to be declining at the national level, it masks what’s happening more locally. While previous hotbeds, like New York are significantly improving, cases are rising rapidly in middle America. We must continue to be vigilant in monitoring it as the economy re-opens for any signs of outbreaks or virus resurgence.
Based on the weekly Family Finance Mom polls on Instagram, 69% of you indicated your town and its local businesses had reopened (up from just 55% the week before), but 75% still do not feel confident about resuming normal activities. Restoring the confidence of the American people is key to economic recovery.
I’m also including this new chart which shows how much testing has increased. This is of critical importance, particularly as the economy starts to re-open, to catch and control outbreaks early, to prevent a second shutdown.
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.
At the end of April, the Fed reaffirmed its commitment to the 0.0-0.25% fed funds target rate, as we continue to weather current events. Since that announcement, the short-term end of the curve has seen rates drop further, and the long-term end of the curve has seen rates tick up – widening the spread. The curve is beginning to look more normal, though spreads (the difference between 30 year rates and shorter term rates) shrunk again after Chairman Powell’s remarks last week, but the entire curve shifted up slightly this week.
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 April Employment Situation was released on Friday. Total nonfarm payroll employment fell by 20.5 million in April, and the unemployment rate rose to 14.7 percent, both record-breaking numbers since the data series began.
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 a one week lag.
The Department of Labor has reported unprecedented initial jobless claims for each of the last 10 weeks, dwarfing any previously reported highs by 5-10x. However, new claims have consistently declined for the last 8 weeks. Before last month, 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.
The unemployment rate declines as the economy begins to recover… albeit far more slowly than its rapid ascent. The good news??? We are starting to see that happen. There have been fewer initial jobless claims in each of the successive last 8 weeks, and now we are seeing the insured unemployed, the cumulative total, start to subside, and the insured unemployment rate fall.
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. According to the weekly Family Finance Mom polls, about 25% of you have lost your job or income since March. However, last week, 29% who had lost their job, have now gone back to work… up 4% from the week prior, and definitely a positive sign.
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.
Last month, 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.
Like unemployment, the complete and total shutdown of non-essential businesses dramatically impacted retail sales. The 8.7% decline in March from February was more than 2x the largest previous monthly decline. And now April was down nearly 2x more than March. Every major channel saw double-digit declines, with Restaurants being most severely impacted, down nearly 30%.
Going forward, retail sales will be further impacted by the loss of jobs and income. When we see these numbers start to bottom out and tick back up again, it will be another strong sign of recovery.
The decline in retail sales is consistent with the sharp decline in Personal Consumption Expenditures (PCE), down 13.6% for April. Disposable Personal Income was actually up significantly in April, due to the receipt of stimulus checks by many families, but savings rates increased to 33% as people prepared for future job loss and uncertainty. The decline in PCE, like many other April numbers, is the largest one month decline on record.
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.
April saw minimal CPI growth of 0.3%, 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 30%, 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.
Historically, home prices have suffered more in periods of financial crises, like the Great Recession of 2008. So far, through March, 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 down 17.8% on a seasonally adjusted basis for April 2020, as transactions were disrupted by the quarantine. However, pricing still remained strong, with the median existing-home price up 7.4% year over year, with price increases in every region nationwide.
The NAR indicates 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.
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. Last week, 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 coming week, we will get the monthly Employment Report from the Bureau of Labor Statistics for April, with additional insights into where job loss is concentrated. I also continue to closely watch health data, particularly as areas have begun re-opening.
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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