The Coming Recovery.Will it be fast or slow?
Yield curve. Last summer, when the U.S. economy had just notched a decade of economic recovery and unemployment stood at 3.7%, Campbell Harvey, a professor of finance at the Fuqua School of Business at Duke University, predicted a recession for 2020 or early 2021. Why? Because the yield on the three-month Treasury bill was higher than the yield on the five-year Treasury note for the entire second quarter of 2019. That “invert-ed yield curve” had been the harbinger of the previous seven recessions. Harvey first identified the yield curve’s predictive power in his 1986 doctoral dissertation at the University of Chicago. So here we are in the deepest economic hole since the Great Depression, triggered by a global pandemic, and with unprecedented actions by global governments and cen-tral banks to lift the global economy and Mr. Harvey thinks the recession will be fairly short and recovery will come soon. He said recently in a telephone interview, “This time the cause is clear, it’s a biological event, and the solution is also clear: another biological event.” He is, of course, referring to the development of a vaccine. He does not anticipate the V-shaped recovery that Wall Street is hoping for. “I think it’s more what I call a skinny U, because I do believe we will have a vaccine by the first quarter of 2021,” he said. Let us hope he is as right about recoveries as he has been about recessions. Mr. Harvey hit on several important points. One, a vaccine would spur both global and U.S. economic growth. Secondly, the recovery might not be very vigorous starting out. The very nature of opening up businesses, while still practicing social distancing, translates into a slow rebound in economic activity. The re-opening is likely to be patchwork, with some areas accelerating before others. A lot will depend on the shell-shocked consumer, who is likely to be conservative on spending for at least a few months.
The one thing that would promote a quick economic recovery would be the develop-ment of a vaccine. There are more than 100 different COVID-19 candidates in various
stages of development going on, with eight already in human trials. Experts are “cautiously optimistic” the world will get a vaccine. They just don’t know when. It is possible that an emergency vaccine could come by the end of 2020 or early 2021 if -and only if- promising results come from the first human trials. Typical vaccine timelines take years. Let us be optimistic and say a vaccine is developed by late 2020. The next step would be getting emergency use authorization from the FDA, allowing policymakers to offer the vaccine to health care workers, first responders and essential workers like grocery store clerks and delivery truck drivers. One big question would be how long the vaccine is effective. Research would need to continue in order to make sure that the vaccine is effective but also that it is long lasting. It would need to keep additional illness at bay for a year, or more, in order to be effective. There are a lot of companies investing a lot of time and money into the development. Phase 1 involves a small group of volunteers and Phase 2 a much bigger population. At this moment, several companies are moving into Phase 2. If all goes right, it is possible to have a vaccine candidate by September and mass availability by early 2021. There is no guarantee, only a hope, and it could be longer. But, the essential work is being done.
The alphabet of recoveries
Obviously dependent on the virus timeline and reinfection rates, the economy is already starting on the road upwards. There is an alphabet soup of possible outcomes for the economy and even a mathematical symbol. Some economists expect a “V-shaped” recovery, straight up after several months of pent-up demand. Other pro-pose a gradual curve, the “U-shaped” recovery. Alternately, a “W-shaped” recovery might suggest a double-dip recession. Now add to that alphabet soup a square root, which is what analysts at Ned Davis Research are forecasting. Ned Davis analysts’ Pat Tschosik and Bob Anderson didn’t coin the phrase, but it describes an economy that would naturally bounce upwards, but would then “settle” into a prolonged period of subpar growth.The U.S. economy has well over 30 million people out of work, although that number will recede in coming weeks. Recently, equity markets have risen on the news that
restrictions are being lifted across the globe and that the COVID-19 curve is flattening. However, barring a near-term vaccine, the recovery is likely to be slower than anticipat-ed. Consumers are likely to settle into the “new normal” of lifted stay-at-home orders but remain cautious. A recent survey asked if consumers are likely to go back into a restaurant. The answer was yes, but not for a month or two. It is also likely that consumers will shy away from big spending decisions. More bad news for the auto and housing market.The coming recovery will depend on the cycle of the virus, how long it takes to get a vaccine, and consumer reaction to the shock. The economic carnage caused by COVID-19 was clear in the April job numbers. The job loss has been massive, totaling 21.4 million since the crisis began and incredibly broad based. The unemployment rate surged to 14.8%. However, there are several different ways of measuring unemployment. The U-6 Underemployment Rate, which includes those not counted because they couldn’t actively search for a job while sheltering in place, soared to 22.8%. Underemployment has not been this high since the Great Depression in the 1930s and compares with the peak of 17.2% at the apex of the financial crisis just over a decade ago.Barring the rapid development of a vaccine, the track to a healthy rate of economic growth would involve a firming up of state and local government budgets and more support for small businesses, i.e. more government stimulus. The worst scenario would be a wave of new infections. No matter how you add the numbers, the virus stands in the middle of the road. With all the research on a global level, it is probably safe to project that we will have a vaccine in a year. The game changer would be to have one ready in a quicker time frame. Until that time, both the global and domestic economy is likely to only see a slow road ahead.
On the rebound
As stated earlier, green shoots are starting to appear. Scheduling software company Homebase has been providing data on employment and hours worked on a daily basis during the crisis, which is a useful real time indicator because its customers are in the restaurant, food and beverage, retail and services sectors. This is where the job losses are centered. The bad news was that employment was down 47% on May 14 from the pre-shutdown levels. The positive view of this is that on the worst day, April 12, employment was down 74%. Tom Porcelli, chief economist at RBC Capital Markets is a big user of the data. He estimates that the U.S. economy likely clawed back 5 million of the 20+ million jobs lost by early May. The Homebase data is broken down by state and major cities. As of May 5, the worst city, to little surprise, is New York City, where 58% of the businesses were closed. The best is Oklahoma City, where just 24% of the businesses are shut. On a state basis, Montana has just 13% of its busi-nesses closed and North Dakota 14%. These percentages will move lower as May unfolds.April was an awful month for the economy. However, data over the last couple of weeks does suggest the economy has ticked up as businesses are re-opening. Oil and gas demand increased the last couple of weeks. There has been an uptick in seated diners in parts of Texas, Georgia and Florida. There are more people traveling. New mortgage applications picked up in early May. Truck traffic, as measured by FTR, has seen a notable move upward in the last few weeks after bouncing along at minimal levels for several weeks during April. Activity is still depressed but it does seem that most indicators agree that the economy has bottomed out. Historians in the future will study this time-period. It is a new event in economic history. How governments and central banks reacted and the economic consequences will be studied for wisdom on how to react in a future crisis. Whether the recovery is a V, or a W, or a square root is not known to us now but will be of interest to future historians. We are living in interesting times.