It seems highly likely that the U.S. recession is over. However, it’s not all great news and the markets are looking past it.
The National Bureau of Economic Research (NBER) are the umpire that calls U.S. recessions, and to get it right, they do it with a lag once all the data is in. Earlier in the year it was clear that the U.S. had entered recession, even though the NBER had not yet called it. That determination came in June, 4 months after the recession hit. Similarly, the recession is now almost certainly over, though the NBER will perform further analysis to confirm that and call the exact endpoint.
It is worth noting that this recession is very likely unusual, as the NBER themselves stated in June. “The committee recognizes that the pandemic and the public health response have resulted in a downturn with different characteristics and dynamics than prior recessions.” What this means, primarily, is that the 2020 recession is likely very short compared to past recessions. However, despite its brevity, the 2020 recession may be more severe than most. Recessions have historically lasted around a year, 2020’s may prove much shorter. This is because once the economy starts growing again, the recession is over. Yes, the recession may be technically over, but output is well below where it was earlier in the year and growth may not be that rapid.
For example, take unemployment. On July numbers 10% of the U.S. working population are unemployed. Now that’s a big improvement from the 15% unemployment we saw in April. Yet, we’re still above peak unemployment from the 2008-9 recession which was itself unusually severe. Coming back from these unemployment levels can take years, if history is any guide.
As we emerge from any recession there is generally talk from economists of the prospects for a double dip. This is that the economy will fall back into recession if growth stalls. A double dip always a possibility with recession fresh in people’s minds. The early stages of growth can appear fragile, especially if further shocks emerge. Though double dip recessions are discussed far more than they occur. We last saw one in the U.S. 40 years ago. The economy is certainly now vulnerable to another shock, but historically such shocks aren’t all that common. If there is no further stimulus to the U.S. economy from lawmakers, that may present one risk, but even then underlying growth could offset it.
The U.S. markets have rallied for various reasons. A potentially short recession is part of it. However, the $3 trillion of stimulus applied to the U.S. economy has been important too, as has the tailwinds for many mega-cap stocks within the index such as Microsoft MSFT , Alphabet (Google), Apple AAPL , Facebook and Amazon AMZN . These companies have seen trends within the pandemic that have helped their businesses as tech becomes more important in a socially distanced world. Yes, many more firms in sectors from travel to bricks and mortal retail have hit real problems, but their index weight is a lot smaller. Since the index is driven more by the tech names with large weightings, they have more of a say in driving the stock market than they do in impacting the U.S. economy.
It is good news that the economy is likely now on a positive trajectory. However, we’re starting from an extremely low base on that upward journey when compared to most recessions in history. The gap between the recession ending and things being back to normal is unusually stark. That’s causing some economists to call this a depression, reflecting the fact that large numbers of people are still out of work even as things start to move up. Plus, of course, the recession may be over, but the pandemic still remains.
The 2020 recession has been unusual in many ways. The good news is the recession is likely technically over, but the drop in output has been so severe that getting back to the levels of activity we saw in late 2019 is likely to take years. Recent recessions with similar levels of unemployment, suggest that could take around 6 years, though a quicker rebound as the pandemic recedes may accelerate that. A further challenge for investors is that while the economy has fallen substantially, the markets are broadly flat for the year and valuations remain elevated on many measures. That’s another unusual component of the 2020 recession.