Did The US Recession End In July?

Yes, according to the 3-month average of the Chicago Fed National Activity Index (CFNAI-MA3), which rebounded sharply in July. But the usual routine of business-cycle analysis has been unusually volatile since the coronavirus hammered the economy and so there’s reason to remain cautious on issuing an all-clear signal.

Taking CFNAI-MA3 at face value certainly paints a bright picture. In fact, the July surge for this broad measure of US economic activity (reflecting 85 indicators) marks the highest reading, by far, for the benchmark’s 50-year-plus history based on the three-month average. (Note: CFNAI-MA3 was launched in 2001 and is back-filled to 1967.)

The 3.59 print for last month is extraordinarily high. Prior to July, readings in the 1.0-to-1.5 range have been recorded, but the latest bounce is unprecedented by a hefty degree.

For some perspective on CFNAI-MA3, the history of the index puts it in an elite group of business-cycle benchmarks for 1) providing timely real-time signals of the start and end of US recessions that are also 2) relatively reliable in terms of vintage numbers falling in line with revisions. As I noted in my book on monitoring and analyzing the business cycle, CFNAI-MA3’s record in the 2001 and 2008-2009 recession is quite good in issuing relatively early signals that a downturn had started.

It’s important to note that the timeliness of CFNAI-MA3’s recession signals in the two previous downturns are based on vintage data (i.e., numbers that were published in real time, before revisions). CFNAI-MA3’s signals were later confirmed by the gold standard on US recession dates via NBER. Although NBER’s data set is accepted as the last word on when economic contractions start and end (the dates are never revised), the announcements come far too late to be of practical value beyond academic analysis. Therein lies the value of CFNAI-MA3 as a real-time gauge.


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But the coronavirus that started in March 2020 was unusual in the extreme. For starters, it arrived with lightening speed. The month began with a moderate expansion intact. Before March ended, the US economy was collapsing at a pace that matched and exceeded (temporarily) the darkest days of the Great Depression.

The catalyst for this year’s downturn, of course, is the coronavirus. The self-imposed economic shutdown left large swaths of the economy at a virtual standstill. The fact that the economy fell off a cliff surprised no one and so by late-March there was little need for formal signals to recognize that the macro trend had taken a very dark turn in record time.

The bigger challenge is deciding when the recession ends, which brings us to the current state of affairs. CFNAI-MA3 and some other business-cycle benchmarks show a strong rebound in progress. The Philly Fed’s ADS Index, which is updated more frequently but with a smaller data set than CFNAI-MA3, has been signaling for several months that the US economy has been bouncing sharply.

Per design, CFNAI-MA3 has been slower to react. Par for the course for an index that’s generally more reliable vs. the higher-noise content in ADS. But with the latest release for July, CFNAI-MA3 has confirmed recent ADS data by showing an unusually strong recovery.

It’s getting easier to find economists to agree.  “All in all, we’re still seeing that economies are recovering pretty well from what was basically a lockdown recession,” Ed Yardeni of Yardeni Research tells CNBC.      

Several nowcasts of third-quarter GDP also paint an upbeat profile. The Atlanta Fed’s GDPNow model, for instance, estimates that Q3 output will surge nearly 26%, based on the Aug. 18 estimate (based on seasonally adjusted annual rate).

Other GDP models aren’t as bullish, but most show a solid bounce. The New York Fed’s latest Q3 analysis, for example, calls for a 14.6% rise in GDP (as of Aug. 21).

Even if the rosy estimates are correct, one strong quarter of GDP growth will still leave the economy with only a partial recovery after the record 32.9% GDP collapse in Q2.

It’s also important to recognize that rebounding from a massive economic decline can be misleading. If you fall 100 feet and bounce 50 the last data point may look impressive but it needs to be considered in context with the preceding loss. In other words, don’t confuse “a rebound for a recovery,” advise economists Carmen Reinhart and Vincent Reinhart, authors of This Time Is Different: Eight Centuries of Financial Folly.

Indeed, with initial jobless claims still rising by 1-million every week, give or take, there are still substantial macro risks lurking. It’s clearly good news to see that the economy is recovering. But the real test awaits in August and September.

CFNAI-MA3 is destined to decelerate from July’s unsustainably high reading. The question is whether it will hold above the -0.7 recession mark? There’s enough forward momentum in the economy to provide a basis for expecting growth to continue. But economic conditions remain volatile and the uncertainty linked to the coronavirus remains high.

The recession may have ended last month. But deciding if there’s a genuine recovery that’s sustainable and meaningful is not yet obvious. It’s premature to dismiss the possibility, but it’s not yet a high-probability forecast either.


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