A number of encouraging economic indicators suggest that the US is recovering from the coronavirus recession that crushed output in the second quarter. But deciding if a bounce off a very deep bottom is laying the foundation for a robust, sustained recovery remains unclear. There are still too many unknowns lurking to develop a high-confidence forecast for the second half of 2020.
The biggest unknown is the arrival date of an effective vaccine that’s widely accepted by the public. Although Russia claims bragging rights as the first nation to formally announce a vaccine, there’s plenty of skepticism that this mostly about politics rather than science.
The good news is that vaccine development is evolving rapidly on several fronts. US health secretary Alex Azar said this week that America could greenlight a vaccine by the end of the year.
The expected efficacy of any vaccine is open for debate. Ditto for the percentage of people who’ll take the vaccine. But as a silver-bullet solution for what ails the economy, the prospect of a vaccine is, in theory, second to none.
Meantime, the guessing game goes on about how the economy recovers from a devastating Q2 that drove the US GDP down by a record 32.9% in annualized terms.
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After such a steep decline it’s encouraging to see early estimates of Q3 GDP reflecting a strong bounce. The Atlanta Fed’s GDPNow model, for example, currently estimates growth at 20.5% for the July-through-September period (as of Aug. 7). Other nowcasts for Q3 offer similarly upbeat estimates of a rebound.
Various business cycle indexes also reflect a strong bias for recovery. The Philly Fed’s ADS Index, for instance, has rebounded sharply, based on data through Aug. 1. (The red line is the San Francisco Fed’s estimate of a neutral level that separates growth from contraction.)
But identifying convincing econometric clues that distinguish between a dead-cat bounce and a genuine recovery is a work in progress.
Another measure of the macro trend, courtesy of the New York Fed, leaves room for doubt that the danger has passed. The bank’s Weekly Economic Index, which estimates the year-over-year change in GDP, remains deeply negative, as of the Aug. 8 update. (The red line is The Capital Spectator’s estimate of a neutral level that separates growth from contraction.)
Perhaps the main threat to recovery is the ongoing rise in new filings for unemployment benefits. Although initial jobless claims have receded sharply from the unprecedented surge in April, this leading indicator continues to rise by one-million-plus every week. The latest update shows newly unemployed workers increased 1.2 million. That’s the lowest since the pandemic started, but it’s still far too high to encourage optimism that the labor market’s woes have passed.
Economists warn that without a new round of unemployment aid from the federal government, the risk is rising for a new phase of economic crisis. Reviewing a recent survey of analysts via FiveThirtyEight.com, “participants see the federal [unemployment insurance] supplement as being highly critical to the growth path of the economy for the remainder of 2020,” says Allan Timmermann, a professor of finance and economics at the University of California, San Diego. But at the moment, the prospects for new legislation on this front remains dim.
Another reason for maintaining a cautious outlook on recovery prospects: The Capital Spectator’s near-term projections of the Economic Trend Index and Economic Momentum Index (a pair of proprietary macro benchmarks) point to a stall in the rebound. In the chart below, the June-through-August gains in ETI and EMI are currently on track to fade in September. (For details on ETI and EMI design and the methodology for projecting the indexes, see this review.)
The future, as always, is uncertain, and that can be a positive as well as negative. Much depends on how the nation manages the coronavirus in the weeks and months ahead. Decisions on government policy and Covid-19 vaccine research and development are also critical factors that can skew positive or negative.
“The issue with the resurgence in the virus is it slowed down or somewhat muted the recovery we’ve been expecting,” Robert Kaplan, the Dallas Federal Reserve Bank president, advised last week.
Optimists can counter that there’s room for improvement. That leaves us with a key question: Can the US finally muster the political and cultural willpower to do a better job at managing this health crisis?
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