The Recovery Will Have Many Shapes, Not One

Mish

No economists in a recent survey thinks the recovery will be V-shaped but opinions regarding the shape have changed since the last survey in late Lay.

No Support for a V-Shaped Recovery

Please consider a FiveThirtyEight report on the shape of the recovery.

In partnership with the Initiative on Global Markets at the University of Chicago Booth School of Business, FiveThirtyEight asked 34 quantitative macroeconomic economists what they thought about a variety of subjects around the coronavirus recession and recovery efforts. The most recent survey, which was conducted from June 19 through 22, echoed many of the predictions from the last round — though there were also a few new wrinkles in their forecasts.

When we first asked about the shape of the recovery, 58 percent of respondents thought the trajectory of future U.S. gross domestic product looked like a Nike “swoosh” — a sharp downturn followed by a long, slow recovery. This time around, however, a consensus has formed around a slightly different shape: a reverse radical (i.e., a mirrored version of the square-root symbol).

Twelve of the 17 economists who had predicted a swoosh in our survey in late May changed to the reverse radical this time, leaving just five respondents sticking with the swoosh in this round of the survey. (And no economist switched to the swoosh, another sign that other patterns fit the trajectory of this economic recovery better.)

Reverse Radical

Economists Expect an Uneven Recovery

Worst Case Scenario

What Might Cause a Worst-Case Scenario

The economists now favor the Reverse Radical but that is an oversimplification of things, even if reasonably accurate on average. 

What's happening now does not look like the Great Recession or any recession that preceded it. 

Compare the lead chart to this one.

The Uneven Recovery Detail

The Uneven Recovery Detail 2020-07-01

Can there be a recovery with no decline?

Nonstore retail sales (think Amazon) accelerated and never looked back. The worst case scenario for online shopping is the current uptrend slows. 

There is nothing to recover from, nor will there be.

Grocery stores advanced in the recession but as people returned to eating out sales declined, Nonetheless, grocery store sales are well ahead on the prior trend. 

That change is going to be permanent because more people will be working from home and thus driving less and eating out less for lunch. 

Department stores are in a world or hurt and the trend is unmistakable. The best-case scenario is a U to the trendline before the collapse resumes. 

What About Housing?

Housing has positive and negative factors in play, both short and long term. 

Positive Factors

  1. People have to live somewhere. The population is still growing. 
  2. There is a bit of pent-up demand. People were forced to put off moving plans when Covid suddenly hit. 
  3. Interest rates are low and the Fed will keep them that way.

Negative Factors

  1. Jobs, Jobs, Jobs 
  2. The attitudes of millennials and generation Z are quite different than that of their boomer parents towards housing and family formation.

Demographics

Aging Boomers want to downsize. There is no one to sell their mansions to. 

But eventually boomers will die. 

The kids who inherit the houses will each get a chunk of money and perhaps will then decide to buy a new house of condo. 

I believe attitudes are the key, long term. They may change. In the short term, it's all about jobs. 

Continuing Claims

Continued Unemployment Claims in 2020 June 25

For 8 weeks, continued claims are at or near the 20 million mark. Those claims are ate the state level. 

There are perhaps as many as another 10 million collecting Federal assistance. 

These claimants are not going to buy a home. Most were not candidates anyway, but some were. And others who were not impacted at all may have had second thoughts.

Mortgage Applications

There was a huge surge in mortgage applications recently, but that was a reversal of the housing plunge in April and May, two of the busiest months in the year. 

Throw those busy month applications into June and July and then seasonal adjustments make the rebound look bigger than it really was. 

Factor in Credit Risk

For discussion, please see Banks' New Dilemma: They Cannot Tell Who is a Good Risk.

Also note see Mortgage Forbearances Rise for the First Time in 3 Weeks

Every Sector Will Have Its Own Shape

On average, I think the economists are correct with the Reverse Radical idea. 

However, there are a small number of big winners coupled with a rising threat of bankruptcies and so many sector variances that averages mislead. 

Multiple shapes is the right idea. 

Reopenings in Reverse

Those reopening reversals are what caused over 40% of the economists to worry about a worst-case scenario.

Mish 

Comments (36)
No. 1-9
dbannist
dbannist

Here in rural NC homes have not slowed at all. In fact, they are accelerating.

I'm a property manager, and the primary driver of the property acceleration in my area is people moving here from more densely populated areas (think NYC and New Jersey).

A person moving here likely has a pension that goes much further here than it does where they currently live. It will be interesting to see how that may change if 1. The pension bubble pops and 2. COVID changes mindsets from moving to the city back to moving to rural areas.

Tony Bennett
Tony Bennett

"On average, I think the economists are correct with the Reverse Radical idea."

...

Really?

What bounce we've had courtesy of almost $3 trillion in fiscal stimulus (a lot still to be spent) and probably another $1 trillion or so when Congress passes something this month + huge amount of forbearance / moratorium. When all that starts to wane (H2 and 2021)?

The country as a whole has spent the last 11 years since GFC taking on massive amount of debt to paper things over. Payback coming. As delinquencies / defaults surge (and stimulus wanes) credit will tighten ... then economy will settle lower.

Tony Bennett
Tony Bennett

"There was a huge surge in mortgage applications recently, but that was a reversal of the housing plunge in April and May, two of the busiest months in the year."

...

Waning already?

"Mortgage applications fell last week despite mortgage rates hitting another record low in MBA's survey. Investors are contemplating the risks of the recent resurgence of COVID-19 cases to the labor market and economy, and Treasury rates and mortgage rates are moving lower as a result," said Joel Kan, MBA's Associative Vice President of Economic and Industry Forecasting. "After two months of strong growth, purchase applications declined for the second week in a row. The weakening in activity is potentially a signal that pent-up demand is starting to wane and that low housing supply is limiting prospective buyers' options. The average purchase application loan size increased to a record high in our survey - more proof that tight inventory conditions are leading to faster price growth."

anoop
anoop

recovery? nasdaq is at new all time highs. there is nothing to recover from. you snooze, you lose.

Realist
Realist

Hi Mish. Good analysis. The reverse radical is the most likely shape for the US economy over the next several years. Some sectors will show different shapes as they are affected differently by the pandemic. I suspect that US gdp will get back to Jan 2020 levels later this decade.

Of course the US does have some strengths like science, tech, and energy.

But the pandemic has shown some US weaknesses as well. Including:

  1. A president who has abdicated responsibility for leading the nation while it faces the pandemic. He is leaving the fight to individual states, cities, and businesses to somehow defeat the enemy. It’s like going to war without any command and control. Just throw out all your troops and equipment and hope for the best.

  2. A health care system comprised of so many pieces and parts with little coordination or cooperation. Again, every person for themselves. Survival of the fittest. If you look at other developed countries with single payer systems, they have all been very successful in a coordinated response to the pandemic. Three months in, those other countries have reduced cases and deaths by over 90% from peak. The US is still hitting new peaks after 3 months.

  3. A populace who has been continuously force fed the idea that you shouldn’t trust the health or scientific experts because they have some hidden agenda. As a result, they won’t follow the advice of those with the knowledge, and are more likely to listen to anyone who disagrees with the health experts.

It appears as though the US economy is going to be suffering a long time with this pandemic. I’m not even sure that a vaccine will help, once it is available, as so many Americans will refuse to take it, because of their distrust of science.

njbr
njbr

The importance of an effective vaccine cannot be under-stated.

As I have said from the beginning, this will be a long-term issue with portions of the economy blinking on and off in response to spikes. Supply chains will remain disrupted. Productivity will not be strong. People have to be confident in order to spend money. Until certainty returns to the economy, it will remain shit. The helicopter dump of federal money to individuals and programs used by individuals will need to continue to keep this ship above water until a vaccine or some sort of other end to this pandemic will occur.

But now, with the rise of the anti-masker, anti vaxxer components of society (not necessarily the same group), there are further wild-cards being thrown into the mix.

Even if it is decided to let the chips fall where they may "because we'll all get it in the end"--there WILL BE long term effects. How many small and medium businesses with no viable succession plan are out there that depend on people in high risk categories? How many families depend on those people? What about the people who end up in the hospitals--who's going to pay those bills? And how confident are you that you won't get it a second time? How confident are you that the damage you receive the first time (and studies DO show long-term damage in even asymptomatic people) won't mean a worse time with a second bout?

Too many unknowns.

But all risks to the downside.

But hey, I'm up over 6% total for the year in my investments.

TCW
TCW

Results from Sweden as of 7/1/20. Death rate for those under 70 = .86% and for those 70 or more = 6.8%. Time to protect old folks and go back to work.

BaronAsh
BaronAsh

Good article.
If they could get rid of the second wave fear porn and stop the rioting, then the country could rebound that much better, esp. if there is a massive infrastructure program in 2021.
Of course that is unlikely, given that we are now in a vicious civil war in which one sides is relying on the economy being in the toilet to so demoralize their opponents as to not only win at the ballot box, but so retool the system as to ensure that anything resembling the old Republic is buried forever. Totalitarian Utopia, here we come!!

BaronAsh
BaronAsh

Meanwhile, the Nasdaq looks like this:


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