Driving Toward Recovery

The pace of the recovery in 2021 will depend not only on the course of COVID, as well as development of vaccines, and therapies, but also public policy.

COVID-induced global recession has ended based on global economic indicators. Sharp recoveries in China and the U.S. — the two largest economies — helped end the recession. However, the COVID pandemic is still far from over. The impact of a second wave is renewing shutdowns throughout the world particularly in European economies.

Q2 real GDP contracted at a -31.4% annual rate, a record pace, as the COVID response temporarily shut down large parts of the economy. But since the broader nationwide lockdowns ended, economic activity has rebounded. The Atlanta Fed’s GDPNow Model is currently tracking at a 35% annualized growth rate for Q3. This implies that a substantial part of the output lost in 1H 2020 would be recovered quickly. Economist surveyed by CNBC expect real GDP to shrink 4.1% without further stimulus in 2020 and recover to an annualized 4.6% in 2021. Fiscal stimulus is supportive of faster economic growth, it could top $4 trillion dollars by next year.

State coincident indexes show broad-based recovery as growth resumed across the country after the lockdowns ended. One of the biggest bright spots in the recovery is housing. Besides robust new home construction, existing home prices keep rising. Rising home values create a positive housing wealth effect which boosts consumer spending and is a pillar of any economic recovery. Ultra-low mortgage rates, debt service payments, allow for greater discretionary spending.

On a y/y basis, the inflation increased 1.3%, below the Fed’s inflation target of 2.0%. It suggests that Fed policy will remain accommodative and consumer borrowing rates low.

Although way off its high, unemployment rate at 7.9% is an issue for the economy. Continuing claims are gradually declining, now about 10 million, the fewest since early April. However, both are still higher than in any other recession since 1967, as labor market slack remains exceptionally large. Targeted stimulus to COVID affected sectors, a vaccine, re-opening economy nationwide is the path to lower unemployment.

© 2018 by Aspetuck Financial Management LLC

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