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.)
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
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.
- People have to live somewhere. The population is still growing.
- There is a bit of pent-up demand. People were forced to put off moving plans when Covid suddenly hit.
- Interest rates are low and the Fed will keep them that way.
- Jobs, Jobs, Jobs
- The attitudes of millennials and generation Z are quite different than that of their boomer parents towards housing and family formation.
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.
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.
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
- Drinking Banned at Florida Bars and What About the NBA?
- Texas Shuts Bars at Noon as Covid Cases Surge
Those reopening reversals are what caused over 40% of the economists to worry about a worst-case scenario.