On June 8, the National Bureau of Economic Research Business Cycle Dating Committee put out a statement that economic activity had peaked in February and that March was the beginning of the coronavirus-induced recession.
The peak marked the end of the longest economic expansion in U.S. history that began in June 2009 after the financial crisis. The expansion lasted a record 128 months.
The committee is charged with determining when the economy moves from expansion or recovery, to contraction or recession. To make these determinations the committee looks at all relevant data, including data related to production and employment.
Typically, the committee is not able to make a firm determination when a recession has started until six to 18 months after it really began.
For example, the committee determined in December 2008 that the recession associated with the financial crisis started 12 months earlier, in December 2007. In some instances, the recession already was ending by the time the committee was able to conclude that one started some months earlier.
The recession that started in March was the steepest economic downturn since the Great Depression. It was accompanied by the fastest stock market drop from market high to bear market in history — 22 days. However, we already are seeing signs of improvement.
A record 3.3 million people applied for unemployment in the second to last week of March followed by a record 6.6 million people the next week. Since the end of March, however, weekly jobless claims declined each of the next 10 weeks.
The May employment report was shockingly better (less bad) than expected. While economists expected a loss of 7.7 million jobs, the report showed the economy added 2.5 million jobs. There were some unusual factors affecting the report, but it did show a significant number of people returning to work.
If the June report, due out on July 2, also shows improvement, it will be additional evidence that the economy is improving.
As states and businesses reopen, consumer sentiment is rising. The University of Michigan’s consumer sentiment index posted its biggest gain in four years in June hitting 78.9, a 9.1% gain over May and the second consecutive positive month.
With the improvement in jobs and the consumer index, the stock market staged a major recovery. In the second week of June the technology-heavy Nasdaq index hit a high and the S&P 500 had recovered all the losses for the year. The stock market is a leading economic indicator.
In the post WWII era, the stock market has hit its low and started to recover an average of five months before the end of the recession but there were instances where it was as little as three months.
This recession was not brought on due to the usual problems of imbalances in the economy and higher interest rates. The economy was doing well and was improving in the months leading up to the pandemic-induced shutdown. Unemployment was at record lows with no signs of inflation.
Generally, a recession lasts long enough to cure problems the over-heating economy had created. This recession does not have any of that work to do.
The recession that occurred amid the 1918 Spanish Flu pandemic (estimated to have killed at least 50 million people worldwide) lasted just seven months. It was the second shortest recession on record (the shortest was six months). This was before the creation of the Federal Reserve and quantitative easing.
The Federal Reserve and Congress have delivered record amounts of stimulus to help boost the economy and lessen the financial pain for those impacted by the shutdown. The fiscal stimulus announced has amounted to nearly 10% of GDP. It is hard to believe that this unprecedented level of stimulus, applied as a salve to a healthy economy that had to be shut down for the health and safety of people, won’t have a major impact on its recovery.
Could this recession be just two months? Could the NBER Business Cycle Dating Committee decide sometime later this year or next that the economic recovery began in May 2020, with the improvement in employment and consumer sentiment? I think it is definitely possible.