The Shortest Recession in History?

By Charlie Bilello

28 Jul 2020

How quickly things change.

Back in March, there were widespread fears of a second Great Depression.

A few months later, as stocks surged, everyone was talking about the “v-shaped recovery.”

What does the data suggest?

Let’s take a look.

First, we need to put the pre-covid economic environment in context. In February when the economy peaked, the US had just completed its longest expansion in history at 128 months.

Typically it takes some time before a recession is officially dated and announced (the 2008 recession wasn’t announced until December), but the slowdown this year was impossible to miss. NBER (the official arbiter of recessions) announced in June that an economic contraction had started in March.

How does NBER define “recession”?

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion.

The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, we refer to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. 

Source: NBER

And how do these indicators look today?

1) Real Income Less Transfer Payments

Real Personal Income (excluding transfer payments) peaked in February, declining 2.9% in March and 6.2% in April before rebounding 1.5% in May.

It remains 7.5% below its February high with the next report (June data) set to be released this Friday.

Importantly, this excludes “transfer payments,” which means the record federal unemployment boost ($600/week) and stimulus checks are not counted here.

If we include those “transfer payments” real personal income boomed in April like never before (+11.3% monthly increase was largest on record), as a majority of those on unemployment were now receiving a higher income than when they were working, and more than 159 million Americans received stimulus checks (the vast majority of whom were not unemployed).

In prior recessions, this wasn’t the case, and real incomes declined irrespective of transfer payments.

2) Employment

Non-farm employment peaked in February and declined 0.9% in March and 13.8% in April before rebounding 2.1% in May and 3.6% in June.

It remains 9.6% below its peak, with the next report set to be released on August 7 (July Data).

Created in YCharts

The 14.6 million reported decline in total non-farm payrolls (from February peak to June) likely understates the true toll, as over 31 million people were claiming some form of unemployment benefit as of July 4.

Source: DOL

2) Industrial Production

Industrial Production actually peaked well before this year, back in December 2018. But the sharp declines did not occur until March (-4.4%) and April (-12.7%). It has since bounced back (+1.4% in May and +5.4% in June), but remains 10.9% below February’s level and 11.8% below its all-time high.

Created in YCharts

4) Real Retail Sales

Those pointing to a “v-shaped recovery” often use retail sales as their prima facie evidence.

After a record collapse in March (-7.8%) and April (-14.0%) during the shutdowns, we saw a record rebound in May (+18.2%) and June (+6.9%) as the economy reopened.

Buoyed by an unprecedented amount of stimulus, the American consumer is spending their newfound money, with Real Retail sales only 0.4% below their January peak.

Putting it all together, what does the data suggest? Will this go down as the shortest recession in history?

It very well could, if we are defining a recession’s end at the point when the economy hits its trough. Given the widespread shutdowns throughout the country in April, it will be nearly impossible for the indicators above to move below their April lows. That is as long as there is not a second shutdown of a similar fashion, which seems highly unlikely given the change in public’s attitude toward shutdowns (ex: Disney World reopened this month at the same time COVID-19 cases, hospitalizations, and deaths in Florida were hitting new highs).

Previously, the shortest post-war recession was 6 months in duration, from January through July in 1980. It’s entirely possible that this recession, when NBER does its official dating, breaks this record.

How about the V-Shaped Recovery Theory?

That appears to be on shaky ground. While Real Retail Sales does indeed look like a V, the other 3 indicators (Real Income, Employment, and Industrial Production) do not. The most important of these is employment, which has not “come right back” as many were hoping for.

As such, whether the other indicators continue to recover is likely to be highly dependent on whether there is more “stimulus” ahead.

On that point, the additional $600 per week that has allowed the majority of the unemployed to make more money than they were working, is set to expire this week. We don’t yet know what the new amount will be, but it’s likely to be lower (Republicans have proposed a reduction to $200/week with a second round of stimulus checks; Democrats have proposed a continuation of the $600/week with higher stimulus checks and bailouts for states).

We can debate which stimulus plan is better policy, but the fact that more money is deemed to be “necessary” on both sides tells us that there is no V in this recovery. It may be the shortest “recession” in history, but that doesn’t mean the economy is back to where it was in February. We still have a ways to go.


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