Bob Baur
COVID-19 has severely disrupted the world’s economy, plunging it into the worst recession since 1930 and putting an end to the longest economic uptrend in history. According to the National Bureau of Economic Research (NBER), the arbiter of U.S. business cycle dates, February was the peak of the last expansion, ending the 128-month period of expansion.
Dr Bob Baur notes that while many are calling for a prolonged period of economic stagnation, economic data suggests the opposite, with a recovery already under way in much of the world. While NBER is yet to put a date on the end of this recession, it is likely that despite it being the worst since 1930, it may well be the shortest.
First to emerge from the lockdown, China leads the way to recovery
“China was the first country to emerge from the COVID-19 lockdown and data from its government notes economic improvement in March from the collapse in January and February.”
Dr Baur indicates that this economic improvement bodes well for the rest of the world, with industrial output and consumer spending among the data improving:
“Industrial output for those worst two months combined was down 13.5% below the prior year. Production surged in March and surpassed the prior year in April, up 3.9%; further progress was made in May.
“Purchasing manager indices (PMIs) from manufacturing business surveys improved from May and showed faster expansion. According to the Chinese government, industry is mostly back to normal and expecting output in June to exceed May’s annual gain.
“Consumer spending is still somewhat restrained from lingering fear of infection with retail sales disintegrating in January and February, off a combined 23.7% from the same period in 2019. Sales recovered in May but were still down 2.8% from the prior year. Still, demand seems to be improving overall.”
The U.S. economy rushed higher in May as business reopened
“The huge May pop following the April economic collapse was like taking the express elevator back to the ground floor from the sub-subbasement”, said Bob Baur on the V-shaped upwelling after a record contraction.
“By September, the early reopening energy will have dissipated, and the recovery turn more gradual. We expect vigorous third-quarter GDP growth near 10% annualized but followed by a more prolonged recovery with GDP and employment not likely to reach their prior peaks until 2022.
“Regional manufacturing PMIs leapt to near breakeven or more in New York, Philadelphia, Richmond, Kansas City and Dallas, most well above expectations.
“May retail sales sky-rocketed 17.7% over April as consensus forecast only an 8.4% gain.
“May payrolls climbed a monster 2.5 million jobs versus pre-report guesses of a 7.5 million job loss. June payrolls continued the gusher with a record gain of 4.8 million new jobs, 1.6 million above average projections.”
Stay optimistic for now
“The continued revival of world growth should keep the equity uptrend intact at least for a while. There’s a lot of uncertainty around the strength of the rebound into next year and the potential for a second wave of virus activity.
“Looking further ahead, stock valuations as well as bond prices are very high, signs that long-term financial returns may be far less than exciting. The best potential for robust long-term equity profits is a rotation into value and cyclical stocks, a reverse of the investment climate of the last decade.
“For now, though, the recovery seems on track and we’d stay fully invested commensurate with one’s tolerance for risk. Stay optimistic for now.”
By Bob Baur, Chief Global Economist