July 2020 Economic Forecast - The Recession Is Likely Over But A Strange Recovery Is Beginning

Econintersect's Economic Index forecast has begun the recovery process. The economy began to open in May, and the reopening has been growing in June so logic dictates that economically June should be better than May. I personally do not believe the economy will ever return to its old trends (an economic reset just occurred).

Analyst Summary of this Economic Forecast

In the case of our forecasting model, it was not built to accurately forecast very swift movements - as our model averages to remove noise. That means the relative decline from the pandemic is understated. Analyzing the data, the real decline of the pandemic was much deeper than the Great Recession. Our forecast of the pandemic induced recession shows a relatively small contraction.

A recession ends when the economy begins to recover - and the economy is definitely recovering albeit still in contraction year-over-year. This will be the shortest recession ever at 2 to 3 months.

There is not a chance in hell the economy will recover quickly as the fundamentals have changed - we are in a period of economic reset. As an analyst, I can only guess at what the building blocks of the economy will look like in the future.

Big businesses and government are figuring a way to do more with fewer people. Further, this pandemic has added trillions of debt to the government and businesses. Normally debt is created for future gain - this debt was created for today's crash and it will be paid back in the future. I belong to the school of thought that debt is a headwind to economic growth - borrow today and pay back tomorrow. For growth to stay the same, your old income + debt repayments = new income. Money was not borrowed to improve productivity/profits - it was borrowed to cover pandemic expenses. Add this to the reality that there will be no quick recovery because:

  • there are only partial reopenings currently - and the pandemic is growing.
  • there will be a mountain of bankruptcies;
  • will there be an exodus from big cities? This would affect home prices and home sales volumes;
  • working from home changes consumer spending patterns - not to mention business and governments now need fewer workers.
  • and the major unknown is what changes consumers will make in their lifestyles. It is likely consumers will not flock to restaurants anytime soon (businesses in this sector are at risk); sports will not be as profitable; returning to gyms or going to concerts will be less popular.

Bottom line is that the gearing of the economy will be impacted - and change always creates disruption.

You do not have to be an economist to understand the U.S. was in a recession for at least the last two months. The way recessions are determined, recessions end when the economy begins to recover - and that means the recession likely ended in May. The question now is how fast will the economy improve - the pandemic has worsened and maybe the citizens will be locked down again.

COVID-19 is a black swan economic event. Black swan events are unexpected at the time with immediate significant impact and are defined:

The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalised after the fact with the benefit of hindsight. The term is based on an ancient saying that presumed black swans did not exist - a saying that became reinterpreted to teach a different lesson after black swans were discovered in the wild.

The last time the U.S. had an event that stalled the economy immediately was the oil embargo in the early 1970s. The years immediately following that event experienced more turmoil than usual. Economic forecasting tools are not designed to anticipate black swans and uncertainty can follow their occurrence.

This month the indicators and predictive coincident indices are showing signs of recovery.

Our index is designed to forecast Main Street growth, whilst GDP is not designed to focus on the economy at Main Street level. One can suggest that GDP is a lagging indicator of the underlying economy - and does not accurately portray the strength and trends of the Main Street economy.

Although not part of our forecast, I am concerned that new and existing home sales volumes will be sickly for at least a year - although the forecasters in real estate think the recovery will be swift because of pent-up demand.

Note that the quantitative analysis which builds our model of the economy does not include housing, personal income, or expenditures data sets.

Econintersect checks its forecast using several alternate monetary-based methods - and they are currently all over the map.

Our employment forecast is forecasting POOR employment growth.

THE BOTTOM LINE - Our forecast is based on a mechanical input of data. This approach works 99.9% of the time, but a black swan event still unfolding does not create the proper trends where one can accurately forecast. All that is known for sure is that there are a lot of unknowns ahead. Stay safe.

Note that the majority of the graphics auto-update. The words are fixed on the day of publishing, and therefore you might note a conflict between the words and the graphs due to new data and/or backward data revisions.

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