This Was No Depression

The economy is being faced with doubly good news. First, uncertainty over COVID-19 is falling as Pfizer’s vaccines will start going out to workers on the frontlines (in hospitals) in December. The possibility of COVID-19 being a problem for several years is minimal. Furthermore, the bear case isn’t that bearish. The worst possibility is we get lockdowns for a couple of months and COVID-19 vaccines don’t stop the virus until late in the spring. That’s an order of magnitude better than the fears earlier this year.

As you can see from the chart above, the GDP shortfall under consensus estimates and renewed lockdowns are almost the same. Lockdowns would hurt in the short term, but become a blip once the vaccines are administered. Some feared there would be a depression because of the virus, but instead the lost GDP ground will be less than the prior three recessions. That’s partially because growth is slower now. In recessions, less ground is lost because growth was low anyway. Specifically, the 3-year lost growth ground in the prior three recessions was 5% (early 1990s), 6% (early 2000s), and 8.4% (great financial crisis). The current trend growth is only 2.3%. That being said, losing 2.6% growth ground isn’t bad. That’s because the initial recovery was so strong. We could have another vertical leg up when the economy reopens after the vaccines are given out. 

Update On The Consumer

According to the National Retail Federation, holiday retail sales growth will be from 3.6% to 5.2%. Obviously, that growth will be driven by online sales. The retail trade group usually makes this forecast at the start of October, but it instead made it this week because of COVID-19 related uncertainty. We think the NRF saw reason to be optimistic in early October, but it didn’t want to be caught being very wrong because the virus caused consumer weakness. It seems the consumer has modestly weakened, but nothing major has happened yet. This won’t be a great holiday season, but it might be considered great considering the headwinds. 

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