August 2020 Economic Forecast - Some Improvement But The Pandemic Stopping Any Real Recovery

Econintersect's Economic Index forecast continues to see a recovery underway from the pandemic induced recession - although not significantly better than last month. I continue to see evidence of an economic reset and doubt the economy will return to its old trends.

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 of the forecast index is understated. Analyzing the data, the real decline of the pandemic was much deeper than the Great Recession.

A recession ends when the economy begins to recover - and the economy is definitely recovering albeit still in contraction year-over-year. This may be the shortest recession ever at 2 to 3 months. HOWEVER, the pandemic is not over and the coronavirus will decide when it wants to release the economy from its grip. It is even possible that the economy can worsen again due to the pandemic which means the recession is not over.

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 to cushion an economic collapse 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. There will be no quick recovery because:

  • there are only partial reopenings currently - and the pandemic is growing and there have been some shutdowns;
  • there will be a mountain of bankruptcies and the quantity will be determined by the length of time the coronavirus keeps the economy from opening completely;
  • will there be an exodus from big cities? This would affect home prices and home sales volumes. Evidence this month shows a fairly strong housing market;
  • 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 is being impacted - and change always creates disruption.

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 continuing to show 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.

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.

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.

The graph below plots GDP (which has a bias to the average - not median - sectors) against the Econintersect Economic Index (which has a bias to median).

 

This post will summarize the:

  • special indicators,
  • leading indicators,
  • predictive portions of coincident indicators,
  • review of the technical recession indicators, and
  • interpretation of our own index - Econintersect Economic Index (EEI) - which is built of mostly non-monetary "things" that have been shown to be indicative of the direction of the Main Street economy at least 30 days in advance.
  • our six-month employment forecast.

Special Indicators:

The consumer is not spending all of their income - the ratio between spending and income is significantly below the average of the levels seen since the Great Recession.

Seasonally Adjusted Spending's Ratio to Income (an increasing ratio means Consumer is spending more of Income)

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Disclaimer: No content is to be construed as investment advise and all content is provided for informational purposes only.The reader is solely responsible for determining whether any investment, ...

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