Will The US Economic Rebound Falter In 2020’s Second Half?

Another measure of the macro trend, courtesy of the New York Fed, leaves room for doubt that the danger has passed. The bank’s Weekly Economic Index, which estimates the year-over-year change in GDP, remains deeply negative, as of the Aug. 8 update. (The red line is The Capital Spectator’s estimate of a neutral level that separates growth from contraction.)

Perhaps the main threat to recovery is the ongoing rise in new filings for unemployment benefits. Although initial jobless claims have receded sharply from the unprecedented surge in April, this leading indicator continues to rise by one-million-plus every week. The latest update shows newly unemployed workers increased 1.2 million. That’s the lowest since the pandemic started, but it’s still far too high to encourage optimism that the labor market’s woes have passed.

Economists warn that without a new round of unemployment aid from the federal government, the risk is rising for a new phase of economic crisis. Reviewing a recent survey of analysts via FiveThirtyEight.com, “participants see the federal [unemployment insurance] supplement as being highly critical to the growth path of the economy for the remainder of 2020,” says Allan Timmermann, a professor of finance and economics at the University of California, San Diego. But at the moment, the prospects for new legislation on this front remains dim.

Another reason for maintaining a cautious outlook on recovery prospects: The Capital Spectator’s near-term projections of the Economic Trend Index and Economic Momentum Index (a pair of proprietary macro benchmarks) point to a stall in the rebound. In the chart below, the June-through-August gains in ETI and EMI are currently on track to fade in September. (For details on ETI and EMI design and the methodology for projecting the indexes, see this review.)

The future, as always, is uncertain, and that can be a positive as well as negative. Much depends on how the nation manages the coronavirus in the weeks and months ahead. Decisions on government policy and Covid-19 vaccine research and development are also critical factors that can skew positive or negative.

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