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Momentum is slowing, but the recovery continues

August 28, 2020
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Monthly Review (Page 3)

The economic recovery continued to sprint ahead in July although there were signs that the positive momentum has slowed with renewed virus disruptions for consumers and businesses. The economy added 1.8 million jobs during July as the surge in rehiring post-lockdown extended for another month. Spending by consumers climbed again, too, especially on big-ticket autos and homes with interest rates at-or-near record lows. Business sector activity also improved as many firms have seen a pickup in demand upon the reopening of state and local economies. Still, there were weaker signs among the high-frequency data in the second half of July and into August as consumer mobility has plateaued while jobless claims continue to run well above normal as businesses struggle to adapt to the post-COVID environment. This suggests that the recovery has downshifted from the reopening surge. Despite the growth concerns, broad equity market indices continued to move higher, climbing to (or near) all-time highs in mid-August on positive earnings data and expansionary monetary policy.

Outlook (Page 4)

While the COVID-19 recession is likely already over, the recovery from the sharpest quarterly decline in economic growth since at least World War II is expected to be lengthy. Even if the economy can maintain above-trend job gains and real GDP growth in coming years, the gap created by this year’s downturn will not be filled for at least a couple of years. In response to this economic gap and with inflation continuing to run below its long-term goal, the Fed has signaled that no discussion of tightening monetary policy will occur for a while —keeping interest rates low and liquidity plentiful. Real GDP growth should spurt at a record pace in the third quarter, but is likely to be more modest – albeit still above-trend – after that. This will put downward pressure on the U-3 unemployment rate for years to come, but “full employment” is unlikely to be reached until late 2022 at the earliest. It’s still too early to determine if recent consumer trends in response to the coronavirus and social unrest will persist over the long run, including: elevated saving rates, a preference for digital (such as online shopping) instead of in-person, and a desire for “space” that results in more housing demand in suburban and exurban areas.

Go deeper with the full August dashboard linked below.