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The COVID-19 recession began in February but did it end in May?

June 26, 2020
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Monthly Review (Page 3)

The May snapback from April’s lows was stronger-than-expected for many economic indicators as state and local economies slowly reopened. Nonfarm payroll gains surprised by adding a record 2.5 million jobs, led by the sectors hardest hit during March and April. Consumer activity bounced back sharply in May with a surge in retail spending, a solid gain in light vehicle sales, and signs of stronger homebuyer demand. Business sector surveys also improved, especially with a resurgence in new orders and production for the service sector. While all of these readings are coming off of extreme depths, the improvement in May is a positive sign that the economic recovery from the COVID-19 recession is starting to take shape. The Federal Reserve maintained its zero interest rate policy at the June FOMC meeting (with no rate hikes expected until at least 2023) and announced further asset purchases. Broad domestic equity market indices rode higher on optimism about the economic reopening, rising by as much as 38 percent from the March 23 market low – although concerns about a second wave of virus infections still loom and have brought equity markets down a bit from their recent highs.

Outlook (Page 4)

The COVID-19 recession was recently announced as having begun in February, but May’s surprising employment surge and other positive signs for consumer demand suggest that the economic recovery may start sooner than expected. While real GDP growth for the second quarter will still likely post a record annualized decline of 35-40 percent, there is growing optimism that the economy will expand again in the third quarter, perhaps sharply. On the upside, the building momentum would carry into the fourth quarter and into 2021 with continued above-trend growth, supported by an eventual vaccine and aggressively expansionary fiscal and monetary policy. There remains, however, a meaningful risk of a second wave of infections and/or a slower widespread release of antivirals/vaccine for the virus. In this downside scenario, the economy could see a slowdown with some renewed stay-at-home/social distancing mandates – which might extend the downturn into 2021. The odds still favor a faster recovery with the COVID-19 recession perhaps the shortest downturn in U.S. history. Even with strong growth, however, new peaks for total employment and real GDP will not be reached for several years given the depth of the decline in the first half of this year.