A three-phase recession will be ‘unlike anything we have seen in modern history’

On By Tony Kendzior - Financial PlannerIn Economy & Markets, Investing Money

My Comments: Mindful that we could use some good news, this may disappoint most of you. But it is what it is and like so many messages these days, we all need to come together as one and fight like hell for a better world.

But the reality of economics, just like the reality of infectious diseases, doesn’t respond well to prayer and hoping for the best. It takes effort, time and collective wisdom to get through all this. That being said, don’t hold your breath about life turning to normal anytime soon. We’ve got a ways to go. Keep in mind this was written before the massive protests across the country, most of which violate the premise of social distancing and large gatherings. Experts believe this will lead to setbacks in our fight against Covid-19.

by Miles Udland \ 21 MAY 20 \ https://tinyurl.com/y7oky3ds

As of Wednesday (May 20th), all 50 states had begun to loosen coronavirus-related restrictions in some form or fashion. But the road ahead for the U.S. economy coming out of this pandemic induced recession is a long one.

And according to economists at Bank of America Global Research, things will be even more challenging than initially thought.

“The damage to the economy from this historic shock has been hard to grasp,” the firm wrote in a note to clients published Wednesday. “Indeed, we now believe we have understated the extent of the decline and are revising down the path of GDP.”

The firm now sees the recession playing out in three phases: lockdown, transition, and recovery.

Bank of America thinks the initial bounce in economic activity this summer will be stronger than initially expected, but expects the COVID recession to linger into 2022. (Source: Bank of America Global Research)
Bank of America thinks the initial bounce in economic activity this summer will be stronger than initially expected, but expects the COVID recession to linger into 2022. (Source: Bank of America Global Research).
First, the good news – during the transition phase, the bounce we’re going to see in economic activity after a springtime collapse, is now expected to be stronger than previously forecast. We are currently in this phase.

 

“An earlier reopening means an earlier bounce in activity,” BofA said. “We are revising up 3Q GDP growth to +7% qoq saar vs. -1% qoq saar previously. The gain is entirely driven by a snap higher in consumer spending; we still expect a meaningful decline in investment.”

And data such as Apple’s mobility trends report which shows driving across the U.S. just a few percentage points below baseline suggests consumers are ready to leave the house and more businesses are allowed to re-open.

Driving in the U.S. is almost back to its baseline level as consumers grow more comfortable leaving the house and more businesses are allowed to re-open across the country. (Source: Apple)
Driving in the U.S. is almost back to its baseline level as consumers grow more comfortable leaving the house and more businesses are allowed to re-open across the country. (Source: Apple)

 

Earnings reports from companies including Target and Walmart this week have indicated that stimulus provided to consumers through the CARES Act is making its way to some retailers and helping steady the consumer.

But in Bank of America’s view, the impact from the lockdown phase that hit the economy hardest in March and April and the return to pre-COVID levels of GDP will be larger drags on the economy than previously expected.

In the second quarter, BofA now expects GDP to decline at an annualized rate of 40%, up from its prior estimate of a 30% annualized drop in activity. The firm now expects a peak-to-trough GDP drop of 13% — up from its prior forecast for a 10% drop in GDP — which far exceeds the 4% decline seen at the nadir of the financial crisis.

Driving this sharper-than-forecast initial decline is a massive retrenchment in consumer spending and investment, with BofA calling for a 46% annualized drop in consumption and a 35% annualized drop in investment during the second quarter. Of second quarter GDP data, BofA says plainly: “It will be ugly.”

Looking out over the next 18 months, BofA sees a soft labor market, disinflation, and a lack of investment conspiring to keep growth below pre-COVID levels into 2022.

“An earlier reopening has prompted health experts to increase estimates for the number of COVID cases, which will slow the recovery,” the firm writes. “We have also become increasingly concerned about solvency issues and a sticky-high unemployment rate. We now think it will take until the end of 2022, or later, to return to the pre-COVID level of GDP.”