A record-short recession
After a record-short recession, a new United States economic expansion may have begun. Economic data suggests recovery may be under way in much of the world. Daily new cases of COVID-19 are rising in some areas, though sources (via Worldometers) aren’t yet indicating signs of a second wave. Equities made progress in June with the best returns among emerging market and tech-heavy indices. A modest stock market uptrend should persist through the summer but may encounter selling near the prior highs and more volatility before the U.S. election.
The National Bureau of Economic Research (NBER), the arbiter of U.S. business cycle dates, concluded that February was the peak of the last expansion. That economic uptrend lasted 128 months from the recession low of June 2009, the longest in U.S. history.
The worst recession since the 1930s began in March, due to business closures and shelter-in-place policies to check the spread of the current pandemic. This recession has also been unique in its length, the shortest in history, ending in April or May, after only two or three months.
Whatever date the NBER puts on the recession’s end, a new expansion may have begun. That’s mostly true around the world: A recovery from the worst global recession in decades is possibly underway. China was the first country to emerge from the COVID-19 lockdown and data from its government notes economic improvement in March from the collapse in January and February. Industrial output for those worst two months combined was down 13.5% below the prior year. Production surged in March and surpassed the prior year in April, up 3.9%; further progress was made in May. Purchasing manager indices (PMIs) from manufacturing business surveys improved from May and showed faster expansion. According to the Chinese government, industry is mostly back to normal and expecting output in June to exceed May’s annual gain.
Chinese consumers have been more restrained, likely from lingering fear of infection and reports of a renewed outbreak in Beijing. Retail sales disintegrated in January and February, off a combined 23.7% from the same period in 2019. Sales recovered in May but were still down 2.8% from the prior year. Still, demand seems to be improving. June PMIs from services companies were robust and above expectations. The all-industry composite index from the National Bureau of Statistics reached the highest since mid-2018. China reports incredible progress in just a few months. If that’s indeed the case, its sharp recovery would help lead the world out of recession.
The Eurozone economy is also showing signs of life after the devastating collapse in March and April. The PMI for manufacturing companies was 47.4 in June, still below 50 breakeven. But it’s the second highest this year and up from adevastating April low of 33.4. The all-industry composite PMI jumped nearly 35 points in two months to 48.5, with further increases likely in July. Daily mobility statistics point to a healthy pickup in activity. German retail sales in May surged 13.9% over April to put them above the level in February as well as May 2019. May retail sales in France and Spain rose even more sharply. Confidence is still low but seems to be rising.
The Eurozone is benefitting from strong action by the European Central Bank (ECB) to increase its country bond purchases and expand its bank lending program. The ECB hiked its Pandemic Emergency Purchase Program (PEPP) to a massive €1.35 trillion of potential bond purchases. In addition, the latest auction of its Targeted Longer-Term Lending Operation swelled to €1.3 trillion, funds that are available to banks for specified lending activity at a cost that could be as low as 1.0%. Further, after years of Eurozone austerity, fiscal stimulus is coming to the fore. The German government agreed to new fiscal spending well over €100 billion; other countries’ deficits are surging. With PEPP, ECB bond purchases can be large enough cover the Eurozone’s anticipated deficits. Widespread work subsidy programs have kept the Eurozone jobless rate from roaring higher, only ticking up to 7.7% in May. The Eurozone recovery will accelerate in the third quarter. Japan’s economy was faltering ahead of the COVID-19 crisis from the October hike in the value-added tax. Fourth quarter gross domestic product (GDP) in 2019 plunged 7.1%, annualized quarter-over-quarter, and another 2.2% in this year’s first quarter.
The economy in June was following two tracks: further weakness in industrial output, down another 8.8% in May after a bigger 9.8% plunge in April. The other track shows clear gains in consumer activity with May retail sales up 2.2%. The Apple Mobility Index for Japan keeps mending, now, nearly back to January’s level. The composite PMI, at 40.8 in June, is still very low, but rising. Recovery appears to be underway, but it will likely be gradual and protracted.
The U.S. economy rushed higher in May after the collapse and closures of March and April. Regional manufacturing PMIs leapt to near breakeven or more in New York, Philadelphia, Richmond, Kansas City and Dallas, most well above expectations. May retail sales sky-rocketed 17.7% over April as consensus forecast only an 8.4% gain.
According to data from the Bureau of Labor and Statistics, May payrolls climbed a monster 2.5 million jobs versus pre-report guesses of a 7.5 million job loss. June payrolls continued the gusher with a record gain of 4.8 million new jobs, 1.6 million above average projections. The May Chicago Fed National Activity Index rose to a record, implying U.S. GDP growth near 8%. The up-wave in data for May came from businesses reopening and people returning to work.
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