Notes on the Economy – 3Q 2020 Summary

EMERGING FROM THE LOCKDOWN

Second quarter real GDP (total output of goods and services) for the United States fell at an annualized rate of 32.9%. In the first quarter real GDP fell an annualized 5.0%. The second quarter’s drop was easily the steepest drop on record. (In second place is a 10.0% drop in the first quarter of 1958.) The drop in U.S. production is not an isolated event. Global data show that the vast majority of the world’s economies experienced sharp second-quarter declines in output. As in the United States, the primary cause of the downturns can be traced directly to the COVID-19 pandemic and government efforts to contain it by discouraging or prohibiting various economic activities.

In order to provide relief to adversely affected workers and businesses, and set the stage for an eventual recovery, governments have instituted very expansionary economic policies. The International Monetary Fund (IMF) estimates that collective global fiscal policy support for COVID-19 relief totals about $10.8 trillion.

As containment efforts met with varying degrees of success, governments began to loosen restrictions, and economies are generally experiencing nascent recoveries. Nearly all, like the United States, experienced the restart of growth during the second quarter. Global Purchasing Managers’ Indices (PMIs) bottomed in April, and the most recent data (for July) imply that world economic activity has entered an expansion phase.

WHAT’S IMPORTANT

• COVID-19 Remains a Fat-Tail Risk – It is now known that the course of the economy and asset values depends on the course of the disease. Yet, even now, no one knows, and no one can know, what that will be.
• In a Good Place – In Federal Reserve (Fed) Chairman Powell’s words: “policy is in a good place.” Short-term interest rates will remain very low, at least until Fed policymakers are confident that the effects of COVID-19 are well in the rear-view mirror.
• Remain Wary of Low Credit Quality and Long Duration – Default risk can be elevated in high-yield issues. An extended period of low short-term rates does not preclude an upward drift in longer-term rates.
• Global Recovery Is An Opportunity – Lagging segments of the global equities markets have yet to fully rebound. U.S. small and mid-cap stocks, foreign stocks, and value stocks remain relatively well-positioned.

LOOKING AHEAD

Updated IMF forecasts now have global real GDP contracting 4.9% in 2020, with output for both advanced as well as emerging and developing economies falling for the first time since the Great Depression. The global real GDP is projected to advance 5.4% in 2021. The 2021 rebound will only get world output back to its 2019 level. It will not restore it to its expected path prior to the pandemic. Advanced economies are expected to do worse, with 2021 output that falls short of 2019 results by 3.6% in the aggregate.

The U.S. economy has probably passed its low point. In May relaxation of COVID-19 containment restrictions began, auto and general retail soared, industrial production and capacity utilization started to move up, and employment began to grow. Improvement was more widely spread and stronger in June, but growth tapered in July. Part of the rebound was boosted by pent-up demand funded by previous government support. So easing in the rate of growth was to be expected. Also, a pickup in new COVID-19 infections in certain locations led some local authorities to reimpose containment restrictions.

Nevertheless, on a national basis, it appears probable that anti-COVID-19 restrictions will be gradually lifted. Still, some activities (such as travel-related services, entertainment, and sporting events) may bounce back only partially in the near term, and lingering containment restrictions may well drag out the recovery. As for the rest of 2020, annualized real GDP growth should exceed 20.0% in the third quarter but taper down to mid-single-digits in the fourth quarter.

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