Since America has begun reducing the severity of its COVID-19-shutdown, the country has seen an incredible economic rebound. The tax and regulatory reforms put in place before the shutdown set the stage for rapid recovery.
Today, many areas of the American economy are showing vibrant signs of life. Several measures of economic momentum have nearly returned to their heights of the pre-COVID-19 era.
Manufacturer’s new orders of consumer goods and materials peaked in September 2019 at nearly $138 billion, then sank to around $110 billion in April 2020 during peak-shutdowns. With parts of the country reopening, new orders have risen again to over $136 billion for two consecutive months.
New housing starts are another area of economic activity that has come on strong as Americans change their lifestyles to avoid the shutdowns and riots of the big cities. Housing starts had a near term peak in January of 2020 at 1.536 million, then fell rapidly to only 1.066 million in April. Over the last two months though, housing starts have grown to 1.483 and 1.47 million consecutively. ISM New Orders and construction contracts are two other indicators showing signs of rebound after the shutdowns.
Perhaps most important of all is the resurgence in consumer confidence. The Conference Board’s index of consumer confidence grew faster in September than it has at any point in the last 17 years. The survey also found that more Americans plan to purchase big items like appliances, cars, and homes than did the previous month.
Where Does the Economy Go From Here?
The impressive pace of the rebound has been proportionate to the frightening speed with which the economy crashed in the second quarter. From peak to trough, GDP fell by 10.2%. For comparison, during the 2008/2009 financial crisis, GDP fell by about 4%. And the average peak to trough decline in all recessions (not counting this one) since 1947 is 2.2%.
So while any growth is good growth, even with third quarter GDP likely to increase more than 7% (over 30% at an annualized rate), economic activity will still be at a level commensurate with the worst recessions in the last seven decades.
The low hanging fruit of the recovery has been picked. The bounce back was aided by a massive fiscal and monetary stimulus that is unlikely to be repeated. Trillions of dollars were handed out to millions of consumers and thousands of businesses. This may be the first recession on record where disposable income rose.
The key questions moving forward are, will the growth continue as the stimulus is depleted, and how quickly will the recovery proceed? The good news is, the strength in the housing market looks to have legs and housing has a powerful multiplier effect on economic growth. The savings rate also remains elevated, signaling consumers may have some reserves left in the tank that can make their way into the economy.
The bad news is, the labor market remains a mess. Aside from the extra unemployment benefits and stimulus checks, spending would likely be much lower. Small businesses are failing at an alarming rate, and the leisure and hospitality industry is in shambles. Will these jobs return? If so, when? If not, where will many of these low-skill workers find employment? Amazon only has so many jobs to offer!
The pace of the recovery from here may depend on the outcome of the presidential election. A Biden/Blue-state agenda is much more likely to result in a protracted recovery (or even a double dip) with the type of elevated unemployment situation we see in deep-blue states like New York, Rhode Island, California, New Mexico and Massachusetts. A Trump victory and a continued pro-growth agenda would likely help the economy recover faster than it otherwise might.