Bottoming Out Does Not Mean Things Are Good Again

US

Recently we have seen a lot of data indicating that the US economy, after a few desperate months of decline, has now stopped this horrible free-fall. After plummeting at record rates in March and April during the shutdowns, we are now starting to see data that is showing record, spectacular rebounds. We see the good news in the charts below in employment, retail sales, the index of leading indicators, and of course weekly jobless claims. It also shows up in the homebuilders’ optimism index, regional Federal Reserve surveys, and surveys of independent businesses.  The economy appears to have bottomed out, and that is certainly good news.

The NBER Makes Offical Call About US Economy

The National Bureau of Economic Research (NBER) is an independent organization that makes the official call about when the US economy enters and exits a recession.  Recently the NBER declared that the US entered a recession in February, and with all the recent evidence of a rebound, it’s likely that the NBER will declare that the recession ended in May or June. That is also good news, but it’s far from the end of the story, and it requires some examination.

When an economy goes into a recession, it simply means that it stops growing and starts to shrink. Business conditions and economic measures continue to get worse and worse. However, when a recession ends, it simply means that things have stopped getting worse. It does not mean things are better. Things are still bad. They’ve just stopped getting worse. The chart below illustrates the situation.

Another analogy to illustrate the situation would be to think of the economy as a tide going out… it is “receding.”  When it stops receding, the recession is over, but it’s nowhere near back to high tide.

A final analogy would be a sick patient whose fever gets worse and worse every day – their health is in recession.  When the fever stops climbing, the patient’s health is no longer receding, but the patient is still very sick with a very high fever.

The end of the recession also coincides with the start of the recovery, and the economy will be growing again, probably very fast at the beginning. But it raises the question as to “how long will it take for things to get better? How long will it take to get back to where we were?”

The answer is, unfortunately, probably a long time. Our broadest measure of the health of the economy is Gross Domestic Product (GDP), which is the value of all that is produced by the economy. The chart below shows the recent history of GDP in recessionary periods.  Each line represents a recession labeled with the corresponding year. Each recession starts at quarter 0, then each recession ends when its curve hits bottom, and then each curve starts turning back up into the recovery. When the curve gets back to where it started, the economy has reached the GDP level just before the recession started, and it has fully recovered. The table corresponds with the different recessions but also adds five more recessions going back to WW-II.  On average, it takes 6.3 quarters to recover, and if we strip out the extraordinarily long ’08 recession, the average is 5.5 quarters. Given these historical patterns, it’s likely that the recovery will take at least seven or eight quarters which would put us well into 2022 until we have returned to what it was like before COVID.

GDP

GDP is interesting for economists, but what is really important to people is if they have a job. So we can do a similar analysis for how long it takes to recover all of the jobs lost in a recession. As shown in the chart, for the past five recessions, it has taken an average of 36.5 months to regain all of the jobs lost during the recessions.  If we again strip out the extraordinarily long ’08 recession, the average recovery time is 28.4 months. Note that for the ’08 recession it took 77 months, or over six years to recover all of the jobs.  It takes longer to regain the jobs that it does to regain GDP.  Given these historical patterns, it probably won’t be until well into 2022 or even 2023 before we regain all of the lost jobs.  We are in a deep hole. 

Canada

Canada has also demonstrated a ferocious rebound in jobs, creating 290k in May, almost three times the previous record of 100k. But March and April were devastating, and like the US, the Canadian economy is in a very deep hole.

Nonetheless, it’s likely that it will take Canada more than the average nine quarters to recover, putting it until late 2022 or early 2023 until Canadian GDP returns to pre-COVID levels. Similarly, I would expect that all the jobs will not return until 2023 or 2024.

In both the US and Canada, we entered the sharpest economic downturn since the Great Depression, perhaps worse.  But given their self-induced, and self-cured nature, the economies have probably bottomed, and their recessions are over. However, remember the end of the recession simply means that things have stopped getting worse and that they are still bad.  Now we need to recover from very, very deep holes.  Given the historical evidence, overall economic conditions are still two to three years away from pre-COVID levels in both countries.