WHEN DID THE U.S. DOWNTURN START AND WHAT SHOULD BE DONE ABOUT IT?

It appears that the United States and other countries have entered recessions. Focusing on the U.S., the U.S. Bureau of Economic Analysis (https://www.bea.gov/news/2020/gross-domestic-product-1st-quarter-2020-advance-estimate) reported that seasonally adjusted, annualized real GDP fell by about 4.8 per cent in the first quarter of 2020. Given the COVID-19 coronavirus shutdown, many if not most or all expect a larger decrease in U.S. real GDP in the current quarter (2020q2). Two or more consecutive quarters of decreases in real GDP are often considered as a recession according to undergraduate textbooks such as Macroeconomics (second edition) by Krugman and Wells (2009, p. 160, Worth Publishers), although Krugman and Wells point out that a precise definition of a recession does not exist. The National Bureau of Economic Research (NBER) will determine based on factors like quarterly real GDP growth or lack thereof and employment whether or not the U.S. entered a recession, and if so announce the month that it began.

According to the FRED website of the St. Louis Federal Reserve Bank 

(https://fred.stlouisfed.org/data/CE16OV.txt) with seasonally adjusted data from the U.S. Bureau of Labor Statistics (BLS), employment based on the household survey decreased four out of the last six months (November 2019 through April 2020) based on my calculations.  The only exceptions were December 2019 and February 2020, but my calculations indicate that the increase for February was only about 45,000 jobs.  Although the estimated decrease between October and November 2019 was only about 8,000 jobs and is quite small compared with the estimated decreases of nearly 2.99 million jobs between February and March of 2020 and about 22.37 million jobs between March and April of 2020, it is still a decrease. 

Using the BLS establishment survey instead, my calculations find seasonally adjusted U.S. nonfarm payroll employment increased each month from November 2019 through April 2020 except for March and April 2020, when the decreases were about 881,000 jobs and roughly 20.5 million jobs, respectively, both less than the job losses from the household survey. (https://fred.stlouisfed.org/data/PAYEMS.txt)  If my calculations are correct, the monthly change in U.S. nonfarm payroll employment based on the establishment survey has been either more positive or less negative in five of the last six months.  Is this important?

Will the NBER consider retail sales data in its determination of whether or not the U.S. economy is in recession, and if so, when it began? According to data from the U.S. Census Bureau (https://www.census.gov/retail/marts/www/marts_current.pdf), advance total retail sales (seasonally adjusted) for April 2020 plummeted by approximately 16.4 per cent, following a substantial decrease in March 2020 by about 8.3 per cent.  However, census data accessed from the St. Louis Federal Reserve web page (https://fred.stlouisfed.org/data/RSAFS.txt) show that this series also decreased in February 2020, albeit by only about 0.44 per cent, according to my calculation.

Regardless of when the downturn started, I believe that more should be done to help those who have lost jobs and/or income. Additional tax cuts and increases in government spending benefiting those who need additional disposable income the most and would be most likely to spend a large percentage of their newfound income would be appropriate, given that monetary policy may be either at or near its limit in terms of what it can achieve in increasing economic growth. Interest rates in the U.S. are already quite low and money velocity has been falling, raising the question of how frequently U.S. dollars newly added to the economy are being spent in real GDP transactions. Fiscal policy may be much more effective in ensuring that spending in the economy increases and in reducing economic inequality.

(Note that the time series variables mentioned above may be revised. Such revisions could change the analysis in this blog entry. Also, as time passes, data releases that are 'current' as of May 15, 2020 will no longer be current. )

DOES FALLING MONEY VELOCITY OFFER GUIDANCE ABOUT ECONOMIC POLICIES TO FIGHT THE COVID-19 CORONAVIRUS RECESSION?

With an estimated decrease in real GDP by the U.S. Bureau of Economic Analysis (BEA) for the first quarter of 2020 announced earlier this week (with the percentage decrease available at www.bea.gov), it appears that the United States has likely entered a COVID-19 coronavirus recession.  This is especially true if real GDP for the second quarter of this year falls even further.  Compared to understandably much attention being paid to real GDP, is it surprising that relatively little attention has been given to U.S. money velocity?  

Based on estimates from the Federal Reserve Bank of St. Louis, the velocity of the M1 money supply has now fallen by more than 50 per cent from its peak in the fourth quarter of 2007.  In that quarter, M1 velocity was nearly 10.68 on a seasonally-adjusted, annualized basis.  But, in the first quarter of 2020, M1 velocity was only about 5.27.  (https://fred.stlouisfed.org/data/M1V.txt)  This means that each U.S. dollar on average traded less than half as many times in GDP transactions in the first quarter of 2020 as it did in the fourth quarter of 2007.  In my view, this underscores the need for expansionary fiscal policy to minimize the damage from this economic calamity.

At a fundamental level, from the definition of money velocity, M1 velocity has been decreasing most quarters starting with the first quarter of 2008 because the growth rate of the money supply has exceeded the growth in nominal GDP spending.  (Note that nominal GDP measures production at prices in the period in which GDP is measured.  Real GDP measures spending at prices in the base year or the base period.)  Does the velocity data offer a message at a deeper level?  

At times, stabilization policy to complete the recovery from the Great Recession relied mainly if not exclusively on monetary policy.  But if money velocity falls substantially, then how effective is the expansionary monetary policy?  Despite some disadvantages when compared to expansionary monetary policy, expansionary fiscal policy, particularly government purchases, can guarantee that U.S. dollars and other units of currency are traded in exchange for goods and services counted as part of GDP.  In my 2015 book, It’s Velocity, Stupid! (short title), I mentioned the cliché about leading a horse or horses to water.  Strategic expansionary fiscal policy, by providing income to households and businesses that are 'thirsty,' can ensure that the desired ‘water consumption’ occurs.

(Readers should be aware that subsequent data revisions could cause changes to the above analysis.)