WHERE WAS THE U.S. ECONOMY BEFORE THE PANDEMIC?

As noted in my previous blog entry (https://harrisonhartman.blogspot.com/2020/07/is-timing-everything-regarding-covid-19.html) from July 19, 2020; the U.S. recession often associated with the COVID-19 coronavirus shutdowns may have already ended.  Given that the economy appeared to deteriorate rapidly around the start of the shutdowns, one might conclude that the only reason for the recession was the curtailing and in some cases the stoppage of economic activity to control the pandemic.

Clearly, the shutdowns contributed to the decline in real GDP, if the shutdowns were not the main or sole factor.  However, not all of the evidence suggests that the U.S. economy was performing well prior to the start of the pandemic.  As I pointed out in my July 19, 2020 blog entry (https://harrisonhartman.blogspot.com/2020/07/is-timing-everything-regarding-covid-19.html) and my May 15, 2020 blog entry (https://harrisonhartman.blogspot.com/2020/05/when-did-us-downturn-start-and-what.html); remember that estimated U.S. retail sales compiled by the U.S. Census Bureau fell in February 2020.  This estimated decrease was before most, if not all of the U.S. shutdowns implemented to try to contain the COVID-19 coronavirus pandemic.

Also, remember that estimated U.S. employment not from the establishment survey (total nonfarm payroll 

employment) but from the household survey conducted by the U.S. Bureau of Labor Statistics decreased for 

4 out of 6 consecutive months from November 2019 through April 2020.  (series LNS12000000 at

 https://data.bls.gov/cgi-bin/surveymost)  The estimated decrease in employment in November 2019 was even further away from the COVID-19 coronavirus shutdowns than the February 2020 drop in estimated U.S. retail sales.  I tried to call attention to the decrease in U.S. employment based on the household survey in my February 9, 2020 tweet (@HarrisonCHartm1) and in at least two earlier blog entries:  https://harrisonhartman.blogspot.com/2020/03/is-temporary-dichotomy-emerging-between.html and https://harrisonhartman.blogspot.com/2019/12/the-november-2019-jobs-report.html .

At least two other signs of economic problems for the U.S. economy appeared even sooner.  Following a brief period when money velocity increased most quarters, the velocity of the M1 money supply started decreasing again, having fallen five out of six quarters from the fourth quarter of 2018 through the first quarter of 2020 (despite reaching a local maximum in the first quarter of 2019) based on data from www.economagic.com.  Readers may want to note that M2 velocity in the U.S. has also been decreasing lately.  Previously, I tried to alert people about the decrease in money velocity, including in this blog entry from November 4, 2019:  https://harrisonhartman.blogspot.com/2019/11/us-money-velocity-fell-again-in-third.html .  My 2015 book It’s Velocity, Stupid! (short title) has more information about money velocity.

The yield curve is another factor to consider.  If I remember correctly, the yield curve or yield gap calculated as the five-year U.S. Treasury interest rate minus the two-year U.S. Treasury interest rate turned negative in December 2018.  Other yield curves or yield gaps followed suit.  Of particular interest may be the one-to-ten year yield curve.  According to Bauer and Mertens (2018), the U.S. Treasury one-to-ten year yield curve (probably based on monthly data) turned negative two years or less before each U.S. recession in recent decades, with only one instance when the one-to-ten year yield curve was negative but a recession did not ensue within two years.  Thus it may be very foretelling that a recession followed the late March 2019 inversion of the one-to-ten year yield curve (based on daily data from the FRED web page of the St. Louis Federal Reserve Bank) in about a year!  (Note that my understanding is that the yield curves are now positive.)

How strong was the U.S. economy in February 2020 given possible warning signs such as (1) falling money velocity, (2) an inverted yield curve soon before then if not in February 2020, (3) falling retail sales, and (4) household survey employment at times falling soon before February 2020?  Would a less severe economic downturn have occurred without the COVID-19 coronavirus shutdowns?  Regardless of the answers to those questions, I reiterate my call (and likely the call of others) for more expansionary fiscal policy and more expansionary monetary policy to try to help the economic recovery.

Clearly, the U.S. economy cannot completely recover without solving the COVID-19 coronavirus pandemic.  However, if the U.S. economy was either in a recession or heading into a recession before the shutdowns, then this suggests at least to me a role for fiscal policy and monetary policy in helping the U.S. economy to reach its potential.

(Please realize that data revisions could impact the analysis in this blog entry.  Thanks for your understanding.)

IS TIMING EVERYTHING REGARDING THE COVID-19 RECESSION?

Encouraging macroeconomic data such as estimated retail sales for May and June of 2020 suggest that the recession often associated with the COVID-19 coronavirus shutdowns in the United States might have already ended, at least from a technical perspective.  The U.S. economy may well have resumed growth as of this writing in mid-July 2020. 

However, a few questions remain.  Can we be certain that growth has resumed?  If the recession has technically ended, then what most likely led to the return to growth?  What does the possible end of the recession mean for the well-being of hundreds of millions of people in the U.S.?  And when exactly did the recession end and begin?  Some thoughts about these questions follow.

Regarding the first question, we may not be able to be sure that the recession ended until we receive real GDP data with a growth rate no less than zero per cent.  My understanding is that most if not all are expecting data to show that real GDP in the U.S. decreased again in the second quarter of 2020 and by more than it decreased in the first quarter.  Therefore, absolute certainty about the end of the recession may be at least a few months away, particularly if we need consecutive quarters of expansion to declare the recession over.

Concerning the second question, two obvious possibilities that could have ended the recession in the U.S. would be (1) the at least partial ending of the shutdowns and (2) extremely expansionary fiscal and monetary policies.  The expansionary stabilization policies may possibly have been more helpful at preventing an economic collapse much more severe than the one that the United States has experienced to this point than in returning the economy to growth.

But what does our economic situation mean for hundreds of millions of people?  More people are probably working in the U.S. now than were working in April 2020.  That should help to increase household incomes.  However, probably fewer people are working than the number working in January or February of 2020.  Further, additional unemployment compensation may be about to expire, creating substantial problems for those unable to find employment. 

Moreover, health concerns could be slowing down a possible economic recovery.  For example, should we expect people to spend normal amounts of money on vacations and recreational travel when (a) the pandemic may be worsening and (b) people may be concerned about losing their jobs? Some people may view the situation as amounting to a tradeoff between trying to stop the spread of the COVID-19 coronavirus versus reopening the economy.  However, others may ask whether the two actually go hand-in-hand.  With a widely-available vaccine or a widely-available cure or both, much if not most or all normal economic activity could resume, and the economy should grow.

There would still be the issue of how long it would take for the economy to recover fully from the economic downturn.  That is a topic that will need to wait for further discussion.

If the economic recovery has started in the U.S., then when exactly did it start?  Likewise, precisely when did the recession begin?  One statement from the National Bureau of Economic Research (NBER) could indicate that the recession started in February (https://www.nber.org/cycles/recessions_faq.html).  However, another statement from the NBER could be interpreted to mean that the recession started in March if the monthly peak was in February 2020 (https://www.nber.org/cycles/june2020.html).  If the former is accurate, then the recession started well before the shutdowns (at least to the best of my memory) and poses questions about what the cause of the recession was.  Even if the later time is accurate, the economy may have started contracting before the shutdown.  Readers should realize that estimated retail sales in the United States from the U.S. Census Bureau declined relatively sharply in February 2020 (https://www.census.gov/retail/marts/www/adv44x72.txt), ahead of the shutdowns.  The decline in estimated retail sales was much larger in March and April of 2020 than in February 2020.

The contraction in economic activity in the U.S. was so strong in March 2020 that it offset likely gains in January 2020 and possibly February 2020, with the NBER stating that the peak in economic activity in the U.S. based on quarterly data was in the fourth quarter of 2019 (https://www.nber.org/cycles/june2020.html). To make matters more complicated, I was reminded while listening to something on T.V. last week that U.S. manufacturing, although likely expanding now, had been in a recession in much (if not most or all) of 2019.  Please realize that data revisions may change at least some of the analysis in this blog entry.

Obviously, the sooner that a vaccine or a cure for the COVID-19 virus is widely available, the better it will be for people’s health and the health of the economy.  Both could be very positive developments for people’s living standards.

Beyond the health and the living standards of hundreds of millions of people in the U.S., the recent economic performance or lack thereof could play an important role in the 2020 U.S. elections.  Those elections are as of this writing less than four months away.  But returning to living standards and well-being, in terms of ensuring that everyone shares in the prosperity of the United States, clearly it’s about time!