The determination by the National Bureau of Economic Research that the American economy entered into recession in February March 2020 was a surprise for many. The recession thus started before the World Health Organization declared a pandemic and a full month before President Trump declared a state of emergency. But is this early recession really surprising?
In a feature article to appear in the forthcoming (Summer) issue of Regulation, which will hit the newsstands before the end of this month and the web earlier, I tried to see what diagnosis of the “Trump economy” (if such a label can be used) could be made on December 31, 2019.
My article contains 9 figures that give a good idea of the evolution of the American economy during these three years. Some of the data may surprise you. My main question was: To which was the American economy prepared for an economic shock? I don’t want to spoil the suspense, but I think that the subtitle of my article is not badly chosen: “Three Years of Volatile Continuity.” But wait to see the charts.
P.S.: A comment by TMC below has led to the changes indicated in my post.
READER COMMENTS
Thomas Hutcheson
Jun 9 2020 at 8:53am
Although TIPS inflation expectations did not fall off the cliff until the end of February (and the time that 5 year expectations dropped away from 10 year expectations), they fell noticeably in late January compared to December, so at least expectations of recession were growing in January. This is not so odd as events in China were starting to be reported.
Pierre Lemieux
Jun 9 2020 at 6:26pm
@Thomas: Interesting, but here is the enigma. On January 31, there had been only 7 reported cases in the US. It is true, though, that Trump’s DHHS declared a public health emergency on that date, but it was arguably mainly as a measure against China (and probably perceived as such). Most people, it seems, thought SARS-coV-2 would not be worse than the 2003 SARS-CoV-1. One interpretation is that the US economy was on the brink of a recession and that coronarirus rumors were enough to start it.
Alan Goldhammer
Jun 9 2020 at 9:03am
I will look forward to reading the article. IMO, the American economy was not in the best of shape. Pre-pandemic, there was too much corporate debt. The fracking industry was not profitable and we have seen the results with the collapse of oil prices. Equity prices were driven to high levels as many investors moved out of low yielding bonds in seek of higher yields along with stock buy backs from CEOs who enjoyed higher compensation bonuses as a result.
Most of us who do deep dives into balance sheets knew this and adjusted appropriately. Smoke and mirrors works only so long and the Clauswitzian ‘fog of war’ eventually lifts.
Craig
Jun 9 2020 at 11:36am
“American economy entered into recession in February 2020 was a surprise for many.”
I am not sure why that month would have been a surprise. I mean, the corona-fear began to grip the economy on February 12th – February 13th.
Pierre Lemieux
Jun 9 2020 at 6:16pm
@Craig: Why these particular dates? There were still only a handful of cases in the US and, according to Wikipedia’s timeline, only three new cases were confirmed between February 12 and 15. As the NBER mentions, the employment level started plateauing in December, if not before (depending on what you call a plateau) and the first sharp drop was between the week of Feb 10-15 and the week of March 9-14 (weeks of the BLS household survey). See the chart at https://fred.stlouisfed.org/graph/?g=recq. The rosy Economic Report of the President and the CEA’s report were published on February 20, and did not mention the coronavirus; neither did the White House’s press release. The CEA’s report still predicted a 2.9% GDP growth in 2019. There was no widespread panic. Perhaps only those at the heart of the economy sensed that something had been going wrong, and this may not have been (only) the coronavirus threats. My article will contain other data up to December 2019.
Craig
Jun 12 2020 at 8:05pm
“There were still only a handful of cases in the US”
That’s when the stocks peaked and the investors started to sell off. You’re correct there weren’t many cases. But there were a significant number worldwide and there were enough here and enough there and it was obvious that the US was not going to actually be able to contain it. The market realized that the cat was out of the bag, Captain Trips was coming and there was absolutely nothing we were going to be able to do about it and we were all just sitting in places hours away from any other place by aluminum kootie tubes made by Airbus and Boeing well known as a great place to get sick.
The jobs report for February AS A WHOLE was still a big + number.
The 2nd half of February is when the air came out of the sails. You could see it in the market, you could feel it in the traffic, you started to see masks, the traffic decreased, whole nine yards.
Craig
Jun 12 2020 at 8:14pm
https://www.washingtonpost.com/business/2020/03/06/march-jobs-report/
”
The U.S. economy added 273,000 jobs in February, showing impressive strength before the coronavirus outbreak began weighing heavily.
The report, published by the Bureau of Labor Statistics, offers a snapshot of an economy that was relatively strong in the days before the coronavirus’s spread into the United States.
The jobs data was collected largely before U.S. financial markets began a dramatic slide, oil prices fell sharply, the Federal Reserve announced an emergency interest rate cut and Congress rushed to pass an $8.3 billion spending bill to boost the government’s health readiness.”
If I had to bet $1 on the specific day, I’d bet on February 13th, but to me it seems obvious the slide must’ve started after the Household and Establishment Surveys were taken because those surveys released on March 6th, 2020 are not indicative of a recession.
TMC
Jun 9 2020 at 2:42pm
Second sentence:”The committee has determined that a peak in monthly economic activity occurred in the U.S. economy in February 2020. “
Pierre Lemieux
Jun 10 2020 at 10:00pm
@TMC: You are right. I should have written that, according to the NBER, the recession started in March, not February (which was the peak). It is possible that, considering employment only, the peak was in February if most of the March drop has been between February 10-15 (the survey week in February) and the end of the month. But that is not what the NBER determined. I made the correction in my post. Thanks.
Pierre Lemieux
Jul 1 2020 at 11:01pm
@TMC: Note that Greg Ip in the Wall Street Journal of July 1 has the same interpretation as my original formulation:
I think the problem is the following. Monthly data show the peak in February, but the probability is that the actual peak was at some time that was not February 29.
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