Is the U.S. Economic Recovery Fading?
By: James Picerno, Director of Analytics
Judging by several third-quarter GDP nowcasts, the rebound remains strong. But GDP estimates only capture one dimension of how the economy is faring in the wake of the coronavirus recession. For deeper insight, monitoring various real-time indexes is useful. By that standard, the current outlook remains mixed.
Let’s start with the good news. Several GDP nowcasts for the upcoming Q3 report (due on Oct. 29 from the Bureau of Economic Analysis) are pointing to a strong rise. The Atlanta Fed’s GDPNow model, for example, estimates that output in the July-through-September period will surge 32.0% (real annualized seasonally adjusted change), based on the Sep. 17 estimate. By that standard, GDP will increase by the most on record for a quarterly change.
Other nowcasts point to lesser gains, although it’s encouraging that there’s a near-universal consensus that Q3 GDP will bounce. Now-casting.com’s current estimate (Sep. 18) is a 10.9% rise and the New York Fed’s nowcast sees a 14.3% advance (Sep. 18), for instance.
The overall message: the off-the-charts 31.7% GDP loss in Q2 isn’t likely to continue in Q3. Good news, although the analysis is fuzzy when we start to dig into the details.
Let’s start with a couple of new real-time data sets from two regional Federal Reserve banks. The Dallas Fed Mobility and Engagement Index (MEI) “summarizes the information in seven different variables based on geolocation data collected from a large sample of mobile devices to gain insight into the economic impact of the pandemic.” As a proxy for broad economic activity, this data should be viewed cautiously. Nonetheless, it’s useful for tracking how conditions appear to be evolving in real time. On that score, MEI suggests that the recent rebound has faded. After plunging in March and April, the US MEI rebounded sharply but has been treading water in recent weeks and remains well below the pre-pandemic level as of mid-September.
A data set developed by the Atlanta Fed paints a mixed picture via business expectations for the four-quarters ahead (BE). These monthly numbers offer a conflicting assessment through August. While employment growth expectations have improved and point to a solid pickup in hiring, the outlook for sales revenue growth remains well below the levels that prevailed prior to the coronavirus recession.
Another real-time data set for the labor market is published by the American Staffing Association, an employment consultancy. The firm’s ASA Staffing Index (ASA) tracks weekly changes in temporary and contract employment. ASA has bounced sharply in the immediate aftermath of the March and April collapse, but the growth rate has slowed in recent weeks, which may be an early warning sign. The latest update shows the index’s four-week growth rate through Sep. 6 slipping to the lowest pace since late-July.
These data sets are hardly definitive measures of economic activity but they’re useful for supplementing the standard indicators in the cause of profiling economic activity. There are, of course, many other alternative indexes to watch for assessing how the US economy is reacting to the coronavirus blowback.
Meanwhile, the standard numbers still leave plenty of room for caution. That includes the weekly jobless claims numbers. Although new filings for unemployment benefits fell to a pandemic low in the latest update for claims through the week of Sep. 12, the 860,000 increase is still sky-high relative to the historical record. Mohamed El-Erian, chief economic advisor at Allianz, commented that claims were “at pace below what’s both needed and possible.”
The labor market will likely remain the critical measure for evaluating how economic activity is faring. Indeed, if hiring doesn’t rebound at a sufficiently strong pace in the months ahead, economic risk will remain elevated.
The good news: the monthly change in private employment has been positive for four straight months through August, rising at a high rate vs. the historical record. Unfortunately, even four months of unusually high increases have only recovered about half of the 21 million job losses in March and April. It doesn’t help that the rebound last month fell to the slowest pace since the rebound started.
“Both employment and overall economic activity remain well below their pre-pandemic levels, and the path ahead continues to be highly uncertain,” warned Federal Reserve Chairman Jerome Powell on Monday.
That’s a reminder that judging the success, or failure, of the economic rebound starts with monitoring the employment trend. Although numbers to date offer a basis for optimism, the latest updates suggest that the economic recovery remains vulnerable to setbacks.
(An earlier version of this article first appeared at The Capital Spectator.com on September 22, 2020.)