Investments

Economic Activity and Our Recession Oppression

By Bud Kasper, CFP®, AIF®

July 9, 2020

Economic Activity and Our Recession Oppression

The National Bureau of Economic Research (NBER) officially announced in June that the U.S. economy is in a recession. The NBER committee determined that the peak in monthly economic activity occurred in February 2020. The peak marks the end of an expansion that began in June 2009. The expansion lasted 128 months, now the longest expansion in U.S. business cycles on record dating back to 1854. The previous record dates back to March 1991, stretching to March of 2001, lasting 120 months. Now that our economy is in a recession, what should we expect our new recession to look like? The definition of a recession is a period of temporary economic decline during which there’s a reduction in trade and industrial activity.

How Economic Activity Defines a Recession

Recessions are generally identified as two consecutive quarters of negative growth as measured by GDP (Gross Domestic Product). Usually, recessions are accompanied by a widespread drop in consumer spending. Recessions are also characterized as a business cycle contraction that creates a significant decline in economic activity and is typically measured by a visible reduction in production and an increase in unemployment. Recession begins when the economy reaches a peak of economic activity and ends when the economy reaches a trough.

The National Bureau of Economic Research notes in their definition that recessions historically speaking, usually involves a decline in economic activity that lasts more than a few months. The committee weighs the contraction’s depth, the duration, and whether economic activity declined broadly across the economy. The committee recognizes that we are in the grips of a worldwide pandemic, COVID-19, which has been identified as our global recession’s genesis.

Impact of Healthcare Crises on Economic Activity

The U.S. public health response is a bi-product of our present economic downturn with more significant and differing factors and dynamics that we didn’t experience in prior health-related recessions. Those that experienced their disease-related recessions include SARS in 2003, MERS in 2012, and Ebola, a West African disease, in 2014. With our current healthcare crisis, the unknown is when we will get a vaccine that ends both COVID-19 and most likely our recession.

The speed of the decline of our current recession has no modern precedent. This new recession has fostered government lockdowns and business closures, both small and large. America’s current recession has experienced workers furloughed by the thousands. This pushed unemployment from its worst level in 50 years, as witnessed in February 2020, with 15.9% in May 2020. Fortunately, the June 2020 report saw total nonfarm payroll employment increasing by 4.8 million, dropping the unemployment rate to 11.1%.

Recovery Continues

According to the U.S. Bureau of Labor Statistics, after such a crushing economic drop in the second quarter, America’s economy continues to try and recover from the challenges of the COVID-19 pandemic. The Blue Chip Report anticipates U.S. GDP to grow by an annualized rate of 17% in the third quarter and 9% in the fourth quarter of our current year. The U.S. Chamber of Commerce reported in June 2020 that 79% of small businesses are at least partially open for retail sales, which rose in May 2020 by 18%, more than doubled the anticipated increase of 8%.

Investors today have historically high cash positions. The highest since 1992 indicates private capital is readily available to reinvest into commercial operations as communities prepare to reopen. Secretary of the Treasury Steve Mnuchin stated that “We are in a strong position to recover because the Trump administration worked with Congress on a bipartisan basis to pass legislation to provide liquidity to workers and markets in record time.” He continued, “In particular, the Paycheck Protection Program (PPP) is keeping tens of millions of employees connected to their jobs. Economic Impact Payments are also helping millions of families and workers to make it through these challenging months.” There has been a large number of government programs established to support Americans in this challenging period.

Government Programs to Curb Poor Economic Activity

These newly created government programs were all part of the CARES Act, which includes:

  • Paycheck Protection Program has supported 4.8 million small business loans totaling so far $519 billion, supporting an estimated 50 million jobs and at least 72% of small business payrolls in all 50 states.
  • Economic Impact Payments which has distributed 160 million payments totaling more than $260 billion in record time.
  • Programs to Support Aviation and Other Eligible Businesses that have disbursed over $27 billion to over 500 airlines and other aviation businesses, preserving hundreds of thousands of jobs.
  • Coronavirus Relief Fund which is a $150 billion fund going support state and local governments.

The CARES Act also granted through the direction of the U.S. Treasury, the authority to provide $454 billion to support Federal Reserve lending facilities under Section 13(3) of the Federal Reserve Act. Nine critical programs, managed through the Federal Reserve, were the beneficiaries of this support. Without this financial support, this author believes that our markets would have experienced much greater turmoil and created more challenging government solutions than what we have so far experienced.

It’s anticipated that further financial support legislation will be forthcoming in July! It’s also expected that any additional relief would be targeted to specific industries that have been especially hard-hit by the pandemic. The intense focus would be on jobs and putting American workers who lost their jobs through no fault of their own, back to work.

The Recession Oppression

So what do all of these facts have to do with our recession oppression theme? It explains the magnitude of our economic stress that we are dealing with every day. Consumer spending fell a record of 6.6% in March 2020, and 12.6% in April. Recall that 70% of our nation’s GDP is based on American consumption. If businesses are closed down or only partially open, how will our economy grow? Fortunately, spending increased by a record 8.3% in May 2020. It seems pent up demand coupled with stimulus money and generous unemployment checks helped boost that measurement.

A rise in employment also helped reopen some businesses that desperately needed higher and, hopefully, more sustainable sales. Consumer confidence is also improving according to the Conference Board’s Consumer Confidence Index but remains well below pre-coronavirus levels. But let’s be realistic, a rosy outlook is not sure, and a strong recovery is not assured. Visibility remains quite blurred is a message from Federal Reserve Chairman Jerome Powell.

On June 30, the Powell said, “Many businesses are opening their doors, hiring is picking up, and spending is increasing. Employment is higher, and consumer spending rebounded strongly in May 2020. We have entered an important new phase and have done so sooner than expected.”

He continued, “The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus. A full recovery is unlikely until people are confident that it’s safe to reengage in a broad range of activities.”

More Stimulus to Come?

At this point, I can’t tell you that in the next two-quarters a rosy outlook is certain. $200 billion was the original amount dedicated to just the CARES Act. Secretary Mnuchin commented that over $250 billion remains to be distributed on an as-needed basis to expand already established programs or perhaps targeted other areas of the economy that mat need government aid in the future.

What Do Recent Spikes in Cases Mean for Economic Activity?

The COVID-19 virus is spiking once again in many states of our union, creating a new round of uncertainty. Dr. Anthony Fauci announced on the 4th of July that a “disturbing surge” of new cases sparked by hotspots in Texas, Arizona, Florida, and California with new cases of young Americans spiking! That said, the stock market appears to be, at least presently, a more bullish path!

Economic Recovery Shapes

The pressing question is, are there enough solid economic fundamentals to help support this latest growth spurt that has moved the S&P 500 from this year’s 2020 low recorded on March 23, 2020, of down -30.1% to where it’s as of July 8, 2020, with a negative – 2.65%? In our opinion, no, not yet! It begs the question that I addressed in a previous article, Who Do You LUV?

The letter W, L, U, and V indicate the types of economic recovery we might see during the possible recovery. If you read that article, you’ll see that one of the four outcomes could be a V-shaped recovery. Of course, this is the one outcome that every investor would like to experience and is what we appear to be in at the moment. There are several highly thought of economists that believe that our market will retreat at some point between now and fall and return to retest our recent prior low on March 23, 2020. If that were to happen, that raises the stronger possibility of a W-shaped recovery.

I suggested that a U-shaped recovery could become a likely outcome in my original paper. In a U the market retreats and then floats sideways with very little volatility (+/- 10%) until we finally break out once again to the upside. That seems to be less likely as of today. The L-shaped recovery is not worthy of consideration based upon today’s input. So V or W seems to be the more noticeable outcomes. I could give all the reasons in the world that we are in the early stages of a solid rebound, and on the other side, give you reliable and well-supported reasons for a sluggish recovery.

Understand Your Situation, Understand the Risks

For the moment, let’s enjoy our most recent streak of higher returns. However, simultaneously let’s not forget the actual amount of economic damage that has occurred as of this moment. The CERTIFIED FINANCIAL PLANNERS® at Barber Financial Group understand all possible scenarios. They suggest ways to alter portfolio risk at the appropriate time. This helps our clients mitigate downside participation to engineer a successful retirement outcome regardless of the various economic challenges we will always face in many different shapes and sizes.

If you would like to work with our financial planning professionals, reach out to us today. You can fill out the form below or give us a call at 913-393-1000 to start the conversation.

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The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.