The U.S. economy appears to be losing some steam as the COVID-19 cases continue to spread throughout the country. As the virus weighs on business activities and leads to another round of business shutdowns and layoffs, it is beginning to show up in unemployment claims and deteriorating consumer sentiments, and waning consumer spending.
Concerns from some Economists
Some well-known economists are raising concerns about the potential for another contraction in the U.S. economy early next year, marking the first "double-dip" recession since the early-1980s. According to the National Association of Business Economists' late-summer 2020 survey, nearly 80% of its members believe there is a 25% chance of an impending double-dip recession. During the same timeframe, the NY Fed also puts the probability of a U.S. recession by August of 2021 at almost 19%.
With the approval of the two COVID-19 vaccines (Pfizer-BioNTech and Moderna), Congress reaching a deal on a new $900 billion stimulus bill, and continued easy money from the FED some are now forecasting a speedy U.S. economic recovery next year.
So, the question remains – will the U.S. economy sustain a double-dip recession in 2021?
NBER – Recession started in February 2020
The National Bureau of Economic Research (NBER) is the official arbiter of calling the start and the end of U.S. economic recessions. NBER reported the US economy officially fell into a recession starting in February 2020. The committee determined a peak in quarterly economic activity occurred in the fourth quarter 2019 as US economic activity plateaued from December 2019 through February 2020, and then declined precipitously from February to March 2020 due to the special circumstances associated with the coronavirus pandemic and the ensuing business lockdowns both in the U.S. and around the world.
The committee concluded a significant broad contraction of economic activities across the U.S. economy has occurred as defined by various key economic indicators including unemployment, GDP, GDI, US production, and other economic measures to warrant an official end to the US economic expansion that began in June 2009. The expansion lasted 128 months and was one of the longest in the U.S. business cycles dating back to 1854, exceeding the previous record of 120 months from March 1991 to March 2001.
Different type of U.S. Recessions
History shows US recessions in the past have occurred for many reasons. Typically, it is the result of the imbalances in the economy that need to be corrected. However, an exogenous event (i.e., medical crisis) can also lead to a recession as evidenced by the current COVID-19 pandemic. The public health response (social distancing) resulted in a dramatic economic shutdown and the recession.
The characteristics and dynamics of the current economic contraction are unlike the prior recessions. Nonetheless, the magnitude of the decline in economic activities has been unprecedented and its broad impact across different sectors and industries of the economy fits the definition of a recession.
So, now that NBER has officially called the start of the US recession in February 2020 what does this mean for the stock market and investors?
Since this an exogenous or an externally induced shock to the economy that created the U.S. recession, then it is reasonable to say the degree of the response to the external shock (pandemic) will help to determine the severity of the recession. Externally induced recessions tend to differ from normal recessions. Does this then imply the duration of the current contraction to be briefer than previous economic downturns?
History of Previous U.S. Recessions and Expansions
A review of the 11 previous U.S. recessions as defined by NBER shows the following statistics:
- The average U.S. recessions/contractions sustained for 11-months. The median was 10-months. The longest of the U.S. recessions was the global financial crisis recession from December 2007 to June 2009 or 18-months. The shortest of the U.S. recessions was the first of the double-dip recession from Jan 1980 to July 1980 or nearly 6-months.
- The average U.S. expansions endured for 64-months. The median was 52-months. The longest was the recent June 2009 to February 2020 or 128-months. The shortest was the July 1980 to July 1981 expansion or 12-months leading to the second leg of July 1981 to November 1982 double-dip recession.
- SPX returns (in percentage) during prior recessions were 0.09%. The median was 5%. Six (6) out of the past eleven (11) U.S. recessions or 55% of the time were positive.
- Since the double-dip recession (1980/1981-1982), the three subsequent U.S. recessions that occurred during July 1990-March 1991, March 2001-November 2001, and December 2007-June 2009 were separated by a window of 8-10 years of U.S. economic expansions.
In summary, based on the above information, the prior U.S. recessions cycles tend to be short-lived as compared to the lengthy durations of U.S. expansion cycles. Although the December 2007-June 2009 or 18-month recession resulted in SPX declining -37% and the November 1973-March 1975 or 16-month recession led to SPX falling -13% the rest of U.S. recessions generated modest negative returns from -5% to -2%. Surprisingly, the six previous U.S. recessions resulted in SPX gains. July 1953 to May 1954 contraction of 10-months was noteworthy as it led to SPX gains of +18%. Another interesting recession was April 1960 to February 1961 recession, which also resulted in SPX appreciating 17%. Note that both recessions occurred during the SPX structural bull of 1949-1965, suggesting they may have been cyclical downturns.
2020 COVID-19 Pandemic and 1918 Spanish Flu Comparison
In the realm of infectious diseases, a pandemic is a worst-case scenario. When an epidemic spread across the world, it officially becomes a pandemic. The World Health Organization announced that the COVID-19 virus was a pandemic on March 11, 2020. The closest resemblance of a medical-induced crisis resulting in a recession was the 1918 influenza pandemic known as the Spanish flu. The virus infected 500 million people worldwide or one-third of the global population and killed an estimated 20-million to 50-million victims, including nearly 675,00 Americans. Although there was no available vaccine to fight the Spanish flu, the threat disappeared during the summer of 1919 when most of the infected had developed immunities or died.
It is crucial to point out the Spanish flu occurred during the latter stage of the 1901-1920 structural bear market. When the structural bear ended, it led to one of the fastest and most explosive structural bulls in history, namely the 1921-1929 roaring twenties structural bull trend.
March 2020 Recession and Stock Market as Leading Indicator
The COVID-19 pandemic and the subsequent global shut-down led to the February 2020 recession resulting in the sudden but swift -35.41% February to March 2020 stock market (SPX Index) bear market decline. Since this is an externally induced recession (medical pandemic) when the pandemic ends, the recession will end.
Since the stock market is a leading indicator of business cycles, cyclical, and structural trends in the U.S. stock market can offer guidance to pivotal turns in the economic cycles. The prevailing long-term structural trend in U.S. equities is a structural bull as displayed by the May 2013 breakout above 1,576.09 in the SPX Index, which signals the start of the present structural bull market.
The duration of the structural bull trend is only 7-years old. It is also common for a structural bull trend to witness one or more cyclical bear declines. Since the May 2013 technical breakout SPX has experienced three market setbacks: Nov 2015-Feb 2016 (-14.5%), Sep 2018-Dec 2018 (-20.21%), and the recent Feb-Mar 2020 (-35.41%). We suspect the three market corrections helped alleviate the overbought conditions and prevented the 7-year-old structural bull from turning into a speculative blow-off market top. Although the 136.5% rally from May 2013 (SPX – 1,576.09) is impressive, the structural bull does not appear to be a mature structural bull trend. Many structural bull and bear trends tend to span from 8-years to 20-years.
If you believe the 3/23/20 bottom (SPX – 2,191.86) is a major bottom, then the recent surge above the prior 2/19/20 all-time high of 3,393.52 is a technically significant development. The action confirms a V-pattern breakout. The 11/9/20 technical breakout suggests 1,201.66 points or an SPX projection of 4,595. If history is any guide, then a continued bullish stock market trend to 4,595 during 2021 implies an improving U.S. economy. Not one that is vulnerable to a double-dip recession as some economists are claiming.
When will the February 2020 Recession End?
The NBER formally determines when recessions begin and end. They consider aggregate real economic activities such as real personal income fewer transfers (PILT), nonfarm payroll employment, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, employment as measured by the household survey, and industrial production.
Although there are no fixed rules to the process for their decisions, typically, the NBER committee has taken from 6 to 21 months to declare economic peaks or troughs. Perhaps, NBER will call an end to the February 2020 recession as early as the first or second quarter of 2021, when SPX rallies to new fresh record highs in the mid-4,000s.
When is the next U.S. Recession?
Based on the historically long durations of U.S. expansion cycles and the tendency for 8-10-year durations, the last double-dip recession occurring 1980/1981-1982. It would imply the next U.S. recession may be years away, possibly during the 2028-2030 timeframe.