Economy May Be Out Of Recession But Not Out Of The Hole
The second quarter GDP report showed a huge decline in the April-May-June period, a clear recession. Right now, however, we may be technically out of recession. Unfortunately, being out of recession is not the same as back to normal.
Gross domestic product did not fall as much as the headline number—32.9%—suggests. In the U.S. (but not other countries), the quarter-to-quarter change is annualized, meaning it is roughly four times greater than the actual percentage change from one quarter to the next. Still, it’s a huge drop.
Quarterly reports such as GDP also obscure details. Employment data, available on a monthly basis, show that April 2020 was the worst month, with a sharp but partial rebound in later months. GDP for the second quarter was certainly bad, but where monthly data are available, June shows generally better than April, indicating we are now turning up.
We economists define the recession as the period of declining economic activity. After the decline has stopped and the economy has turned up, we say the recession is over—even though the level of economic activity is just barely higher than it was at the bottom of the cycle.
Imagine a person walking down the street (visually illustrated on this video). He is not paying attention to the construction site in front of him, and he falls into a 10-foot hole. An economist observing this says, while the man is falling, “He’s in recession.” At the bottom of the hole, the man picks himself up, dusts himself off, and takes one step upward. The economist would say the man is out of recession. All of the other bystanders would say that the poor fellow is nine feet down a ten-foot hole.
That’s a pretty good description of where the U.S. economy is right now: nine feet down a ten-foot hole. We suffered a huge decline in the second quarter, but positive signs abound. Employment increased in May and June—again from a low level without regaining most of the lost ground. Consumer spending rebounded a bit, and small business earnings eked out a wee gain. Manufacturing production improved significantly in May and June, but without reaching pre-Covid levels. Housing starts are 27% above April’s low figure, with sales of existing homes up 21% from their May low.
Not all parts of the economy are recovering, of course. Business orders for equipment declined in June, for the fourth straight month. Exports from the U.S. to the rest of the world remain weak. Low oil prices continue to depress petroleum exploration and development.
The idea that we have risen a bit up from the bottom does not tell us that we’ll have easy sledding from here on out. A second decline is quite possible in any business cycle but especially in one marked by a resurgence of disease. Still, the economy will most likely continue to improve. Some indicators will rise sharply, others gradually. But just because “the recession is over” does not mean that we are back to normal. We are still pretty far down that 10-foot hole.