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Will The Economy Surprise To The Upside?

Despite issues like the rising third wave of the pandemic, the election, and the wildfires, the economic recovery has carried on. In fact, consumer confidence is holding steady, personal spending is doing well, and business confidence and investment are strong. Given all this, could it be that the risks aren’t as big as has been commonly assumed—and that we could reach a full economic recovery sooner than many expect?

The Big 4

I started this thought process as I was contemplating the economy in 2021. We are now in a recession, and how we do in 2021 depends critically on how quickly we move out of it. As I looked at the data, though, I realized something. Of the four indicators that are the best in terms of tracking the economy (i.e., business confidence, consumer confidence, the yield curve, and job growth), two are indicating the recession will end shortly, and the other two are getting close to that conclusion. That is not what I expected. But if the data is correct, and they have been good indicators for decades, we may be closer to a full recovery than anyone expects.

1) Business confidence. Let’s start with business confidence, which is the most positive indicator. When you look at the surveys from the Institute for Supply Management, the composite measure is at close to the highest level since February 2019. In other words, business is about as confident as it has been for more than a year and a half. Generally, we do not have a recession when the index is above 50; at 57.5, we are now in boom territory. This is just one indicator, but it is a reliable one.

2) Consumer confidence. Right now, consumer confidence is at about the level we last saw in late 2016. Yes, it is below the higher levels of 2017 through 2019. Still, it is close to the highest levels we saw in the recovery before that. On an absolute basis, consumer confidence still looks surprisingly healthy.

A better indicator, though, is whether consumer confidence is rising or falling over the prior year’s levels. Here, too, the news is surprisingly good. The economy historically goes into a recession when confidence drops by 20–25 points over the prior year and into recovery when confidence recovers to within 20–25 points over the prior year. Right now, the index is down 24.5 points, suggesting that if confidence keeps moving up, we could see it move out of the danger zone in the next couple of months. More than that, since the measure is on a year-to-year basis, March of next year would very likely see a decisive move out of the danger zone. Either way, this signal looks like changing back to positive by early next year.

3) The yield curve. Interest rates are also signaling improvement. In a healthy economy, the difference between longer-term and shorter-term rates is positive. Historically, when the difference has dropped below zero, the economy has gone into recession; when the difference has risen to over 50–75 bps, the economy has emerged from recession. Right now, the difference is 52 bps, suggesting that financial markets think a recovery is not that far away.

4) Job growth. The worst indicator is job growth. Job creation is slowing, layoffs remain high, and it is hard to see how the economy can move out of recession without more jobs. History shows, however, that it is not the level of job growth that signals expansion but just the fact. In the past four recessions, once job growth bottomed out, the recession had already ended. We have already seen that bottom. Even though conditions remain weak, positive growth is a positive sign.

Economic Surprise?

None of this is to minimize the risks—especially the medical risks—going forward. It is, however, to recognize how resilient and adaptable the U.S. economy is, even under crazy circumstances like the present. The fact that consumer confidence and business confidence are still healthy means something, as does the fact that the yield curve spread is rising. The bad news is real, but so are the positive signals.

Much of this depends, of course, on how the pandemic evolves. We could see another downturn. But if the medical news improves, for example with better treatments or vaccines, the economy might surprise everyone to the upside. Something to keep in mind when you read the headlines.
Source: Forbes

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