Peter Bernstein, Vice President pbernstein@rcfecon.com, 312-431-1540 x1515
RCF has previously published its recession scorecard, tracking which economic variables were pointing toward growth and which pointed to decline. Our last scorecard, released in May, showed virtually all variables point to recession which is not surprising given that the National Bureau of Economic Research (NBER) declared that the economic expansion ended in February.
With the economy in recession, RCF debuts its Recovery Scorecard, tracking the extent to which key economic variables have rebounded from their lowest levels. Given the fast-changing nature of the U.S. economy, we limit our analysis to monthly data and therefore do not at this time include quarterly measures such as real GDP or corporate profits. As more of these quarterly values are released, RCF will include them in our recovery scorecard.
Notes and methodology: All data are seasonally adjusted monthly values. For economic variables #1, 2, 3, 10, 11, 12, 14, 15, 16, June 2020 is the latest data available. For economic variables #4,5,6,7,8,9,13, July 2020 is the latest data available. Example calculation for economic variable #1, real income less government transfers fell 8.4% from its February value to its low point in April. Most of the variables in the table hit their low values in April. In the latest available report (June), the variable was 5.8% below its February value. Therefore, it has recovered 31% of the loss. Data Sources: #1, 2, 3, 12, 13: Bureau of Economic Analysis; #4, 5, 6, 7, 8: Bureau of Labor Statistics; #9: U.S. Employment and Training Administration; #10: Federal Reserve; #11: Bureau of the Census; #14, 15: Bureau of the Census and U.S. Department of Housing and Urban Development, #16: National Association of Realtors.
Summarizing the data, we find that labor market measures (i.e., wages, employment, unemployment) have recovered about 40% of their losses. New unemployment claims have shown a greater recovery but that is mostly because the increase from February to April was record-shattering. Consumer spending and vehicle sales have recovered most of their losses, owing to a large degree to the massive influx of government aid that has keep household incomes from falling as much as workers’ earnings. Exports have shown the smallest recovery as the COVID-19 pandemic has crushed global economic activity. The unweighted average recovery of our 16 variables is 45% meaning that we are not quite half-way recovered from the sharpest and deepest recession in U.S. history.
A Note on NBER Definitions of Recessions and Expansions
Contrary to popular thinking, U.S. recessions are not defined by two consecutive quarters of economic decline. Instead, the designation of the onset of a recession is determined on a monthly basis by the National Bureau of Economic Research (NBER). The NBER looks at a host of economic measures to determine when the economy peaked (expansion ended) and when the recession began. The NBER determined that the longest economic expansion in U.S. history ended in February 2020.
The NBER will conduct a similar analysis to determine when the current recession has ended, and another expansion has begun. But here it is important to understand that the NBER definition of the beginning of an expansion is when the preponderance of economic data have turned positive, even if they remain well below their pre-recession peaks. For example, the NBER could eventually determine that the recession has already ended since most economic variables have begun to improve from their recession lows. Consider the unemployment rate, in February it was 3.5% and by April it had risen to 14.7%, an increase of 11.2 percentage points. By July, the unemployment rate had fallen to 10.2%., 6.7 percentage points above the February level. The NBER might conclude that the decline in the unemployment rate is evidence that the recession has ended, yet many people would consider an unemployment rate of over 10 percent to show an economy mired in recession.
The distinction, then, is that the NBER looks at changes in the direction of unemployment (going down) whereas many people would reasonably look at the absolute level of unemployment (still very high). Neither measure is entirely right or entirely wrong. Taken together they provide a picture of the state of the economy. RCF’s Recovery Scorecard is more in line with the comparison of levels. Thus, we show an economy which is less than half-way recovered from the recession whereas the NBER might conclude that this level of recovery is evidence that the recession has ended.
