What has occurred in the last two months has been stunning, historic. When a $20 trillion economy is shut down, it just isn’t pretty. The monthly data is finally starting to reflect the reality of our situation. The April employment report was the worst in modern history with 20,500,000 people losing their jobs. The unemployment rate, which was “gentle” in my opinion, came in at 14.7%. Why “gentle,” because if you don’t use the government fudge factor in the math, the actual unemployment rate was 23.7%. I am not going to take you through the laundry list of other awful economic data that came out in April, but I do think it is necessary to make some important distinctions in what I think is about to unfold. It really is good news, bad news.
Because the fall-off in economic activity was instant, I have moved to relying on my “high frequency” economic model in my discussions with community bankers because it is as close to real-time as I can get. My weekly model is designed to reflect the start and end of
recessions (major distinction) and give a hint about the severity of the recession, relative to recessions in the past. But with this model, it defines a recession, not the “real feel” of our economy, or in other words, how is the recovery going. The chart below clearly shows the distinction we need to understand going forward. It shows my weekly economic model (blue line) vs my “Real Feel” economic model (orange line). It clearly shows that just because a recession (contraction in economic activity) may be over, it does not mean the economy is now fully recovered. If we measure the time (noted in the chart) between when a recession ends (blue line crossing above zero) and when the economy enters an actual expansion phase (orange line crossing above zero) you can see the bad news I was hinting about. First, the good news. My weekly economic model bottomed on April 16
th and has been getting less negative.
That means that we should start to see less negative economic news going forward. This however does not mean the economy is about to enter a fresh expansion. This is a key distinction for community bankers. On average, it has taken 20 months from the end of recession to the start of a fresh expansion. As the chart shows, the time between the end of recession and the start of expansion has been taking longer and longer and longer. With the Fed now targeting asset prices with monetary policy (Alan Greenspan started this in the 90s), more and more of the Fed’s monetary resources have been diverted to pushing up asset prices, not pushing up economic leverage. BIG DIFFERENCE. Therefore, actually, economic progress has taken longer to happen.
To sum this up, the good news is, this is likely to be the deepest, shortest recession in history; the bad news is, the economic recovery is likely to be a long ways off from the actual end of this recession.