The media often defines a recession as, “two consecutive quarters of economic contraction.” The media sticks to quick sound bites, but it’s incorrect. The National Bureau of Economic Research, the organization tasked with dating recessions, actually defines a recession as, “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
Either definition requires the observation of economic activity over a period of time. Hence, by the time a recession is declared, it has already begun or even passed. So, how do you know when a recession has begun? Economic data can provide hints, yet most of the time… you just know. There is no question the current environment is in recession. However, this recession is unlike any of the past.
Economic expansions typically evolve into recessions due to germane fundamental conditions. Much like a road trip, passengers may need to stop for a flat tire, refueling, or passenger hunger and fatigue. This go around, the economic car was pulled over for no mechanic or passenger related reasons. This recession commenced because the passengers simply said, “stop the car.” There was an obvious logical medical reason, COVID-19, not but a fundamental economic reason.
There is no doubt that the recession will be deep. Just look at the 30 million people out of work or curtailed shopping and travel. However, financial markets are betting for a fairly quick recession. Since the car was pulled over for no fundamental issues, the expectation is that everyone jumps back into the car and drives away. It may not be that simple, but a recent poll by the Associated Press claims 78% of laid off workers expect to return to work¹. This certainly adds fodder to brief recession anticipations.
Another indication is pent-up demand. Pent-up demand is not easily observed. Mostly, it’s indirectly inferred. To complicate things, this recession was an abrupt stop making monthly or quarterly data obsolete. But, less abundant week-to-week data are suggesting green shoots. Weekly car sales are moving northward. Home purchase mortgage applications have increased over the past four weeks. Credit card usage, an indication of consumer buying, is recovering. TSA daily traveler throughput has steadily increased since April 14th. Not to mention, people are in need of haircuts. Whether advisable or not, recent rallies and protests for reopening offer a glimpse into individual angst and willingness to begin the “return-to-normal” process. These early signs suggest pent-up demand is building and economic activity has begun.
1 The Associated Press-NORC Center for Public Affairs Research