U.S. Economic Recovery Scenarios and Their Possible Timelines | Lord Abbett
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Economic Insights

Restoring the countless connections between economic actors—workers and firms, customers and suppliers, borrowers and lenders, etc.—that are severed during a recession inevitably takes time.

The U.S. economy is in a state of suspended animation and is receiving massive fiscal, monetary, and credit support to keep from deteriorating; the longer it is kept in a semi-dormant state, the more support it will need.

What state will the economy be in when policymakers decide that the healthcare risks have become manageable and it is time to re-open? A full V-shaped recovery would see it waking up unscathed and immediately going out for a jog. That is unrealistic; diminished function and some degree of memory loss are inevitable in the early stages of the recovery. Moreover, in the current situation, a full economic recovery likely awaits the development of tests, therapeutic treatments, and, ultimately, a vaccine for the SARS-2 virus that gave rise to COVID-19. This may lie as much as 24 months, or more, in the future.

While the maximum drop in gross domestic product (GDP) during the “Great Recession” in 2008-2009 was only 4%, it took a full two years, until the second quarter of 2011, for GDP to regain its prior peak level in the fourth quarter of 2007. The jobs lost during the downturn were not fully recovered until late 2013, and the employment-to-population ratio, a measure of resource utilization, didn’t regain its 2007 peak level until 2019. This illustrates that restoring the countless connections between economic actors—workers and firms, customers and suppliers, borrowers and lenders, etc.—that are severed during a recession inevitably takes time.

In my opinion, the current downturn is going to be much deeper than the last one (2008-09) and will affect economic output across a much broader range of industries—especially service providers and overseas buyers—than usual. Nevertheless, a strong bounce back in the early stages is likely if the portions of the economy that shut down partially or fully to limit the virus are reopened late in the second quarter of 2020 or early third quarter. A short downturn, while potentially vicious, should permit a significant amount of muscle memory to be retained.

Using 2008-2009 as a benchmark for comparison, two potential recovery scenarios might be described as a “slurp” and a “slog.” Both have an initial V-shaped phase followed by a gradual return to the previous peak over the next two-three years. The slurp achieves the peak steadily while the slog has a period of stagnation followed by a swifter acceleration later on.

 

Figure 1.  GDP Recovery Scenarios: a Jog, a Slog, or a Slurp
Hypothetical scenarios of recovery, U.S. GDP*

Source: Bloomberg and Lord Abbett. *The index base is 2007Q4=100,extending until GDP regained its prior peak level following the 2008Q1-2009Q2 recession. The others are hypothetical scenarios indexed to the same value to allow for comparison with the last recession.

 

In both cases, economic activity will remain depressed and workers, households, state and local governments, and financial institutions will require assistance for a long time. Removing assistance too early would extend the period of low resource utilization and risk another downturn.

 

 

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education.  No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein.   If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in the preceding commentary are as of the date of publication and are subject to change. Additionally, the opinions may not represent the opinions of the firm as a whole. The document is not intended for use as forecast, research or investment advice concerning any particular investment or the markets in general, and it is not intended to be legal advice or tax advice. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.

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