The COVID Business Cycle

Quarantines and social distancing shuttered the service companies causing a drastic decrease in demand, leading to widespread layoffs in industries like leisure, hospitality, and airlines. Manufacturing companies struggled with decreasing demand and production delays caused by workers contracting the virus and the subsequent inability to work. The headline unemployment rate breached levels not seen since the Great Depression, with the April 2020 figure being reported at 14.80%.

The National Bureau of Economic Research (NBER) in June 2020 officially declared that the United States had entered a period of recession starting in February 2020, when domestic economic activity had peaked. Chart 1 at the end of this report depicts Gross Domestic Product (GDP) and the peak in economic activity. Chart 2 shows a labor market strength indicator – Aggregate Weekly Payrolls for All Private Employees.

Notice in these charts the gray bars that began in February 2020 and indicate the recession ended in April 2020, meaning the most recent recession lasted just two months from economic peak to trough. Economic activity started to pick back up as our economy started to reopen. Compare that to the Great Recession that lasted 18 months, from December 2007 to June 2009.

Even before the pandemic, economic activity in the United States appeared to be peaking and starting to decelerate. This natural trend of growth and decline in an economy is typical. However, the COVID-19 pandemic shuttered the economy so quickly and unpredictably that the economy entered a very steep, but quick recession.

As was expected, once COVID cases started to peak and decline and economic activity was allowed to resume, the economy quickly began to expand. The goods sector bounced back first (see Chart 3 – Manufacturer’s New Orders for Durable Goods) while in-person service-oriented businesses remained closed or at limited capacity (see Chart 4 – Advance Retail Sales).

As reflected in these charts, the economy has had a strong recovery and is continuing to improve. However, an important way to view whether an actual decline may happen in the economic data is by examining percentage change from a year ago (i.e., the year-over-year rate of change). This method, used to see whether the data are continuing to accelerate or starting to decelerate, can help determine if an actual decline may happen in the future.

Using the same two data series, Manufacturer’s New Orders for Durable Goods and Advance Retail Sales, but applying the year-over-year rate of change analysis, we see that the pace of the economic recovery peaked in April 2021 (see Chart 5 and Chart 6). Compared to typical growth rates, these factors still show strength in absolute terms. However, there is a suggestion that the pace of the economic recovery has clearly slowed.

The COVID-19 pandemic was such a shock to the system that it appears we entered a sort of “mini-cycle,” a period of quick, deep decline, followed by a fast, steep recovery. It will be important to monitor whether growth can reaccelerate into the final quarter of the year, or if we have reached, or are close to, another peak in the business cycle. The chance for a mid-cycle slowdown is a real risk.

As the impact of COVID starts to dissipate, more industries can fully reopen. Companies have a record number of jobs they are trying to fill (see Chart 7), so labor and wage growth likely still have room to grow.

However, new COVID variants, such as Delta and others, have the potential to reimpose or increase lockdown measures that could slow the pace of the labor recovery, whether in the US or abroad. A key, albeit simple, formula is COVID cases down and employment up. This should lead to greater wages and increased consumption capacity, which ultimately flows through to corporate profits and underpins stock market returns.

This is a crucial relationship to watch as we enter 2022, particularly on the back of decelerating fiscal stimulus from Congress and slowing monetary accommodation from the Federal Reserve.