Might There Be A V-Shaped Economic Recovery After All?

Maybe.

This is a matter where if it happens, I shall be proven wrong.  I have mostly emphasized how much uncertainty and lack of knowledge we face about the pandemic as well as the economy in this situation, and have as a result largely stayed away from making specific or definite forecasts on those matters.  However, here and in other places on the internet, I have made a lot of forecasts that the time path of GDP is likely to look like a "lazy J" or "whoosh," a pattern of a slow recovery after the very rapid decline, with a possible W if a second wave of the pandemic hits hard.  What I often dismissed, sometimes rather pompously to people who seemed to push it for blind political or ideological reasons was that there might be a rapid bounceback, a V-shaped recovery.  Now that looks like it might happen, or at least a modest version of it, so I may be wrong on my past forecasts.

Curiously, as noted in a fairly recent post, I was one who was not surprised by the net increase in employment in May, given the evidence noted in still earlier posts of a likely turnaround in GDP that probably dates back even into late April and probably not later than early May, looking at figures on gasoline demand and carbon emissions.  It seemed not surprising that this turnaround would lead to some new hiring, even as further layoffs were clearly happening.  But most of this data seemed consistent with the Whoosh scenario, with these renewed increases occurring at rates much lower than the rates of preceding decline.  So the net increase in hiring in May was only 2.5%, large for a normal time, but only beginning to offset the double digit plunge that had happened before it.

But now we have the report that looks pretty accurate that retail sales rose 17.7% from April to May, not sure  of the precise cutoffs for this.  I made no specific forecast for that, but given the labor hiring numbers, I would figure that probably retail sales rose more than hiring.  But there is no way I would have forecast a double digit increase, and might not even have predicted more than a 5% increase, if I had done so.  Thus, needless to say, I am quite surprised by this figure.

Indeed, for retail sales this more than a V-shaped recovery.  The rate of decline for March to April was -14.4%.  Apparently retail sales are now only 8% below their peak in February.  So the rate of growth of retail sales could slow to half the April to May rate and end up higher than the February level.  I find this hard to believe, but I also have no good grounds for questioning this data.

Advocates of a V-shaped recovery, whether Trump and his immediate advisers, or other economists, mostly a minority, argued that an outburst of "pent-up demand" would lead to this, and it would seem that has happened, with probably some non-trivial assistance from stimulus checks and generous unemployment benefits, along with some other elements of fiscal stimulus, some of which have already stopped or are scheduled to do so in coming months.  I had dismissed such a strong surge of purchasing based on people being afraid and cautious, as well as many sectors still held down specifically due to pandemic restrictions, at least through much of May.

As it is, there have been large sectoral variations in this.  Among the most rapidly rising sectors have been clothing, sports equipment, and furniture.  Would I have forecast these to be tops?  Not particularly.  Others have remained much lower, e.g. cruise lines are still going nowhere.  But lots of sectors have seen pent-up demand bursting out and large sales increases, with retail sales the major part of consumption, which in turn is 70% of GDP.  So this goes a long way to pushing for an overall GDP V-shaped recovery.

But, of course, while it is the largest part of GDP, consumption is not all of it.  And almost certainly the other parts are not rising anywhere near this retail sales rate, with some of them even possibly declining, such as local and  state government activity.  Federal government activity may not be declining, but it is probably not rising that much, as the huge increases in transfer payments are not directly increases in GDP. They only stimulate that through their role in aiding this surge of retail sales that has happened.  While consumers may not have been held back by all the ongoing uncertainty, certainly businesses are, so I would be surprised if we see any increase beyond minimal in capital investment now.  OTOH, there may be some growth in exports as the rest of the world's economy probably turned around sooner than did the US one, and there are reports of some specific exports rising sharply, such as pork exports to China.

There is reason to believe that some of this increase in retail sales will slow down or even reverse, even as some more laggard sectors might pick up.  Several of those most rapidly rising sectors feature big ticket items not likely to be ongoing, especially furniture.  Some of this may have been an outburst of pent-up demand showing up on such big ticket items that will not continue or may even fall back a bit.  But given that I did not catch the scale of this increase at all, I am not really in all that good of a position to make very definite forecasts on all this. 

My bottom line guess on this is that GDP will still not quite look like a perfect (or more rapidly rising on the right-hand side) V, as the non-consumption parts of GDP drag behind and keep the clearly rapidly rising consumption to produce a total GDP rising more rapidly than it fell.  But it is now highly likely that what we shall see in the near future does more resemble a V than any of the other shapes or letters that have been proposed, including those I forecast.

Barkley Rosser