Recessions can be hard to predict, but that’s not the case today. The COVID-19 pandemic sweeping the globe has pushed the U.S. economy into recession. As large portions of the country stay closed, the second quarter will be even worse. With U.S. consumer spending and industrial production falling sharply, there are five realities of this recession to keep in mind.
1) We’ve been here before (sort of).
The largest post-1950 quarterly GDP decline was 10% in the first quarter of 1958.
This sharp drop came amid the 1957–1958 recession, which resulted from a confluence of factors, including a flu pandemic. While the makeup of the present-day economy is much different, the U.S. is not unfamiliar with pandemic-related economic turmoil. The U.S. economy bounced back strongly in the late 1950s, with growth surpassing 5%.
I anticipate that a rebound in activity might start as early as June in some sectors and more broadly in the third quarter as areas of the U.S. try to ease restrictions.
2) Recessions have tended to be short.
The subsequent expansions have been powerful. The good news is that recessions generally haven’t lasted very long. While this time may be different, a Capital Group analysis of 10 cycles since 1950 shows that recessions have ranged from eight to 18 months, with the average lasting about 11 months. For those directly affected by job loss or business closures, that can feel like an eternity. While there’s no way to minimize that feeling, investors with a long-term investment horizon should try to look at the big picture. The average expansion increased economic output by 25%, whereas the average recession reduced GDP by less than 2%.
3) It’s about the consumer.
The U.S. consumer accounts for approximately two-thirds of the economy. With unemployment claims skyrocketing — although many may be temporary — and consumers staying in their homes, a weakening economy is no surprise. The $2 trillion stimulus package will help support some levels of consumer activity, but employment uncertainty is likely to keep many consumers in a frugal mindset.
4) Lower oil prices may be a tailwind for the economy.
A precipitous decline in crude oil prices has put pressure on the energy sector. May oil contracts turned negative in April as producers scrambled to find storage for bloated supply stores, exacerbated by consumers’ sharp reduction in vehicle usage and gasoline consumption. While lower oil prices may hurt U.S. oilfields, consumers and transportation-heavy companies can benefit from cheaper energy prices.
5) Timing may not be everything.
Waiting for the all-clear may leave investors missing out on market gains. Since World War II, in recessions with a corresponding equity correction, the S&P 500 has bottomed, on average, three months before the end of each recessionary period. It’s little solace to investors who have endured market volatility, but even as the economy weakens, there are opportunities to invest in great companies at a discount.
While the adage that the stock market is not the economy is true, market volatility tends to be captured, with a lag, in economic data. Even as financial markets rebound, the economy may lag behind. Focusing on long-term investing can help investors navigate short-term volatility.
Written by Darrell Spence, an economist and research director with 27 years of investment experience, all with Capital. He earned a bachelor’s degree in economics from Occidental College and is a CFA charter holder.
With thanks to Dean Catalano, SVP, Capital Group. dean.catalano@capgroup.com