The economy is set to record the shortest recession in the 166-year history of the National Bureau of Economic Research’s (NBER) dating of business cycles. The principal indicator used to date business cycle turning points is civilian employment. Its decline since February led the NBER recently to announce that it was a business cycle peak. The Bureau of Labor Statistics announced on June 5 that civilian employment rose in May, suggesting that a business cycle trough, the end of a recession likely was reached in April. A two-month recession would be the shortest on record. The shortest previously was a six-month recession from January to July 1980.
Economists study many economic indicators to determine when economic activity reaches a peak or trough, but employment is the most important. The second critical factor for the NBER is real personal income, net of transfer payments. Transfer payments are payments from the government unrelated to compensation for resource use. They are netted out to obtain a measure of personal income that is more closely related to economic activity or production. Transfer payments include such amounts as the $1,200 payments for adults (and $500 for those under age 18) that the federal government began to pay in April as part of the coronavirus stimulus package, as well as the value of food stamp payments and unemployment compensation, which has been federally supplemented by $600 per week until the end of July. Real personal income also will have to reach a trough in April to support a conclusion that the trough was in April.
The recent global experience has been a supply shock arising from COVID-19-related illness and deaths, lowering available human resources and productivity. Productivity has been reduced by having to divert resources to cleaning, social distancing and producing face masks, drugs and other materials that otherwise would not have been required. Marketing, human resource management, and retailing all have been required to reduce contagion risk within businesses and among consumers. But pandemic-related effects quickly morphed into government-mandated closures and self-quarantine, the major cause of massive employment, output and income losses.
There has not been such an extensive government shock to an industrial economy on record. The onset of the recession came much faster than the onset of a normal recession. It was an example of what economists often call a “sudden stop.” As government mandates relax and uncertainties related to the incidence, contagion and effects of the virus begin to resolve, a rapid rebound becomes more likely.
In a typical recession, sales decline so producers cut back on employment. Losses of income spread through the economy, further reducing employment, output and income. In the current recession, income receipts have not declined. Indeed, unprecedented generous government programs noted above have kept household receipts from falling. In fact, most of the newly unemployed are actually taking home more receipts from unemployment than they were previously earning. And many of their employers are temporarily getting payroll assistance loans that are unlikely to require repayment.
Personal income, a measure of personal receipts, actually rose from February to April, a unique event in business cycle recessions. While it fell about 2 percent in March, it rose 8.1 percent for the two-month period. Consumer spending fell 19.6 percent over the same two months because of uncertainties about economic and health risks associated with the virus. Higher income and lower spending led the personal saving rate to surge to a record 33 percent in April. With sharply depressed spending and a historic saving rate, consumer spending is primed to explode as employment growth accelerates. Indeed, retail sales rose 17.7 percent in May.
Not only did fiscal policy hit record increases to boost consumer income and spending, but monetary policy also has been unprecedented. For example, from the end of February to the end of May, the Federal Reserve’s assets grew from about $4.2 trillion to $7.1 trillion within only three months. This is about 80 percent of the record-setting increase over more than six years during and following the 2008-2009 financial crisis. The money stock measure M1 rose 26.3 percent in the three months since February, the fastest pace on record.
The economy is set to accelerate its pace of recovery through the summer, in the absence of another nationwide shutdown. Indeed, it is likely to reflect the popular V-shaped recovery that had been widely dismissed until May reports of economic performance began to emerge. Monetary and fiscal authorities will be justified in exercising more caution in their attempts to revive an economy in no need of further stimulus.
John A. Tatom is a fellow at the Institute for Applied Economics, Global Health and the Study of Business Enterprise, Johns Hopkins University, and a former research official at the Federal Reserve Bank of St. Louis.