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The size and speed of a US recovery may depend on consumers

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      By Tom Lee, CFAChief Investment Officer, Equities and Derivatives, Parametric

      Minneapolis - Two subjects are top of mind for all investors: the severity of the US economic slowdown and how long it will take to recover. There's no easy way to predict either with any certainty. But we can provide some insight into what form the economic recovery may take.

      Let's start by looking at where things stand today. The federal government announced on April 29 that GDP shrank by 4.8% on an annualized basis — larger than most prior estimates and the biggest recorded drop in GDP since the fourth quarter of 2008. What makes this announcement concerning are the warnings from economists that the first quarter is just the warm-up act for the much larger drop predicted for the second quarter.

      PPAtomlee0504image1

      The New York Fed produces a Nowcast that uses a wide range of economic data inputs as they become available.1 This model estimates that second quarter GDP is expected to come in around -8%. Bear in mind that the New York Fed's Nowcast is not a forecast; it takes economic data into account only when it's released. Given the severity of the exogenous shock hitting the broader US economy, it's fully expected that this Nowcast estimate will deteriorate in the coming months.

      The Conference Board, a business membership organization that publishes a number of popular economic indicators, forecasts a second-quarter decline in real GDP of 33%.2 In other words, the drop will be sharp. That outcome seems to be a foregone conclusion.

      The next question to consider is how long we should expect to wait for a recovery. In statistical terms, the possibilities include but aren't limited to the following:

      • Quick V-shaped recovery (three to six months)
      • Longer U-shaped recovery (six to 18 months)
      • Medium-term L-shaped recovery (two to three years)
      • Longer-term L-shaped recovery (five to 10 years)

      There's little that we can monitor to give us insight into how any recovery will unfold. However, the best indicators will focus on consumer behavior. As the St. Louis Fed points out, the US economy is consumer driven, with two-thirds of the economy's growth attributable to personal consumption.3 The actions of the consumer — such as the willingness and ability to return to shopping malls, restaurants, hotels, and event venues — will be key to determining how long the US economic contraction will last.

      China is ahead of the US in terms of its progression through the pandemic. If we use Chinese consumer behavior as an indicator, it's unlikely that US citizens will be in any rush to return to a more normal consumption pattern soon. This outcome dovetails well with comments from several Fed officials earlier this month predicting that recovery is unlikely to come quickly.4 It also explains why the Fed spent the past month cutting interest rates to near zero and rolling out unprecedented lending support.

      PPAtomlee0504image2

      Bottom line: Aggressive monetary action from the Fed and fiscal action from the government may change consumer behavior in the US. As the chart above indicates, the US has been one of the world leaders in implementing stimulus measures, far ahead of countries like China. That stimulus could give consumers the confidence to go out and spend. Paying close attention to how quickly this happens will provide some insight into how long the economy will take to recover.