by Darrell Spence, Economist, Capital Group
Is a weak economy leaving you anxious? Here are 5 realities to keep in mind when navigating this recession.
Recessions can be hard to predict, but that’s not the case this time. The COVID-19 pandemic sweeping the globe has pushed the U.S. economy into recession, with U.S. GDP falling –4.8% in the first quarter. While the drop was sizable, an even more pronounced decline is in store for the second quarter, as broad swaths of the country remain shuttered. With the U.S. feeling the sting of a sharp reduction in consumer spending and industrial production, there are five realities 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 in growth 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%.
As parts of the U.S. look to ease restrictions, I believe that a bounce back in activity could begin as early as June in some sectors and more broadly in the third quarter.
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, our 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 US$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, aided by consumers’ sharp reduction in vehicle usage and gasoline consumption. While the negative impact of lower oil prices is likely to be felt in U.S. oil fields, lower energy prices can provide a tailwind for consumers and transportation-heavy industries.
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. So even as financial markets are on a path to recovery, it may take time for the economy to catch up. Focusing on long-term investing can help investors navigate short-term volatility.
Darrell Spence, Economist
Darrell Spence is 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 charterholder.
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