Too early to predict this recovery's shape

Chart of the week

The latest data on retail sales and industrial production paint an inconclusive picture of the U.S. economic prospects.

The Covid-19-induced recession has been unusual in many ways. For one thing, it remains to be seen what it will eventually be called. The International Monetary Fund (IMF) refers to it as the "Great Lockdown" recession, which certainly seems appropriate given the scale of the slump. Economic activity saw steep declines across the board from the very beginning. In past recessions, it had usually been the construction and industrial sectors that had suffered first, before the pain began to spread. This time around, the downturn has hit the contact-intensive activities, including services, particularly hard.

What may come next? That crucial question has already turned into a tricky alphabet salad. Various letters are invoked. Markets have been hoping for a "V"-shaped recovery, i.e. a drastic slump, followed by an equally strong upward movement. However, there are alternative, scarier scenarios. These have been subsumed under the letters "U" (a longer-lasting period of stagnation before matters improve), "W" (two downturns in a row) and "L" (a sharp downturn, followed by stabilization at a low level).

With more and more economic figures gradually becoming available, the emerging picture of the U.S. economic prospects remains pretty inconclusive. The pattern of U.S. retail sales released for May looks almost like a “V,” as our "Chart of the Week" shows. However, Christian Scherrmann, U.S. economist at DWS, points out that this partly reflects massive support programs, such as one-off payments of 1,200 dollars to U.S. households. These have strengthened the purchasing power, but perhaps only temporarily. By contrast, industrial production, which already fell sharply in March and then plummeted in April, only stabilized in May. Markets had hoped for a little more dynamic. Translated into a catchy letter, industrial production at best points to a "U"-shaped recovery, but it remains too early to rule out an "L"-shaped one.

As for our main scenario, we continue to expect activity to pick up, as more and more lockdown measures are lifted. However, the rebound is likely to swiftly lose some momentum. The risks of further Covid-19 outbreaks will probably require containment measures for quite a while yet, restricting economic life. We have yet to find a simple letter to adequately describe this complex pattern.

20200619_CotW_Economic activity pattern_CHART_EN_72DPI.png

Source: U.S. Census Bureau, Board of Governors of the Federal Reserve System (US) as of 6/17/20


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