How do we track the gradual recovery? - J.P. Morgan Asset Management
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How do we track the gradual recovery?

Contributor Meera Pandit

The U.S. economy contracted at its fastest pace on record in the second quarter, reflecting the nationwide lockdown and halt in economic activity that took place during the quarter. However, economic growth is likely to be positive in the third quarter, setting the stage for a gradual recovery.

Real GDP fell by -32.9% q/q at a seasonally adjusted annual rate. Consumption collapsed by -34.6%, contributing 25 percentage points of the overall decline in growth. Business fixed investment, housing, imports and exports all plunged, while government spending grew 2.7%, driven by federal spending. Private inventories fell by 316 billion USD annualized, but should shrink by less or even grow next quarter, contributing positively to economic growth.

Revised data still show a 5% q/q annualized decline in economic growth in 1Q20, and this, combined with the 2Q20 plunge, results in a peak to trough decline of 10.6%. We do expect a gradual recovery to take hold, with a substantial bounce of 25% q/q annualized in 3Q20. However, in economic growth, as in portfolios, a percentage rebound needs to be larger than the percentage decline to fully recover, so a 57% bounce would be required to get back to the peak in real GDP of 4Q19. This is something we do not expect to be achieved until at least 4Q21.

Still, it is early in the third quarter and a lot of uncertainty about the recovery remains, particularly as traditional economic indicators lag the real-time activity in the economy. Recently, economists have been relying on high frequency indicators to understand the health of the economy and the shape of the recovery.

As highlighted on page 21 of Guide to the Markets, these indicators show economic activity right now relative to pre-pandemic levels. Housing, measured by weekly mortgage applications, is enjoying a solid rebound with mortgage rates below 3%, dwindling inventory and rising demand for housing outside of major metropolises. On the other hand, hotel occupancy, travel and navigation app usage, restaurant reservations and airline travel are all well below levels from a year ago, reflecting the challenges the leisure, hospitality and travel industries face in a social distancing environment. However, consumer credit and debit card transactions fall in the middle of the road, down just 9% y/y. Rather than cutting spending altogether, consumers are instead spending on different items. Early in the pandemic, consumer staples were in high demand, but now shoppers are buying online across many categories.

High frequency data has allowed analysts to look beyond the plunge and bounce in economic growth and focus on the more nuanced recent weekly trend. Broadly, these indicators point to a gradually recovering economy, but the path forward will depend on successfully controlling the virus until a vaccine is available, and continued fiscal support to households.

High frequency data

Year-over year % change*

Source: App Annie, Chase, Mortgage Bankers Association (MBA), OpenTable, STR, Transportation Security Administration (TSA), J.P. Morgan Asset Management. *App Annie data is compared to 2019 average and includes over 600 travel and navigation apps globally, including Google Maps, Uber, Airbnb and Booking.com. Consumer spending: This report uses rigorous security protocols for selected data sourced from Chase credit and debit card transactions to ensure all information is kept confidential and secure. All selected data is highly aggregated and all unique identifiable information—including names, account numbers, addresses, dates of birth, and Social Security Numbers—is removed from the data before the report’s author receives it.
Guide to the Markets – U.S. Data are as of July 28, 2020.

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