After 128 months of expansion, the National Bureau of Economic Research officially determined the U.S. economy peaked in February 2020 with the recession brought on by the coronavirus pandemic.
The 128-month expansion of the U.S. economy was the longest in history and was followed by a recession that will likely be classified as the shortest and deepest ever experienced. We can thank lawmakers and the Fed for acting so swiftly to support the economy and markets, but market participants will likely be grappling with the effects and consequences of the stimulus packages for years to come.
The jaw-dropping labor market report for May signaled the economy may be recovering faster than market participants expected.
The initial jobless claims data has been a closely followed data point over the past month as investors continue to assess the damage to the labor market from the shutdown. Throughout May, weekly jobless claims data steadily declined from above 3 million per week to less than 2 million for the last week in May. While there may be some noise within the claims releases given that some data could be from delayed filings, it is encouraging to see the numbers continue to decline. More notable, though, was the continuing claims figure which started to decline from the peak of 25 million in early May to 21 million by the third week of May. This was a very positive sign and signaled that workers had been called back to work as states began the re-opening process. At any rate, the jobless claims and continuing claims data provided some evidence to investors that the economy was beginning to rebound.
Lastly, if the high-frequency economic data wasn’t enough to persuade investors that the economy was on the mend, the employment report for May was a clear sign that the rebound was underway. The headline payrolls number in the employment report certainly caused investors to do a double take. The addition of 2.5 million jobs during the month of May was completely contradictory to what market participants were expecting, as most economists were expecting a decline of 7.5 million jobs for May. The unemployment rate, which was expected to approach 20% after the May release, actually declined from 14.7% to 13.3%. Overall, the report suggests that the labor market could have reached a bottom and is recovering faster than originally anticipated.
Consequently, given the data that we have witnessed throughout May, on both the high-frequency side as well as from the Bureau of Labor Statistics’ employment report, it appears that the recovery in the economy has begun sooner than expected. Looking forward, as the economic recovery begins to take shape, one area of focus will be consumers and their spending behavior. Looking at recent data on consumer attitudes, we can see that sentiment has begun to improve, but consumer spending will be key on the road to recovery ahead.
Investors looked to high-frequency data points, such as initial jobless claims, to better gauge the current shape of the economy.
Investors appeared to look past the negative lagging economic data in favor of higher-frequency data points in order to get a better assessment of current activity in the economy. When tracking high-frequency data points in early May, there was evidence of notable trends, such as increased debit and credit card spending, declining jobless claims, rising gasoline consumption, increased restaurant dining in some states, and a steady rise in mortgage applications. Ultimately, the evidence of increased activity culminating with the strong employment report for May provided confirmation for risk asset investors who were betting on a faster road to recovery.
First quarter GDP was revised lower to negative 5%, but many investors were looking past the lagging economic data.
The latest information we have on GDP tells us that the decline in activity during the first quarter was worse than anticipated. The second estimate for first quarter GDP was revised lower, from negative 4.8% to negative 5.0%, and became the worst quarter of economic activity since December of 2008. Data during the second quarter was quite ugly; in fact, some of the economic data points were the worst ever recorded. At this point, we know that second quarter GDP is going to be bad, but the question that remains is, how bad is it? With most economists presenting a wide range of outcomes for second quarter GDP, it doesn’t make much sense to try and estimate where it will ultimately be. The lagging effect of the data doesn’t provide much insight to where the economy is at today, but it does tell the story of where we came from. At this point, we know the economy has started to rebound, but at the end of the day, most investors are trying to judge how strong the recovery will be.
Get the full June 2020 Market Update here
The views expressed above reflect the views of Allianz Investment Management LLC, as of 06/2020. These views may change as market or other conditions change. This report is not intended and should not be used to provide financial advice and does not address or account for an individual's circumstances. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Allianz Investment Management LLC is a registered investment adviser that is a wholly owned subsidiary of Allianz Life Insurance Company of North America.