COVID Recession Over? Don’t Celebrate Yet

This week, the government will release its first estimate of economic growth (GDP) for the third quarter and it’s going to be a welcome relief from the first half of the year, when the COVID-19 national shut down caused second quarter output to plunge at a 31.4 percent annualized pace. The second quarter followed a 5 percent drop in the first quarter, which meant that the financial fallout from the pandemic caused the U.S. economy to enter into a recession in February, according to the Business Cycle Dating Committee of the National Bureau of Economic Research, the organization responsible for declaring the beginning and end of recessions.

The consensus estimate for Q3 is for a 30 percent annual rate of increase, a good first step for an economy crawling out of the COVID-recession, which itself snapped a big upside streak. The previous expansion began in June 2009 and lasted 128 months, the longest in the history of U.S. business cycles dating back to 1854. Now the big question that looms: is the current recession over?

In our lizard brains, we may think “30 down, 30 up, all’s good, right?” Not so fast. The third quarter gains will be coming off of a smaller base, so even if the number is impressive, it won’t be “enough to get us out of the hole we are still in due to COVID,” according to Diane Swonk, Chief Economist at Grant Thornton.

Additionally, data released over the past couple of weeks suggest that the pace of recovery is losing some of its Q3 steam. For the U.S. to achieve what China has achieved, that is, to almost fully return to the pre-COVID pace of economic growth, the government needs to better control the health pandemic and also needs to provide more money to stimulate growth and help those who are suffering.

The virus does not have a view on our collective mitigation fatigue, it continues to ravage the globe. In its most recent assessment of the worldwide impact of COVID-19, the International Monetary Fund (IMF) notes that the health and economic crisis is “far from over. Employment remains well below pre-pandemic levels and the labor market has become more polarized with low-income workers, youth, and women being harder hit.” While growth has improved from the dire worries in the spring, the IMF projects that the U.S. economy will contract by 4.3 percent for the full year.

Despite national governments injecting close to $12 trillion into their local economies and their central banks cutting rates and making asset purchases, the IMF says there needs to be more action, including: greater international collaboration in developing tests, treatments and vaccines; more direct government help for workers and businesses; and worker retraining and re-skilling.

“The next six months will be crucial,” according to Swonk. “The economy could easily stagnate or worse in the fourth and first quarters if Congress fails to deliver. What was hoped would be a short-term shock could metastasize into a more traditional and long lasting recession.”