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Jill On Money: Is the COVID recession over? Don't celebrate yet

Jill Schlesinger on

Prior to the government’s release of its first estimate of economic growth (GDP) for the third quarter, the consensus was that it was going to be a doozie—and for a change, a good one, which would be a welcome relief from the first half of the year. The COVID-19 shut down caused second quarter output to plunge at a 31.4% annualized pace (9% on the quarter), which followed a 5% drop (1.3% for the quarter) in the first quarter.

The sudden stop in national output caused the U.S. economy to enter 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.

In fact, the pandemic recession marked the end of big run for the US economy. The 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 recession over? As stay-at-home orders were lifted throughout the third quarter, activity bounced higher – by 33.1% on an annualized basis, which equates to a quarterly rate of 7.4%. It was the strongest quarterly growth since World War II (the previous record was 16.7% annualized in the first quarter of 1950).

In our lizard brains, we may think “30 down, 30 up—all’s good, right?” Not so fast. The third quarter gains came off of a smaller base, so even though the number was impressive, it was not “enough to get us out of the hole we are still in due to COVID,” according to Diane Swonk, Chief Economist at Grant Thornton. The economy remains about 3.5% below its pre-pandemic level.

Part of the problem is that the report already feels stale because data released over the past couple of weeks suggests that the pace of recovery is losing some of its Q3 steam. Estimates for the current quarter range from about 4 – 5% growth—that’s good, but not enough to recoup the losses that the country has absorbed. For the US 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 world economy has clawed back about 60% of output lost from the pandemic and the IMF projects that the U.S. economy will contract by 4.4% 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 reskilling.

“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.”

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(Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at askjill@jillonmoney.com. Check her website at www.jillonmoney.com)

©2020 Tribune Content Agency, LLC

 

 

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