It really is different this time

Quick takes:

• It really is different this time
• Severity of recession unmatched by duration
• GDP almost fully recovered through first quarter
• Second quarter growth should be strong
• CRE benefitted from short duration of economic downturn

Last week we received official confirmation of something that we have asserted throughout this pandemic-induced downturn in the economy: that this time really is different. Specifically, we mean that although the recession of 2020 represented the worst peak-to-trough contraction in GDP since demobilization at the end of World War II, it also represented the shortest recession on record. Recently, the National Bureau of Economic Research (NBER), the ultimate arbiter of business cycles in the U.S., reaffirmed this, but the downturn lasted an even shorter period than we anticipated. 

Once the contours of the recession became clearer during the second quarter of 2020, we forecasted the duration of the downturn at six months. We knew that the recession would not last long thanks to strong fiscal and monetary support coupled with reopening of some of the economy after shutdowns and lockdowns in the early stages of the pandemic. Initially six months (equaling the previous record-holder for brevity) seemed reasonable given the magnitude of the downturn and how long it would take the economy to stabilize. Once it became apparent that economic growth resumed during the third quarter of 2020, we revised our estimate down to four months, which would have set a record. Ultimately, the NBER declared that last year’s recession lasted a scant 2 months.

When we examine the most-recent recession versus previous recessions, its status as an outlier becomes even more stark and apparent. If we measure duration in months versus severity (as measured by peak unemployment rate) a clear relationship emerges: deeper recessions are also longer recessions, while shallower recessions are shorter recessions. But the 2020 recession breaks that relationship with a deep, short recession, the likes of which we have never observed in the U.S. 

Coronavirus recession technically short but unusually severe

Not second best

In just three quarters, the economy gained back all the GDP lost during the brief recession. That brings us to the present as we await the release of the preliminary look at second quarter GDP, set for Thursday. We anticipate an incredibly strong growth rate, likely in the high single digits, that should push real GDP to a record high level. We expect strong consumer spending, fueled by government stimulus and the release of pent-up demand, coupled with private business investment, to drive growth. Remarkably, the economy accomplished its rebound with millions fewer workers. Even at the end of June, the labor market remained net short roughly 6.8 million jobs. How did it accomplish this feat? Predominantly via something we have also discussed frequently – productivity growth, which grew strongly during three of the last four quarters. A slight increase in average weekly hours worked (roughly .3 to .4 hours) also slightly boosted GDP, but not by nearly as much as productivity gains did. To be fair, productivity growth typically accelerates during downturns. But the nature of this downturn, with so many workers displaced from their workplaces on a prolonged basis, demonstrates that this productivity burst is more than just the usual surge in productivity by those still working during recessions. 

What else we are watching this week

Fed Chair Powell’s statement will likely assert that the Fed retains its dovish stance while also noting that the Fed is getting ready to pull back on quantitative easing (QE), likely by early 2023. New home sales for June likely declined despite some increases in inventory for sale, held back by record- high pricing. Consumer confidence for July likely slipped a bit while final consumer sentiment for July likely remained largely unchanged with the index hovering near a five-month low. A rebound in Covid-19 cases is likely weighing on both indexes. The employment cost index for the second quarter will likely reaffirm the acceleration in wages that we have already observed across other indicators.  Personal spending likely continued to grow in June while inflation, measured by both the headline and personal consumption expenditures (PCE) indexes, reached year-over-year increases unseen since the early 1990s.

What it means for CRE

For commercial real estate (CRE) the rapid rebound in the economy in the third quarter of 2020 helped to prevent the worst from occurring. During the initial stages of the downturn, many forecasted outcomes for CRE just as dire, if not worse, than what occurred during the financial crisis. Yet the rapid rebound in the economy injected some needed confidence into the CRE industry. The short duration of the downturn helped to infuse some confidence in the market. While we are not downplaying the severity, the data (across various metrics) clearly shows the CRE market outperforming not just relative to prognostications from last Spring but also relative to performance during the financial crisis. While not all property sectors and markets have fared equally, the rapid stabilization of the overall economy set the stage for a less-severe downturn that positions CRE well to capitalize on the next expansion in the economy. 

Thought of the week

There are now more real estate agents in the U.S. than there are houses for sale.