We are in a recession. After gross domestic product (GDP) contracted by 5% during first quarter 2020 on an annualized basis, consensus expectations for the second quarter are calling for a mind boggling 32% contraction on an annualized basis. We see a strong second-half rebound in economic growth as more of the economy opens up, and this recession may end up as one of the shortest ever, but the recovery is unlikely to be strong enough to return economic activity to 2019 levels by year-end.
Signs that the recovery is underway are encouraging. Policymakers have taken a depression off the table. Improvements in the data over the past several weeks are encouraging as states have moved their re-opening plans ahead. We have seen increases in vehicle and air travel, hotel occupancies, restaurant dining, and public transportation use, though from depressed levels. There is some pent-up demand.
But a large portion of the US economy cannot be easily socially distanced, which may limit the pace of the recovery by capping the amount of economic activity that can be recovered quickly. Capacity limits for restaurants and restrictions on large gatherings are two examples. Per the US Bureau of Labor Statistics, over 10% of U.S. jobs are in leisure and hospitality, and some of those jobs unfortunately won’t come back. More broadly, it will take time for stranded assets and affected employees to be re-tooled and re-deployed.
Even with the surprising improvement in the June 5 employment report from the US Bureau of Labor Statistics, the true unemployment rate is likely several percentage points higher than the reported 13.3% rate after adjusting for those classified as employed but absent from work. For perspective, the unemployment rate peaked near 11% during the 2008-2009 financial crisis.
We remain optimistic about a gradual recovery in the second half, and are encouraged by recent signs of improvement. However, there are constraints on the pace of recovery in the second half and the next leg gets tougher.
