Yesterday was an interesting day. Yes, the headline declines in the stock market made it interesting, and that news is certainly part of it. Still, that kind of volatility is normal. We haven’t seen it for a while, but if you look back, it’s no big deal. In fact, markets are ticking back up again.
Shortest Recession Ever?
What made it really interesting is the second piece of news that came out yesterday: the National Bureau of Economic Research (NBER), the body responsible for such things, announced that the COVID recession has ended. Now, this conclusion was not really a surprise. What was surprising? NBER gave the end date of April 2020, only two months after the NBER announced the recession’s start. Given those dates, this was the shortest recession (at two months) in U.S. history. It was also, however, one of the deepest, with a decline in economic activity of almost one-third (specifically, 31.4 percent). You might be forgiven for thinking that a drop that fast and hard would take longer to recover from than two months.
In that respect, the NBER would largely agree with you. But given the massive stimulus from the federal government and the subsequent snapback in the economy, which recovered a substantial portion of the decline in the next quarter, the NBER decided the following:
“In determining that a trough occurred in April 2020, the committee did not conclude that the economy has returned to operating at normal capacity. . . . The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession associated with the February 2020 peak. The basis for this decision was the length and strength of the recovery to date.”
And this, I think, points out just how different this recession and recovery have been from anything we have seen before. It also highlights the reason for that—which is that the recession and the recovery were due to policy action rather than to economic factors. It was the shutdowns that killed the economy and the stimulus that brought it back. It was a recession, but it was not an economic recession. The NBER recognizes the economic effects (i.e., we had a recession), but it also recognizes the causes were different.
What Does This Mean for Us Today?
In conjunction with yesterday’s drop in the market, this announcement points out that the economic risks today are still not really economic risks. The economy is doing well. Companies are hiring, people are working and spending, and we are steadily growing. Absent a revival of the shutdowns, we are poised for continued recovery. And therein lies the big caveat. With the Delta variant spreading, there are real medical risks coming back in play. The medical risks are real. But as we learned from the two-month recession, what really matters are the policy risks. Yesterday reflected a sudden recognition that there might be significant policy risks after all.
While these risks are what we need to watch, they remain low—not so much in terms of the case numbers, but in the policy response. We can live with the current infection levels, nationally. In vaccinated areas, they are lower and will not really require shutdowns. Even if they are higher in less vaccinated areas, which might benefit from shutdowns, those are unlikely to happen for political reasons. In any event, shutdowns will be much more limited and likely of shorter duration than earlier in the pandemic. The infections, this time, are unlikely to lead to economically damaging policy changes.
A Risk Decoupling
As such, from an economic perspective, the policy risks, which are what really matter, remain small, which could well explain much of today’s bounce. The economic news is good. While the medical risks are rising, their effect on the economy is not likely to be significant. The medical risks and the economic risks have decoupled. And that is an interesting conclusion.