Several months, or was it years ago; when the coronavirus began its spread across the U.S., several bullish economists were predicting a “V-shaped” recovery, meaning the expected economic recession would be deep but short-lived. The subsequent bounce-back would be extremely strong so that the 2020 recession would be a mere blip on the chart. That consensus opinion was quickly replaced by talk of a “U-shaped” or even an “L-shaped” recovery, with the economy reeling for months if not years, as the number of deaths escalated along with the unemployment filings as the U.S. economy remained shut down.
Now it’s starting to appear that maybe the doomsayers were a bit too hasty in their gloomy prognostications. While it’s far too early to predict how things will eventually play out, the V-shaped recovery may actually be a more likely outcome than the more pessimistic scenarios. Certainly, the most recent economic reports, from both the government and the private sector, are already showing a nascent rebound even as many key states – like New York, California, and Illinois – remain largely in lockdown mode and only recently started to open up. At the same time, some previous forecasts are being shown to have been overly bearish.
Probably the biggest surprise to the upside was last Friday’s May employment report, which showed the economy adding 2.5 million jobs, a far cry from the consensus forecast of a loss of 7.7 million, and April’s loss of nearly 21 million jobs. “These improvements in the labor market reflected a limited resumption of economic activity that had been curtailed in March and April due to the coronavirus (COVID-19) pandemic and efforts to contain it,” the Labor Department said.
The department also reported that the unemployment rate fell unexpectedly to 13.3%. However, the very next day, it said the number should have been higher by about three full percentage points – i.e., 16.3% – due to a “misclassification error.” Still, that was well below the Street forecast of 19.8% and a big improvement from April’s announced jobless rate of 14.7%, which Labor said was more likely 19.7%. And that error had no effect on the new jobs number, which is based on an actual count, not a survey, as is the unemployment rate.
At the same time, the number of new unemployment claims continues to slow. The most recent report covering the last week of May came in at 1.9 million, down from 2.1 million the previous week and nearly seven million at the end of March. Granted, too many people lost their jobs due to the forced shutdown and remain unemployed, but the forward trend is positive.
There are other signs that the economy has bottomed out. The Institute for Supply Management’s manufacturing index rose to 43.1 in May from April’s 11-year low of 41.5, while its nonmanufacturing index increased to 45.4 from the prior month’s 41.8 reading. Both figures are still well below the threshold of 50 that indicates expansion, but they’re moving higher. Also, on the bright side, the Conference Board’s consumer confidence index and the University of Michigan’s consumer sentiment index both rose slightly in May following sharp declines in April.
Other statistics show that the earlier bleak outlook may be overly pessimistic. For example, the CARES Act allowed mortgage borrowers to stop making payments for as long as a year – no questions asked, even if they didn’t have a financial problem – which not surprisingly many homeowners availed themselves of. Understandably, that created fear that many mortgage companies would be left bankrupt as a result of a wave of defaults.
Now, according to the Mortgage Bankers Association, the percentage of loans in forbearance increased “by only seven basis points” to 8.53% at the end of May from the previous week, in the words of Chief Economist Mike Fratantoni, with about 4.3 million homeowners in forbearance plans. Both big and scary numbers, but not as worrisome as previously thought. “With the job market beginning to improve gradually, more homeowners are exiting forbearance, and we are seeing declines in forbearance volume among some servicers,” Fratantoni said.
Indeed, data firm Black Knight reported that forbearance volumes fell during the first week of June. It also reported that almost 80% of homeowners in forbearance have 20% or more equity in their homes, while only about one in 10 has less than 10% equity or are underwater. The more equity, the less likely they will be to default eventually.
Let’s also not forget the dramatic rebound in the stock market, which is now net positive for the year to date, even if it hasn’t recouped all of its losses from the late February lows.
Which, may be why former Goldman Sachs chief economist Jim O’Neill told CNBC last Friday that a V-shaped recovery is still “perfectly possible,” even though “in the past two months, virtually no one has believed that that is possible.”
To quote the late great Tug McGraw, Ya gotta believe.
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George Yacik
INO.com Contributor – Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
