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The Recession Started in February — and Is Probably Already Over

Photo: John Tlumacki/Boston Globe via Getty Images

It’s official: The U.S. entered an economic recession in February, ending an expansion that lasted for more than ten years, according to the National Bureau of Economic Research. What’s not official, but very likely true, is that recession is already over. The economy seems to have bottomed out in April and has been growing again, as seen not just in reports from retailers and airlines and car dealers about business starting to grow again (from a much-reduced base) but also in Friday’s employment report, showing very strong job growth (also from a much-reduced base.)

That report surprised analysts and led to extensive claims on Twitter that the government must have cooked the books or (less outlandishly) that the Bureau of Labor Statistics must have gotten this one wrong at a time when a lot of economic indicators have become more difficult to measure. Much of the attention has been on “misclassification error,” a real problem where some people who have been temporarily laid off from work give answers that lead the BLS to count them as absent from work but employed. But this problem was even more severe in April than in May, meaning that any way you slice the numbers, employment rose and unemployment fell from April to May. Barring a second coronavirus wave severe enough to cause a national reclosure of huge swathes of the country, the economy has returned to expansion after the shortest recession on record, lasting only two months.

An expanding economy is an economy that is getting better, which is not necessarily a good economy, and the economy is not good right now. Unemployment in May was higher than in any month since the Great Depression except for April. But the trend is strongly positive — with many businesses having continued to partially or fully reopen following the May unemployment survey, which reflects the employment situation as of the week of May 12 — and the current phase of our economic recovery appears to be “V-shaped.” You should expect another good job-growth number in June.

The likely path of further economic recovery will be fast, then slower. Many businesses are ready to return to normal as soon as epidemiological and regulatory conditions allow, and many people will return (and have returned) to jobs they temporarily lost due to COVID-19. Many businesses will return to normal in the manner of businesses in a summer resort town that close each fall only to reopen and rehire in spring. But a lot of the economy won’t do that. Some businesses — especially those that involve closely packed crowds indoors — won’t be ready to return to normal soon, and even when a given industry is returning to business as usual, there will be owners who decide it isn’t worth reopening and workers who decide they can’t wait and move on to somewhere or something else. All those people will need to find new things to do, a process that will take a lot more time than simply turning the lights back on.

The better-than-expected pace of the recovery should reduce the amount of fiscal support Congress needs to provide to prevent unnecessary damage to the economy — personal income from work and state and local tax revenue will not be as dire this year as one might have imagined in March — but an additional fiscal package of some size will still be necessary. Many jobs that we can expect to come back eventually will not be back before July 31, when expanded unemployment benefits are set to end, and without additional fiscal support, states and localities will be forced into more and more difficult decisions about what jobs to cut and what workers to lay off. (If anyone in Washington is pushing to defund the police, it’s Republicans who are resisting aid to state and local governments.) In addition to leading to personal misery for the unemployed and the loss of government services, a choice to under-provide federal fiscal support would force many more consumers to cut back on spending — not because stores are closed but because customers are short on cash — which would have knock-on effects slowing the economic recovery similar to those seen from 2009 onward.

Fortunately, I think there will be an additional aid package of some sort; top White House economic adviser Kevin Hassett called it a “near certainty” on Monday, and with the strong stock-market recovery and increasingly positive economic data being two of the few things President Trump has going for him right now, I doubt he will want to impose economic austerity as he approaches the election.

As for those stock prices, a lot of observers are confused: How can stocks be as high as they were at the start of the year, when we weren’t facing a pandemic? Some people say bored retail investors, deprived of other things to do, have been buying so much stock as to irrationally bounce the stock market. But it’s also important to note that interest rates are far lower than they were at the start of the year. Lower rates should generally push stock prices up, so stock prices flat with interest rates down is an indication that market participants think the outlook for corporate profits is still materially worse than it was at the start of the year, even as it is much better than it was in March. None of these data — not even the S&P 500 — is making the case that we are out of the woods. But we are on the upswing.

The Recession Started in February — And It’s Probably Over