Pick a Letter, Any Letter
The article discusses the sharp economic contraction in Q1 2020 due to COVID-19, forecasting a severe recession with Q2 GDP expected to drop about 30%, and explores potential shapes of the economic recovery—V, U, or L—depending on policy responses and consumer behavior post-lockdown.
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Pick a letter, any letter
Wealth Management
May 4, 2020
May 4, 2020 08:55 AM
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We got our first look at Q1 Gross Domestic Product last week, and as expected, it wasn’t pretty. While the Q1 GDP number is subject to revision, it showed the economy contracted (4.8%) Q to Q. If one considers that the coronavirus didn’t hit the US economy hard until mid-March, and that our economy has been shut down since, a recession is a foregone conclusion, with Q2 GDP expected to contract about 30% Q to Q (a recession is defined as two consecutive quarters of negative GDP growth). As we have written before, the economic downturn caused by COVID-19 will be terribly sharp, but need not be terribly long, which will primarily be determined by the efficacy of the policy response from the Federal Reserve and the Federal Government, as well as consumer behavior post lockdown.
We will all be hearing much over the coming weeks about the “shape” of the current economic downturn and coming economic recovery, which brings us to the title of this week’s Weekly Wire, “Pick a letter, any letter.” Strategists and economists will wonder if the economic cycle will be “V” shaped (a very deep drop off, followed by a very sharp bounce higher); “U” shaped (a very sharp drop off followed by a period of little growth and then a robust recovery); or maybe “L” shaped (a very sharp drop off followed by a very long period of little to modest growth), while others will speculate this cycle will more resemble a J or a W.
Truth be told, we don’t know what the economic cycle will ultimately look like—we first need to understand the impact of the policy response and consumer behavior as the economy reopens. That said, we are confident the unprecedented policy response will mitigate the economic damage from COVID-19 and that we will continue to make meaningful progress in the containment and treatment of the virus, two dynamics that will set the stage for a reacceleration in economic growth. The other point worth remembering is that coming into this downturn the US consumer—the engine of US economic growth—was in good financial health, bolstered by a very healthy housing market and an elevated savings rate.
The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.
Tagged: Market perspectives, weekly wire, Tim Holland, economic cycle, GDP
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