𝗦𝗵𝗼𝗿𝘁𝗲𝘀𝘁 𝗥𝗲𝗰𝗲𝘀𝘀𝗶𝗼𝗻 𝗶𝗻 𝗛𝗶𝘀𝘁𝗼𝗿𝘆

◼ National Bureau of Economic Research (NBER) – the only body eligible to arbitrarily call recession dates in the US – has just announced that the Covid-driven recession lasted ONLY 2 months.
◼ This is very surprising for most economists and investors and makes the 2020 even the shortest recession in history.
◼ The NBER’s decision will change quite a bit in determining where we are now in the economic cycle.

𝑪𝒐𝒖𝒏𝒕 𝒊𝒕 𝒊𝒏 𝒅𝒂𝒚𝒔

The Business Cycle Dating Committee of the National Bureau of Economic Research [NBER] announced that they had set the cycle trough date of the last recession in April of 2020. This means that recession that started only in February lasted slightly more than 2 months. Here’s the NBER’s message it gave on why it decided as it did: “The NBER’s traditional definition of a recession involves a decline in economic activity that lasts more than a few months. For example, the previous shortest recession occurred in the first half of 1980 and lasted six months. However, in deciding whether to identify a recession, the committee weighs the depth of the contraction, its duration, and whether economic activity declined broadly across the economy (the diffusion of the downturn). 𝑻𝒉𝒆 𝒓𝒆𝒄𝒆𝒏𝒕 𝒅𝒐𝒘𝒏𝒕𝒖𝒓𝒏 𝒉𝒂𝒅 𝒅𝒊𝒇𝒇𝒆𝒓𝒆𝒏𝒕 𝒄𝒉𝒂𝒓𝒂𝒄𝒕𝒆𝒓𝒊𝒔𝒕𝒊𝒄𝒔 𝒂𝒏𝒅 𝒅𝒚𝒏𝒂𝒎𝒊𝒄𝒔 𝒕𝒉𝒂𝒏 𝒑𝒓𝒊𝒐𝒓 𝒓𝒆𝒄𝒆𝒔𝒔𝒊𝒐𝒏𝒔. 𝑵𝒐𝒏𝒆𝒕𝒉𝒆𝒍𝒆𝒔𝒔, 𝒕𝒉𝒆 𝒄𝒐𝒎𝒎𝒊𝒕𝒕𝒆𝒆 𝒄𝒐𝒏𝒄𝒍𝒖𝒅𝒆𝒅 𝒕𝒉𝒂𝒕 𝒕𝒉𝒆 𝒖𝒏𝒑𝒓𝒆𝒄𝒆𝒅𝒆𝒏𝒕𝒆𝒅 𝒎𝒂𝒈𝒏𝒊𝒕𝒖𝒅𝒆 𝒐𝒇 𝒕𝒉𝒆 𝒅𝒆𝒄𝒍𝒊𝒏𝒆 𝒊𝒏 𝒆𝒎𝒑𝒍𝒐𝒚𝒎𝒆𝒏𝒕 𝒂𝒏𝒅 𝒑𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏, 𝒂𝒏𝒅 𝒊𝒕𝒔 𝒃𝒓𝒐𝒂𝒅 𝒓𝒆𝒂𝒄𝒉 𝒂𝒄𝒓𝒐𝒔𝒔 𝒕𝒉𝒆 𝒆𝒏𝒕𝒊𝒓𝒆 𝒆𝒄𝒐𝒏𝒐𝒎𝒚, 𝒘𝒂𝒓𝒓𝒂𝒏𝒕𝒆𝒅 𝒕𝒉𝒆 𝒅𝒆𝒔𝒊𝒈𝒏𝒂𝒕𝒊𝒐𝒏 𝒐𝒇 𝒕𝒉𝒊𝒔 𝒆𝒑𝒊𝒔𝒐𝒅𝒆 𝒂𝒔 𝒂 𝒓𝒆𝒄𝒆𝒔𝒔𝒊𝒐𝒏, 𝒆𝒗𝒆𝒏 𝒕𝒉𝒐𝒖𝒈𝒉 𝒕𝒉𝒆 𝒅𝒐𝒘𝒏𝒕𝒖𝒓𝒏 𝒘𝒂𝒔 𝒃𝒓𝒊𝒆𝒇𝒆𝒓 𝒕𝒉𝒂𝒏 𝒆𝒂𝒓𝒍𝒊𝒆𝒓 𝒄𝒐𝒏𝒕𝒓𝒂𝒄𝒕𝒊𝒐𝒏𝒔.”

Most of the analysts were calling for a prolonged V-shaped recession or a W-shaped one. The 3rd (down) wave of the W was meant to be the period of global supply chains disruptions in the Autumn of 2020. The consensus was that the recession ended somewhere between Sept 2020 and Jan 2021. As it turns out the NBER had totally different point of view this time around. From CNBC: “Though the drop featured a staggering 31.4% GDP plunge in the second quarter of the pandemic-scarred year, it also saw a massive snapback the following period, with previously unheard of policy stimulus boosting output by 33.4%. “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 NBER said in a news release. “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.””

The former shortest recession was the Jan-Jul 1980 one (6 months). The longest one on the other hand lasted 65 months (Oct 1873 to March 1879) – how depressing it must have been huh.

𝑵𝒆𝒘 𝒔𝒆𝒕 𝒐𝒇 𝒓𝒖𝒍𝒆𝒔

The NBER’s decision is something totally new and definitely puts new light on how the institution will want to approach the whole cycle-dating process going forward. We can surely assume that going forward the NBER will allow more arbitrary attitude towards the process of setting peaks and throughs of the cycle. Given the current circumstances of high unpredictability of pandemic situation (Delta vatiant, etc.) and (God forbid) further lockdowns into Autumn this year, we might just as well undergo another tiny little recession (from the timespan perspective) theoretically. Be watchful, be mindful…

𝑾𝒉𝒆𝒓𝒆 𝒂𝒓𝒆 𝒘𝒆 𝒊𝒏 𝒕𝒉𝒆 𝒄𝒚𝒄𝒍𝒆 𝒏𝒐𝒘?

The NBER’s decision changes a lot as to the interpretation of where we are now in the cycle. This also corresponds to our macro allocation tool called the Enhanced Aggregate Spread by Dr.Robert Dieli. I will definitely be elaborating on this going forward. It might also impact our equity allocation. What’s mostly to be noticed now is that current inflation (measured by CPI) runs at 5,3% vs. Short Term Unemployment Rate (STUR) being at 3,4%. This is an extremely rare phenomenon for the periods of Recovery and Expansion and is rather more typical for late Boom/Peak periods. Although, as the Fed says, this is expected to be TRANSITORY and inflation is supposed to come back down pretty soon (I will write up on that soon as well). If that happens into Autumn it means that it was a one-off.

GlobalAlphaS

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