Personal incomes are up, not down: While markets breathlessly await any news on a potential stimulus package from Washington, the reality is that U.S. personal incomes are still on track to rise by more than 5% this year, an upswing from the 3.9% advance in 2019. Suffice it to say that it’s not normal for incomes to rise in an economic downturn: they fell 3% in 2009. With consumers heavily supported and, at the same time, blocked from buying some services, savings rates have soared this year—on pace to average 16% in both the U.S. and Canada.
Housing has strengthened, not weakened: In a “normal” recession, housing is typically clobbered by its status as a big-ticket, interest-sensitive purchase. The 2008/09 U.S. downturn took that trend to extremes. But because this recession was not preceded by rising interest rates, housing has not suffered its usual “recession victim” fate. Instead, home sales, prices and starts have all come roaring back in both the U.S. and Canada. And, the sector is poised to be a rare source of growth for both economies this year. This week saw U.S. single-family housing starts rise to their highest level since 2007 in September.
Bankruptcies have dropped, not risen: In staggering contrast to every prior recession, insolvency tallies have fallen this year, and fallen hard, for both businesses and consumers. For example, Canadian consumer filings have plunged almost 40% y/y in the past six months to the lowest levels in at least 15 years (September figures are likely to be released next week). Loan deferrals, even lower interest rates, and massive government income supports have explained this odd development.
The fiscal response was immediate and overwhelming: Of course, a big explanation for the prior curiosity on bankruptcies, as well as the rise in personal incomes, was the rapid-fire and heavy-duty government spending measures. Loaded on top of the usual automatic stabilizers, fiscal policy around much of the world went into hyper-drive as economies were shut down in the spring. The IMF estimates that the worldwide fiscal response was equal to $11.7 trillion, or 12% of global GDP, in a mere six months. In a more normal recession, fiscal policy often doesn’t respond until the downturn is over.
The monetary policy response was immediate and overwhelming: While monetary policy has a much better track record for responding to a downturn in a timely manner, this episode set a new standard for a rapid response—especially by the Fed. Learning important lessons from the 2008 crisis, the Fed wasted no time in the heart of the emergency in March, wheeling out all the guns (and some new ones) within weeks of the shutdowns. Recall that in 2008, the Fed did not get rates down to the lower boundary until December, a full year after the recession started. The Bank of Canada also nearly emptied its toolbox by the end of March this year, while it wasn’t until April 2009 that it delivered its final rate cut in the prior cycle.
Stocks regained their losses in weeks, not years: The overwhelming and rapid response by policymakers helps explain how and why financial markets were able to stabilize and repair after the March turmoil. After plunging by more than 33% in a matter of weeks, the MSCI World index had fully recouped those losses by the end of summer. While it has stepped back in recent weeks, the index is still up 7% from year-ago levels, even with the clear second wave building in many major economies.
It was the deepest downdraft in the post-war era: Third-quarter GDP stats are beginning to roll in, with the U.S. expected to report record growth of roughly 30% next week. We’re looking for even gaudier results in Europe and Canada, albeit after deeper drops in Q2. But, even with these massive bounces, almost all major economies will still be well below pre-pandemic levels, owing to the record setbacks during the spring. To pick but one example, Canadian GDP plunged 18.1% in March and April, and even with a spirited rebound since then, it was still almost 5% below pre-pandemic levels by August. In the deep 2008/09 recession, the economy was down by less than 5% at the point of maximum weakness.
It was the shortest recession ever: What this downturn had in depth, it gave up in longevity. In the post-war period, the average U.S. recession has persisted for roughly 12 months. We suspect when the final determination is made, this one lasted two months (there may be some debate over whether the economy was still in recession in May). At this point we would reiterate that this is the economist definition of recession—that is, the period in which the economy is contracting. While technically well shy of the normal two-quarter standard for a recession, the depth and dispersion of the downturn leaves zero doubt on whether this episode qualifies.
Sector differences were extreme: Almost all sectors of the economy were hammered shut by the lockdowns. However, as conditions gradually reopened, the differences among industrial sectors were sometimes extreme. It’s not unusual for some industries to be harder hit during downturns—with cyclical sectors, such as manufacturing and construction, living up to their name. However, this cycle saw some industries devastated, while others actually benefitted on balance. While housing, tech and some retail sectors have thrived, arts and entertainment are down more than 50% y/y and hotels & restaurants are off more than 30% y/y.
Services suffered, not goods: The pronounced weakness in the aforementioned high-touch service sectors runs almost completely counter to past downturns. In a typical recession, stability in the service sector helps to offset deep weakness in the big-ticket durables industries. It’s almost as if the world has been turned on its head this cycle, with goods holding up relatively well and services still struggling massively. Winners and losers among economies have been sorted along these lines, with tourism-dependent nations suffering heavily, while manufacturing-led economies have recovered quickly. Case in point, Germany’s composite PMI stayed strong in October at 54.5, while France flagged to 47.3. Meantime, the world’s largest goods exporter—China—saw industrial production pop 6.9% y/y last month, and the 4.9% y/y rise for Q3 GDP puts that economy on track for 2% growth this year.
Commodity prices held up remarkably well (aside from that little nasty bout of negative oil prices): Let’s just say that amid the deepest decline in the global economy in the post-war era, it is passing strange that many key commodity prices have not only held up, but in some cases thrived. The Bank of Canada’s commodity price index, which is burdened by a heavy energy weighting, has still managed to rise 4% from year-ago levels. To put this in perspective, the index was down more than 40% y/y seven months into the downturn in 2008/09. Strong gains in copper, gold, natural gas, lumber and some agricultural prices have all provided important offsets to still-soggy oil prices. While each of the strong commodities has its own particular story, the key driver is that underlying strength in the demand for goods.
The US$ has weakened, not strengthened: We noted earlier this year that, compared to other financial markets, exchange rates had been a relative wallflower at the 2020 market rave. That’s not to say there was no drama in FX, but this year’s swings have been far from unusual. But what has been unusual is that the U.S. dollar is now on track to weaken this year, versus its usual recession behaviour of rising on safe-haven demand. There was a brief bout of dollar strength in the depths of the turmoil, but it passed quickly, and we suspect it is more likely to weaken further over the next year, almost regardless of what transpires on November 3rd. On the flip side, the Canadian dollar—after briefly showing in March that it never met a crisis it didn’t want to join—is now basically unchanged on net over the past year.