- On 8 June the NBER dated the peak of the US economy in February 2020, closing an expansion of 128 months, the longest on record.
- May’s jobs data showed 2.5 million new jobs and unemployment of 13.3%, but employment was still 13% below February.
- Declaring a recession is a technical label; what matters for a company is the speed and shape of the recovery.
On 8 June 2020, the NBER Business Cycle Dating Committee, the private research organisation that officially decides when recessions begin and end in the United States, announced that the peak of activity had been reached in February 2020. That month ended an expansion that began in June 2009, which at 128 months was the longest since records began in 1854. The previous record, of 120 months, was from 1991 to 2001.
The committee explained that the fall in employment and production had been of unprecedented magnitude and very broad reach, which justified calling it a recession even if it was briefer than earlier ones. To date a cycle it weighs the depth, duration and spread of the decline across sectors. Three days earlier, the May jobs report had surprised on the upside.
What a recession is
In everyday language, a recession is said to occur when GDP falls for two quarters in a row. In the United States, the formal decision is not based on that rule but on a joint assessment of several indicators, and is usually announced months after the start. This time the committee did not wait, because the fall was so rapid and widespread that there was no doubt.
For a company, the label matters less than its content: falling revenue, customers delaying payments and investment plans being postponed. A brief but deep recession calls above all for liquidity to reach the other side. Attention shifts to the recovery: when, at what pace and for which sectors.
May’s jobs data
On 5 June it emerged that the US economy had created 2.5 million jobs in May and that the unemployment rate had fallen from 14.7% to 13.3%. The biggest gains came in leisure and hospitality, with 1.2 million jobs, followed by construction, education and health, and retail. Employment was nonetheless still around 13% below February.
The labour statistics agency itself warned of a classification error: some people absent from work because of closures were recorded as employed rather than as temporarily unemployed. Without it, the unemployment rate would have been about three points higher. It is a reminder that figures for this period must be read with caution and that an initial recovery does not guarantee it will continue.
What to review
Companies with customers in the United States or exposed to its consumption should follow demand indicators, not just employment ones, and review the solvency of their buyers and collection periods. It is useful to have scenarios with a rapid recovery, a gradual one and one interrupted by new outbreaks.
For investors, the economic calendar and the markets’ calendar do not coincide: stock markets anticipate, and tend to move before the data improve. That is why decisions should not be taken on the headlines about the recession alone. Talk to your adviser to check that your portfolio is consistent with your horizon and risk tolerance.
A recession is declared with data from the past; a company prepares with scenarios of the future.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
