Strategy Insight: Looking Forward, Looking Back

May 05, 2020
Chief Investment Strategist Scott Clemons reflects on first quarter economic reports, which confirmed the end of a decade-long expansion, and provides insights on an economic rebound.

Last week, the Bureau of Economic Analysis released the preliminary report of gross domestic product (GDP) for the first quarter of 2020, showing, to no surprise, that the decade-long expansion of the U.S. economy came to an abrupt end in March. GDP contracted at an annualized pace of 4.8% during the quarter, driven largely by a 7.6% decline in personal spending. Exports dropped 8.7%, while imports fell 15.3%, leading to the smallest trade deficit since 2016. Business spending declined 5.6%, while government spending provided the only area of growth, albeit a scant 0.7%.


Chart showing quarter-over-quarter GDP growth from 2004 through May 31, 2020, with a dip of about 4.5% in 2020.


These quarterly figures only capture March data, and the slowdown has clearly continued and accelerated into April. A more frequent measure of economic activity created by the New York Federal Reserve Board illustrates this continued slump. The index in the nearby graph is a compilation of high-frequency data, such as unemployment claims, retail sales, consumer confidence, steel production, electricity output, railroad traffic, withholding tax collections and so forth. This data is then translated into a comparable annual GDP growth rate on a weekly basis.


Chart illustrating the New York Fed Weekly Economic Index, which dropped about 11% YTD 2020 as of May 31, 2020, compared to around a 4% drop in 2009.


This Weekly Economic Index (WEI) ended March at -6.8% and has subsequently dropped to -11.6% as of the last week of April. It is important to note that, by convention, economic data is usually expressed as an annualized rate. The first quarter’s 4.8% decline in GDP does not mean that the size of the economy fell by 4.8%, but rather that the pace of activity in the first quarter, if maintained for a full year, would equate to a 4.8% contraction. The WEI follows the same methodology. The last reading of -11.6% indicates a pace of activity, not a period-to-period change. In periods of normal economic fluctuation, this is a distinction without a real difference, but given the volatility of economic data at present, the annualization methodology can be misleading.

Economies don’t normally fluctuate to this degree. Quarterly economic growth (again, at an annual rate) since 1947 has averaged +3.2%, with a standard deviation of 3.8%. Or, in English, about two-thirds of the time GDP growth falls within a range of -0.7% to +7.0% (the shaded portion on the nearby distribution graph). We will clearly be living in the tails of this distribution for the next few quarters, both on the downside and the upside.

Chart showing distribution of quarterly economic growth, with an average of +3.2% with a range from around -1% to +7%.


There are early signs that braver consumers in states that have begun to reopen are wandering out of their homes and spending money. In the early days of the pandemic, we followed the year-over-year change in restaurant bookings on as a near real-time indicator of how quickly various parts of the country were shutting down. Reservations throughout the country fell 100% in mid-March as states imposed mandatory closures of nonessential businesses. It is perhaps an exercise in extreme optimism to observe that not all cities remain at -100% restaurant activity. We note with interest that several cities in Texas (Dallas, Houston, Austin and San Antonio), as well as Atlanta, are no longer down 100%. To be fair, restaurant activity in these cities is still down about 90% vs. last year, but this perhaps represents the beginning of a much-needed rebound.

Chart showing year-over-year change in reservations made on, down 110% from March 19, 2020, to April 28, 2020, with some change after that.

It will take years for the U.S. economy to return to some semblance of normality, and the new normal will be forever altered by lessons learned during the COVID-19 crisis. We’re still in the middle of it. The economic toll will continue to mount, but investors should remain focused on the future and the ability of the companies in their portfolios to survive the current environment while preparing to thrive in the environment to come.

Opinions, forecasts, and discussions about investment strategies represent the author’s views as of the date of this commentary and are subject to change without notice. References to specific securities, asset classes, and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations. Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally.  This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries. This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented.  This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners. © Brown Brothers Harriman & Co. 2020.  All rights reserved. PB-03592-2020-05-04

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