A Closer Look: US Economy

The Shape of the US Economic Recovery

By: Alex Chausovsky

What you need to know: ITR Economics’ updated US Industrial Production forecast calls for a recovery that is both V-shaped and U-shaped. The different profiles reflect different ways of interpreting the data.

The US economy is in the throes of a significant downturn. Since 2016, we have been calling for a recession in US Industrial Production, our benchmark for the US industrial economy, during this cycle. However, we didn’t foresee COVID-19 and the oil prices crash, the black swan events that ravaged the US and global economies in the first quarter of this year. No one did. The black swans will lead to a longer, deeper period of contraction relative to our prior expectations. As we analyzed the impact of these black swan events and the effects of the corresponding government response and mitigation strategies, we observed a tendency to match the possible visual profiles of the eventual economic recovery with letters of the alphabet. Some expect a sharp, V-shaped recovery, while others are predicting a more sluggish, U- or L-shaped recovery. Any discussion of recovery must first acknowledge that the duration and full impact of the COVID-19 pandemic is still uncertain. Questions remain. When will the actual peaks occur for infections and deaths? Will there be additional viral waves due to the lifting of restrictions, or in the fall, when flu season typically ramps up? When will a vaccine be readily available to distribute to the US population? How effective will that vaccine be?

There are several risks that could undermine our forecast for the US economic recovery:

  1. The potential for another surge in infections and deaths, stemming from either the reopening of the economy or the onset of flu season, is a major risk to our forecast. Its severity — and the government’s accompanying response — would determine the economic impact. We will adjust our outlook as needed when more evidence becomes available.
  2. If the imbalance in the oil market and low oil prices persist for longer that we expect, it would also pose a threat to our forecast.
  3. The government stimulus package is unprecedented and has the potential to introduce unintended consequences.

Government intervention poses another risk to our forecast. ITR Economics’ updated US Industrial Production forecast calls for a recovery that is both V-shaped and U-shaped.

The different profiles reflect different ways of interpreting the data. From a rate-of-change perspective, which echoes the US industrial business cycle, we expect the recovery to look more like a V. The next cyclic al low in the US Industrial Production Index year-over-year growth rate is expected to occur in the first quarter of 2021. Annual growth is expected to be positive in 2021. This sharp decline and subsequent strong recovery is what leads to the V-shaped profile typical of black swan events.

From a data trend perspective, however, the recovery is expected to be more U-shaped. The 12-month moving average for the US Industrial Production Index is expected to decline into early 2021 before a rising trend ensues. Despite the rise, there will be less overall industrial activity (what the data trend measures) than immediately prior to the black swan events, through at least 2021. This prolonged recovery profile is closer to a U than a V. Never has it been more critical for you to maintain a clear, impartial, and data-driven perspective on how factors such as COVID-19 and oil market volatility will impact the most important part of the economy: you and your business. Our advice in this regard is simple:

  • Leverage ITR’s analyses to cut through the fear, noise, and emotion surrounding these black swan events, and to ensure a data-driven approach to your decision-making.
  • Follow the leading indicators outlined in the ITR Advisor™ and research industry-specific leading indicators for your markets.
  • Track your company’s own data trends and rates-of-change.
  • Ensure you have a set of predetermined, quick-to-implement management actions that correspond to specific thresholds in your company data and in the leading indicators.
  • Reach out to us if you need help with any of the above; we help businesses with this sort of planning every day via our consultative programs.

If you follow this simple advice, you will be a better business leader no matter what shape the economic recovery takes.