Why an atypical recession has seen a typical recovery

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Monday, August 2, 2021

GDP recovered to its pre-COVID levels...at an average pace

The first look at second quarter growth figures out last week had some good news and bad news. 

The bad news was that the economy grew slower than expected in the second quarter. 

The good news was that gross domestic product (GDP) — for the first time — eclipsed pre-pandemic levels. 

But in a note to clients published Friday, Oxford Economics' senior economist Bob Schwartz argued that this rebound to pre-COVID levels isn't exactly the flattering economic data point that it might seem at first blush. 

"The rapid first-half growth lifted the level of GDP above its pre-COVID level," Schwartz wrote. 

"That, in turn, underscored the attention-getting headlines that the economy has recovered all of its pandemic-related output losses, leading some to laud this as a V-shaped recovery. As important as that development may seem, we have to point out that there is nothing special about how fast the economy returned to its previous peak," the economist added.

Schwartz noted that a 6-quarter period between the beginning of a recession and the recovery to pre-recession output is merely the average of the 9 prior recessions the U.S. economy has seen since 1953. 

It took the U.S. economy six quarters to recover its pandemic-related decline in output, a recovery that is on par with the average seen over the last 70 years. (Source: Oxford Economics)
It took the U.S. economy six quarters to recover its pandemic-related decline in output, a recovery that is on par with the average seen over the last 70 years. (Source: Oxford Economics)

Moreover, Schwartz noted that real GDP, as of the second quarter of 2021, still remains below where potential GDP suggests output would be had there not been an economic downturn. 

And as Federal Reserve Chair Jerome Powell said in his post-FOMC press conference last week, with just under 7 million fewer Americans working than in February 2020, "the labor market has a ways to go." 

Real GDP surpassed pre-pandemic levels for the first time in the second quarter, but total output is still below estimated trend growth for the economy had there been no recession in 2020. (Source: FRED)
Real GDP surpassed pre-pandemic levels for the first time in the second quarter, but total output is still below estimated trend growth for the economy had there been no recession in 2020. (Source: FRED)

Of course, comparing this recovery to prior recessions does dull the senses a bit to how extraordinary the last 18 months of economic activity have been. As we learned last month, the pandemic-induced recession lasted just two months, according to the NBER, the shortest downturn on record

Additionally, the drop in real GDP stemming from the pandemic sent total economic output recorded in the second quarter of 2020 back to 2014 levels. Prior to the pandemic, the post-Financial Crisis drop in GDP — in which 2009 output fell to 2005 levels at the recession's nadir — had served as the deepest recession in modern times. 

In other words, the economy was set back 6 years by COVID-19; previously, we'd never seen the economy lose more than 4 years of growth. 

And as we've previously noted in The Morning Brief, when you deconstruct GDP by S&P 500 sectors, and look at how many are growing faster than before the pandemic, we see a recovery that is several years ahead of a typical schedule. 

And when one considers that an almost overnight shutdown of the global economy was followed by trillions of dollars in government support — which resulted in a consumer and corporate demand crush unlike any that investors or operators have seen in their careers — it is obvious that no one will get in trouble for calling this economic moment "unprecedented." 

But Schwartz is simply noting that not every superlative is created equal. And that we're still a ways off from declaring anything like "Mission Accomplished" on bringing the economy back. 

By Myles Udland, reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland

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