For Markets, It's the Economy's Direction That Matters
Everyone knows the recession will be deep. But the question is whether the broad data is showing incremental improvement.
Some 25 million Americans are out of work.
Photographer: Stephanie Keith/Getty Images
This is not your typical economic recession, with the cycle from peak to trough likely both narrowed in time and widened in magnitude. The shocking speed and magnitude of the hit to the economy can cause us to lose focus on the fact that all downturns eventually become upturns. Moreover, that shift in the economy will soon come even if the data remains dismal, leaving us to struggle with how to interpret the data.
For market participants, it is probably best to keep an eye on the direction of change and leave the level of activity to policy wonks. It’s important to recognize that the magnitude of the weakness in the data is not driven by what we would think of as typical business cycle dynamics where a negative shock expands over time throughout the economy. Instead, we literally flipped a switch and told companies to close. You can’t feign surprise at layoffs in the leisure and hospitality sector when restaurants and entertainment venues are all shuttered overnight. You can’t expect retail sales to do anything other than plummet if activity is limited to only a narrow class of essential providers.